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Capitation vs. Fee-for-Service

As the current U.S. healthcare environment trends toward value-based care, the fee-for-service (FFS) reimbursement model is under intense scrutiny, often labeled as an antiquated payment model that promotes over-utilization by physicians and patients, while creating fragmentation among healthcare service providers. The Affordable Care Act of 2010, along with MACRA legislation in 2015, has slowly helped to redirect healthcare payment reform away from fee-for-service to a capitation payment system. Both models are in widespread use in the U.S., and both have their critics; however, with a more intentional focus on quality, efficiency, care coordination, cost control, and preventive health, capitation is developing as the model of choice for the value-based care movement.

Fee-for-Service Model

In the traditional fee-for-service payment model private health insurers and government programs (e.g., Medicaid and Medicare) reimburse physicians for the number of services provided. Every patient visit, evaluation, treatment, procedure, test, etc. is billed by the provider to a third-party payer for payment. Many recognize the FFS model as a quantity-based or “excessive cost” payment system, incentivizing doctors to order a higher number of tests and procedures to generate more income, and encouraging them to practice “defensive medicine,” doing everything possible to help patients by “playing it safe” when evaluating and ordering treatments (Kattoo). Inherently, the fee-for-service payment structure leaves the provider and patient “absolved” from fiscal accountability, which arguably encourages over-utilization by both parties, leading to an increase in overall healthcare costs over time.

As structured, the FFS payment model places the burden of financial risk on the payer (i.e., the insurance company). Simply stated, if patients need more care than expected, the burden of cost overages lies with the payer, not the provider. This arrangement creates a scenario with inherent financial uncertainty for the payer concerning medical care costs and payment, explaining in part the ongoing rise in health insurance premiums. In addition, the fee-for-service payment model is also criticized by some as being a reactive healthcare model, encouraging “later interventions in health care, avoiding or downplaying preventive care in favor of greater and more profitable efforts (for doctors) when the patient’s health breaks down” (Diffen). For further insight on the challenges facing the FFS model, see the TXCIN article, “Fee-for-Service Health Care: Three Phenomenon Affecting Success.”

http://www.insight-txcin.org/post/fee-for-service-health-care-three-phenomenon-affecting-success

Capitation Model

Under the capitation payment model, providers are paid a prospective “cap,” or per member per month (PMPM) payment, to provide care for individuals enrolled in managed health plans (e.g., Medicaid and Medicare). Providers strive to meet and to exceed defined standards for quality and efficiency, and if successful, then they get to keep any net realized savings below the assigned payment per patient. In theory, this payment structure encourages providers to consider best practices, value, and preventive health when addressing patient needs. The capitation model, therefore, is recognized as a performance-based payment system, enabling providers to focus on value-based care, and financially incentivizing them to give the right quality care at the right time to a greater number of patients. As healthcare journalist Mark Hagland explains, “Capitation [is] meant to be a step up in terms of creating better incentives for efficiency, cost control, and preventive care in health care.”

The capitation system of payment is recognized as a more stable and financially certain payment model, offering a monthly financial guarantee to providers (primary care doctors, specialists, and hospitals), whether patients seek care or not, and providing financial certainty to payers (insurance companies) regarding the costs involved to manage the health of patient populations. Under the capitation payment model, the financial risk and the control of managed care shifts from the payer to the provider, giving providers the ability to champion quality care, preventive medicine, and cost-efficiency, helping to slow rising of healthcare costs.

As the transition to value-based care continues, the question is whether or not capitated payment rates will remain high enough to allow for provider participation to be successful. As Hagland notes, in some U.S. markets low capitation payments are not providing enough money to really fund the kinds of preventive health care services that capitation should theoretically encourage. When doctors and hospitals begin to lose money, the capitation model has the potential of “stalling out” as a payment method, which would force health care providers to return to the fee-for-service reimbursement model. 

About TXCIN

North Texas Clinically Integrated Network, Inc. (dba TXCIN) is a non-profit ACO that began in late 2014. A small group of independent physicians aligned to initiate clinical integration and value-based contracting. Partnering with RevelationMD and its state-of-the art information platform, TXCIN has become one of the largest, independent networks of physicians in North Texas.

References:

Hagland, Mark. “How Does Your Doctor Get Paid? The Controversy Over Capitation.” pbs.org. 2014. https://www.pbs.org/wgbh/pages/frontline/shows/doctor/care/capitation.html

Kattoo, Susan. “Capitation vs. Fee-For-Service.” McPhee & Associates, Inc. April 9th, 2015. https://mcpheeassociates.com/capitation-vs-fee-for-service/

Nguyen, Kevin V. “Capitation vs. Fee-for-Service Healthcare Payment Models.” Prognocis. April 7th, 2016.

https://prognocis.com/capitation-vs-fee-for-service-healthcare-payment-models/

Unknown. “Capitation vs. Fee For Service.” Diffen. 2015. https://www.diffen.com/difference/Capitation_vs_Fee_For_Service

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