Healthcare Capitation Helps Reduce Costs

What is healthcare capitation?

A capitation is a pre-agreed contract for a fixed payment model which healthcare providers like clinics, hospitals, and private practitioners receive as reimbursement from health insurance companies. 

Every health maintenance organization (HMO) agrees to pay a network healthcare facility a predetermined fixed amount per every patient in their health plan. This limit is known as healthcare capitation which represents the fixed payment model. 

As per the agreement between the HMO and their healthcare partner, a fixed amount will be paid annually for the number of patients covered under a health plan. For instance, assuming there are 5000 patients in a health plan that visit a clinic. The fixed agreed payment per every patient is $500 per annum; then 2.5 million dollars are paid to the healthcare facility by the HMO. The possibility of every patient using their insurance or using it beyond the capitation limit of $500 per annum is less. There will be few patients who will use more than the determined amount and few who may use less or not use the insurance service at all in a given year. 

Features of the capitation payment model

The following three features arise in a capitation payment model between the HMO and a partner facility:

  • The reimbursement payment is in advance and is fixed flat fee
  • It does not take into account how many patients utilize or don’t utilize the services of a partner healthcare provider
  • It covers all the agreed-upon healthcare services for all the patients enrolled in a health plan

How is the capitation amount determined?

Insurance underwriters determine the capitation amount after analyzing a lot of parameters like patient demographics, medical history and health risks of a patient population, healthcare practices of the area or region, patient engagement levels, comorbidities data of the patients in a given group, and other risks associated with insurance claims. The fixed payment that needs to be paid is developed after reviewing local costs and the average utilization of the health services of a region. 

Other incentives in the capitation model

The capitation model is designed to bring the rising costs of healthcare down and allow every individual to receive affordable medical care in the country. Just by fixing a payment model, the costs associated with healthcare cannot be expected to be brought down.

When healthcare practitioners take care to not just provide good care but believe in limiting patients’ revisits or readmission for the same ailment by promoting disease management measures, then the quality of the outcomes improves. 

This result is possible only when caregivers proactively engage their patients and enrich their experience through awareness and clear dialogue. HMOs, incentivize healthcare facilities and practitioners who do not max out the capitation limit from their risk pool. 

Scope of services

When an HMO agrees with a healthcare facility or a provider, then a list of services that will be covered is determined. Most services may be common among health plans and some may have customizations as per the product design of the HMO. A few of the common services usually covered by HMOs agreements are:

  • Preventive, diagnostic, and treatments
  • Immunizations, injectables, and medications as recommended for the given condition
  • Outpatient diagnostics and laboratory tests at secondary care centers
  • Patient engagement services like health education and counseling services 

Advantages of capitation model

  1. Advance payment cycle

The cash flows under a capitation payment model are definitive and can be forecasted. In this manner, if a local clinic has plans to expand its infrastructure, then it is in a better position to plan its scalability. Also, the payment is in advance and there is no waiting period for the healthcare facility. 

  1. Preventive care is incentivized

The capitation model is looking to reduce the repeated episodes of patient care where they need to visit a hospital or a clinic or be admitted again for the same medical reasons. Through patient engagement, their experience and outcome are enhanced and disease management is focused on. 

  1. Only required care is provided

In a capitation model, there is no incentive for a healthcare facility to recommend multiple diagnostic tests as they get paid a fixed flat fee for the care they provide. 


There is an ambivalent view that a capitation model can lead to healthcare professionals not recommending required tests to a patient even when they genuinely need them. But cases have proved this statement to be a myth that can be busted with proof.