Advantages & Disadvantages of Capitation Payments

by Alphonse Lameck ; Updated September 26, 2017

Capitation is a method of compensation in the health-care industry in which physicians are paid a fixed and prearranged amount for each patient seen in a health plan regardless of any treatments or services being offered. The base rate amount paid to the physician is determined by patient demographics such as age and gender. The capitation system was established to improve and increase patient access to health services and to provide equity in health care.

Advantages to Patients

The capitation system of payments was devised to build a stronger relationship between physicians and their patients since the patients are able to visit the same physician for most of their treatments. Capitation also lowers the risk of patients being over-treated since physicians, committed to the aim of reducing costs, should ideally only be prescribing necessary treatments. The cost of treatment is also lower per patient since costs are shared with other members in the system. A 2003 study conducted by the Center for Health Care Strategies established that average pharmacy costs were $20.46 in the fee-for-service system and $17.36 in the capitation system.

Disadvantages to Patients

Patients with many complicated medical issues are likely to be left out of the enrollment system for a capitated plan. This is due to the high cost involved in treating them, so physicians would make little profit, as opposed to the situation when ordinary cases are treated. Under capitation arrangements, a patient's choice of primary health-care providers is limited to a particular physician or group of physicians. Also, optimal treatment may not always be delivered to the patient since physicians are required to keep costs down in order to earn yet better incentives.

Advantages to Physicians

Capitation payments provide physicians with financial security since their income for a given year is predictable and guaranteed. They also allow physicians to nurture long-term relationships with their patients, enabling them to know their needs and medical histories more fully. Physicians are also entitled to incentives for delivering quality and well-managed services to their patients.

Disadvantages to Physicians

Under a capitation system, physicians can potentially lose some of their earnings in a complex treatment case when the cost of the services provided goes above the statistical value assigned to them. Physicians thus tend to ignore complex cases in favor of choosing patients who are easier to care for.

About the Author

Alphonse Lameck is a tutorial fellow based in Kenya, where he specializes in the field of management. He holds a Master of Arts in practicing management from McGill University, as well as a bachelor's degree in international business administration from United States International University.