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 (FFS) payment model has been seen as costly and cumbersome overall to providers.
  • Capitation can be an effective alternative to FFS, though it is not perfect.
  • Many providers believe the optimal financial payment model is capitation, supplemented by FFS 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, supposedly the more effective payment system, is often compared to the traditional FFS payment model. Here we simplify the advantages and disadvantages of capitation to determine whether or not it’s a feasible plan for your practice.

The Advantages of Capitation

To understand Capitation, let’s look at its competitor, FFS. Traditionally this method of reimbursement pays providers based on the number of services provided. Providers make claims based on the number of procedures carried out for a patient over a period of time. There are a few inherent flaws with this method. FFS creates an uncertain climate for providers because finances depend on the number of services rendered. This leads to a possible conflict of interest because it potentially urges providers to schedule superfluous medical procedures for financial gain. Additionally, the projected gain per patient will vary widely, because some patients require little to no care, and others an extensive amount of treatment. This adds to an uncertain financial climate of a practice. FFS is a volume-based system that can become costly and cumbersome for both the provider and the 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 within 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 providing incentives for better quality of care. Charging based on quality and not per procedure 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 reveals 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 FFS, 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 can create a conflict of interest when taking into account the economics of care, in that 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 FFS methods as well.

Some studies have been done that compare 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 Capitation and FFS 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 FFS depends on the demand within the area. Many providers choose to supplement Capitation with FFS when the rates of capitation are low for the area.

Capitation with PrognoCIS

Whether or not to contract with a Capitation plan ultimately depends to the area in which you will practice and the 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 that’s interoperable with your digital patient management system. PrognoCIS fully supports Capitation within the application. It features an automatic write-off function for claims that are Capacitated. PrognoCIS also features an easy-to-use roster sheet which shows payments versus patients, allowing you to accurately gauge your projected finances.

FFS 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 infeasible. Capitation is seen as a more stable and financially certain method of payment arrangement, so that providers can focus on the quality of care, rather than the quantity of services provided.

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

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