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Capitation - One Alternative to a “Fee for Service”

Gallagher Healthcare :: Industry Insights
By Dean Gereau | 12/3/2013

One can hardly escape conversations about “change” in healthcare circles today. Changing demographics, changing industries, changing regulations; the list continues. However, one change, the change in provider reimbursement, is pervasive. We hear constant sound bites concerning the “movement away from the 'fee for service' model,” but movement toward what? If we are not reimbursing providers for procedures conducted, how are we measuring healthcare delivery and how is it paid for?

The most prominent model contained within the Affordable Care Act (ACA) and most often discussed is the capitation model. Far from a new concept in healthcare payment arrangements, capitation methods have existed in American medical models since the emergence of HMOs. In a capitative payment system, a specific group of healthcare providers are granted a fixed pool of money to treat their designated patient population. The total dollar amount is preset and whatever leftover amounts remain after care has been rendered are retained as “profit” for the provider system. This model is predicated on the concept that dealing with a finite capital resource rather than a limitless reservoir will encourage provider systems to treat patients more efficiently and effectively. By encouraging systems to adopt low-cost, high-benefit adaptations, the capitation model intends to dilute the incentive for excessive, ineffective treatment regimes in favor of more medically justifiable and cost-effective alternatives. The anticipated result is a provider base incentivized to create a healthy population rather than a consistent stream of billable procedures.

This model does present unique challenges as well, as no two provider systems will be assigned identical patient populations. Complex payment mechanisms must be used to adjust the allocation of medical resources appropriately to reflect the needs of each respective population and the unpredictable nature of healthcare delivery causes additional complications for a system with unexpectedly biased patient populations. For example, if one provider system happens to service a population affected by an industrial chemical accident or in which complicated pregnancies are over-represented, that population is going to exhaust their capitated resources much sooner than actuarially anticipated. To compensate for these inevitable outliers, a capitation system must maintain an adequate reinsurance mechanism that can be used to backfill after a catastrophic population development.

Additional payment models such as “bundled” payment and “reference” pricing are also being discussed and implemented to a certain extent. These models may be addressed in future postings.


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