Capitation vs. Fee-for-Service Healthcare Payment Models

April 7th, 2016 - By Kevin V. Nguyen

Key Points Comparing Fee-for-service vs. Capitation
The Fee-For-Service (FFS) payment model has increasingly been seen as costly and cumbersome overall to providers. Medicare programs highlighted the need to transition to a quality-based payment model, which is Capitation. Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) legislation improves Medicare by helping providers focus on care quality to make patients healthier.

Capitation may be an effective alternative to FFS in certain situations. Many providers believe that the optimal financial payment model is capitation, supplemented by FFS capabilities, to create, maintain, and grow a practice, it is essential to have a valid payment system. The right payment plan depends on many factors such as region, Health Maintenance Organization (HMO), specialty, and patient demographics. Capitation, thought to be the more efficient payment system, is often compared to the traditional FFS payment model. Here we compare capitation and FFS, simplifying the advantages and disadvantages of each to determine whether or not it’s a feasible plan for your practice.

The Advantages of Capitation Over Fee-for-service

To understand Capitation, let’s look at its competitor, Fee-for-service (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 setbacks to this method. FFS can create an uncertain financial climate for providers because finances depend on the number of services rendered, this potentially incentivizes providers to schedule more unnecessary medical procedures. Additionally, the projected gain per patient will vary widely because some patients require little to no care, while others need extensive treatments. 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 payment for every patient enrolled. Providers are reimbursed for every patient within a set time frame, whether or not they receive care, and regardless of the cost of the treatment. Capitation, a quality-based payment model, is intended to create a system that fosters efficiency and cost-control while providing incentives for better health care. Charging based on quality than the number of procedures encourages health care providers to deliver adequate 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.” When compared to FFS, capitation is the more financially specific method of reimbursement.

Potential Disadvantages of Capitation Compared to FFS

Capitation holds many benefits for providers, but it has its own set of considerations. Capitation can create a situation where providers opt to save money by implementing less expensive procedures and drugs instead of the more reliable, name-brand ones for the same service, and this would create a disparity between providers and pharmaceutical companies. There is also debate whether capitation is financially feasible in all situations or not. In areas with high populations, such as California, some providers receive relatively low capitation rates from IPAs, which forces them to contract with FFS methods in addition to capitation.

Some studies have been carried out and compared 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. He describes his methodology like as the following: “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 the study, 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 and Fee-for-service in Medical Billing Software

Whether your practice contracts with a capitation or fee-for-service based payment system, depending on the medical area in which you will practice (i.e., family practice, pain management, occupational health), it’s essential to have an Electronic Health Record (EHR) application that facilitates both payment models. Additionally, with a medical billing service, you can create a maximize claim payments on either model. PrognoCIS EHR Software elegantly supports both capitation and FFS. It includes special features such as automatic write-off function for claims that are capitated. PrognoCIS also features an easy-to-use roster sheet which shows payments versus patients, allowing you to gauge your projected finances accurately.

In summary, FFS has been considered to be costly and ineffective by many medical providers but may serve as a valuable supplement for a capitation model in areas where capitation alone is infeasible. MACRA legislation has improved Medicare and driven the transition to capitation, which is seen as a more stable and financially sound method of payment arrangement, enabling providers to focus on the quality of care, rather than the number of services provided.

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