How Capitation Contracts Benefit Providers, Payers and Patients


The Covid-19 pandemic triggered a dramatic decline in patient volume that devastated revenues for provider organizations operating under the fee-for-service (FFS) reimbursement model. In response, more provider organizations have adopted alternative payment models (APM) built around financial incentives to efficiently deliver high-quality care.

Lynn Carroll, chief operating officer, HSBlox

Lynn Carroll, chief operating officer, HSBlox

Among those APMs is capitation, a payment system under which providers receive a global fee from payers for services delivered over a fixed period of time or episode of care. Capitation reimbursement models are designed to support the goals of value-based care (VBC) – improving individual and population outcomes while reducing healthcare costs.

For payers, global capitation contracts ensure cost predictability (because they are paying a fixed amount) and a reduction in administrative costs. For providers, capitation ensures a predictable revenue flow and improved administrative efficiency. But capitation also introduces risk to provider organizations through increased accountability for outcomes and controlling costs of care.

The evolution of capitation

Capitation isn’t new. Medicare began experimenting with capitation payments in the 1970s. But we are beginning to see payers and providers meld traditional global capitation contracts — which might cover primary care, behavioral health, or some types of specialty care — with greater coordination between primary and specialty care. The goal of these newer capitation models is to create greater alignment of incentives between primary care providers and specialists.

If patients are polychronic, with multiple conditions such as diabetes, heart disease and chronic obstructive pulmonary disease, their health is managed by multiple physicians or perhaps a particular specialist who's dealing with the most severe disease. Eventually the patients begin receiving more specialty care than primary care. The challenge under more value-based or fixed-price types of programs is that if specialty care isn’t harmonized with primary care, providers can easily overshoot some of their cost containment or program goals and may order unnecessary or duplicative services. At worst, appropriate care may not be delivered to patients.

In a report on value transformation in specialty care, HealthScape Advisors writes that “primary care physicians (PCPs) are less able to manage the health of polychronic members without very strong engagement from specialists.” On the payer side, the HealthScape report notes that payers “continue to struggle with empowering risk-bearing PCPs with the actionable data and information necessary to inform clinical interventions and optimize referral patterns to efficient specialists, particularly when those services are delivered outside of a singular system of care.”

While primary care is foundational and therefore well-suited to capitation models, we’re now seeing a blend of primary care plus specialty components in these contracts, particularly with Medicare. These arrangements call for more clinically oriented care coordination types of activities, impacting who participates in a network model and where referrals go from primary care to various specialists.

Less choice, more engagement

For patients, their concerns with capitation models involve choice. Will I get the specialty care that I need, and will I be able to see the specialist of my choice? So, with the migration to more narrow networks, and as organizations or providers assume risk for a particular population under a fixed payment model, they are more incentivized to understand referral patterns and consumption of services and be more judicious about how they deploy resources.

The challenge for providers is delivering a set of services that meets patient expectations under these program designs. While care becomes more aligned under these types of programs, some patient choice is taken away. Consequently, patient/member engagement and the consumer experience become increasingly critical in retaining healthcare customers. If patients/members are giving up choice, engagement and effective care coordination are paramount. Those, together, should help to ensure better outcomes.

An advantage of these global reimbursement programs is consistency of contracts. Still, a provider organization contracting across different lines of business — Medicare, Medicaid, commercial, maybe some employer-direct components — will need to manage the different nuances of each program.

Administratively, a strategy for capitation program success is to develop a more consistent view of the included services and guidelines, which can reduce the complexity of administering multiple programs across payer contracts.

Capitation contracts are clearly aligned with the goals of VBC, incentivizing collaboration and stronger care coordination between primary and specialty care providers. As CMS writes, “When incentives for primary care clinicians are aligned to reward the provision of high value care, the quality and cost effectiveness of patient care improves.”

Capitation preparation

For healthcare organizations to fully support capitation reimbursement models, they must ensure:

  • Alignment between primary care and specialty care
  • A good experience for patients/members that includes appropriate delivery of care according to quality measures associated with outcomes
  • A digital infrastructure that supports a network of multiple stakeholders that may include hospitals and physician groups, payers, social service networks, and community-based organizations (CBOs)

Capitation contracts can benefit providers, payers, and patients. But they require thoughtful planning, careful alignment between PCPs and specialists, a commitment to optimizing the patient/member experience within a narrower network of providers, and a robust digital infrastructure.

Lynn Carroll is the chief operating officer of HSBlox, an Atlanta-based technology company that supports healthcare organizations delivering value-based care.

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