Capitation vs. Fee-for-Service Healthcare Payment Models

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Capitation vs. Fee-for-Service Healthcare Payment Models

Key Points

  • The fee-for-service payment model has largely been seen as costly and cumbersome to providers.
  • Capitation can be an effective alternative to fee-for-service, though it is not perfect.
  • Many providers believe the optimal financial payment model is capitation, supplemented by fee-for-service capabilities, such as with Medicaid.

To create, maintain, and grow a practice, it’s essential to have an effective payment system. The right payment plan depends on a number of factors such as region, health maintenance organization (HMO), and patient demographics. Capitation, the newer supposedly more effective payment arrangement, is often compared to the traditional fee-for-service payment model. Here we break down the advantages and disadvantages of capitation, and whether or not it’s a feasible plan for your practice.

The Advantages of Capitation

To understand capitation, let’s look at its competitor. Fee-for-service, the traditional method of reimbursement, pays providers based on the number of services provided. Providers make claims based on the numbers of procedures carried out for a patient, through a period of time. There are a couple of inherent flaws with his method. Fee-for-service creates an uncertain climate for providers because finances depend on the number of services rendered. This creates a possible conflict of interest because it potentially urges providers to schedule an exuberant amount of medical procedures for financial gain. Additionally, the projected gain-per-patient will vary widely, as some patients require little to no care, and others an extensive amount of treatments. This adds to the uncertain financial climate of a practice. Fee-for-service is a volume-based system that can become costly and cumbersome for both provider and patient.

With capitation, providers contract with an independent physician association (IPA) to receive a flat monthly for every patient enrolled. Providers are reimbursed for every patient, per a time period, whether or not they receive care, and regardless of the cost of the treatment. Capitation is intended to create a system that fosters efficiency and cost-control, while incentivizing quality of care. By not charging per procedure, it motivates health care providers to provide effective care that keeps the patients healthy and enrolled. A 2011-2012 study by the Health Research and Education Trust revealed that “a capitation model with a for-profit element was more cost-effective for Medicaid patients with severe mental illness than not-for-profit capitation or FFS models.” Compared to fee-for-service, capitation is a more financially certain method of reimbursement.

Potential Disadvantages of Capitation

Capitation holds many benefits for providers, but it has its potential downfalls. Capitation may create a potential conflict of interest when taking into account the economics of care. Providers may opt to save money by implementing less expensive procedures and drugs instead of the name-brand ones for the same service. This may create a disparity between providers and pharmaceutical companies. Additionally, there is debate whether capitation is financially feasible or not. In high-density places such as California, some providers receive low capitation rates from IPAs, forcing them to contract with fee-for-service methods as well.

Some studies have been done comparing both payment models. Dr. Robertson penned an article in Medical Economics, giving a firsthand account on his experience with both fee-for-service and capitation under IPAs. He used data from both his capacitated and fee-for-service patients, and compared the cost. His methodology consisted of “calculating what my Fee/IPA patients earned for me, and then comparing that amount to what they would have yielded under the per-member-per-month rate offered by Cap/IPA.” Through this, he created a spreadsheet with a sample size of 10% of his patients, over a 24-month period. Robertson found that “Fee/IPA was paying me a whopping 27 percent less than Cap/IPA.” A large part of profitability with capitation and fee-for-service depends on the demand of the area. Many providers choose to supplement capitation with fee-for-service, when the rates of capitation are low for the area.

Capitation with PrognoCIS

Whether or not to contract with a capitation plan is ultimately up to the area you will practice in, and rates you will receive. By having an electronic health record (EHR) company that understands the advantages and disadvantages of payment models and has a versatile revenue cycle management interface, you can create a financial system interoperable with your digital patient management system. PrognoCIS fully supports capitation within the application. It features an auto-write off function that can effortlessly write off claims which are capacitated. PrognoCIS also features an easy-to-use roster sheet which shows payments versus patients, allowing you to accurately gauge your projected finances.

Fee-for-service has been proven to be costly and ineffective by many providers, but may serve as a valuable supplement for a capitation model in areas where capitation alone is unfeasible. Capitation is seen as a largely more stable and financially certain method of payment arrangement. It creates a system where providers can focus on the quality of care, vs the quantity of services provided.

Visit the Medical Billing page to learn more about billing options from PrognoCIS.

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