Grace Franz Assignment 2

Healthcare Economics 10/21/2020

XHAD 6230 500

Rising costs in the healthcare market have led to many regulations and programs aiming to
reduce costs within the industry. Two popular models for provider reimbursement, fee-for-
service, and capitation, have had several iterations over the last few decades. Interestingly, these
two programs provide incentives to providers in a very different manner. The incentive structure
under capitation shifts the risk back to the physician which has both advantages and
disadvantages.  The incentive structure under capitation aims to decrease the cost of care by
decreasing needless utilization.

Capitation is a system by which payment for care is provided by the consumer, in a fixed
amount, prior to the care being delivered. These programs provide services by providers for a
defined population but without prior knowledge of the services that will need to be rendered. The
primary care provider (PCP) agrees to cover a very specific list of services for the patients for a
set fee. Some common services are preventative and diagnostic services (lab, imaging, exams),
as well as health and wellness education. (Alguire, 2019) While the initial compensation that
capitation offers may be low, the structure of additional incentives can lead to higher
reimbursement amounts for providers.  

Programs that utilize capitation require patients to pay a per member per month (PMPM) fee for
service.  A portion of the PMPM fee is given to a primary care physician (PCP) to pay for the
anticipated preventative and primary care services. Another portion is placed in a withhold
account that is reserved for Emergency Department services. If the patient does not utilize
emergency services these funds will be paid back to the PCP. This incentivizes the provider to
have ample appointments for patients to be seen even in an urgent situation. The remainder of
the funds will go to pay for additional care such as hospitalization or specialty services. Any
funds not used by these services are returned to the provider. By contrast, any deficits of funds
caused by overuse are removed from the withheld pool and thus decrease provider compensation.
(Henderson, 2018) This structure puts the PCP in the role of the gatekeeper, issuing medical
screening and deeming appropriate care for the patient.  In this system, the provider is
incentivized to decrease the patient’s utilization of services. This may mean that the provider
increases the quality of preventative care and wellness teachings so the patient stays at maximum
health, or it may mean that the provider will deny the patient specialty services that the patient
needs.  In either case, the fewer services the patient uses, the more money the provider makes. 
(James & Poulsen, 2016)

Fee-for-service programs are the more traditional way of billing patients for care.  In this
structure, the provider bills the patient for each and every service the patient receives.  The
patient must be billed for care after the treatment is received.  In the mid-1980s Medicare created
a standardized billing code for each type of care provided. (Dotson, 2013) Providers could no
longer bill for care unless a CPT code had been established for the care that was given. 
According to The Case of Capitation, “for each billed item the government pays the lesser of the
group’s actual billed charges or a federal maximum allowed rate.” (James & Poulsen, 2016) Due
to this regulation providers try to guarantee the maximum payment for each code and thus sets
prices high for each service. The incentive to artificially drive up prices to maximize profit from
Medicare patients will impact the physician’s reimbursement for commercial and self-pay
patients also.  In addition to these artificially high prices, providers are incentivized to provide as
 Grace Franz Assignment 2
Healthcare Economics 10/21/2020
XHAD 6230 500

many services to patients as they can.  The more services the provider can bill for, the more
money the provider makes.  Additionally, from a monetary perspective, there is little incentive to
cultivate the overall health of the patient because the sicker the patient is the more opportunity
the physician has to treat the patient and thus increase profit.

In a capitation program, the risk (normally just spread between plan participants) is also shared
with the providers.  This risk-sharing has both positive and negative impacts.  Since patients
have little “skin in the game” under normal insurance situations, patients tend to over-utilize the
healthcare system.  Placing the PCP as a gatekeeper allows the physician to ensure that care is
medically necessary and can screen patients for symptoms before sending them on to a
specialist.  Another benefit of sharing risk with the physician is that it gives the physician
motivation to keep her patients as well as possible.  This might lead to better health and wellness
education, and better preventative care such as immunizations and early screening for cancers.
(Henderson, 2018)  

On the other hand, since providers are incentivized to decrease utilization, physicians can save
money by “withholding care or providing less expensive care.” (Hagland, 2014) When providers
make choices based on finances rather than medically necessary care there is a conflict of
interest. Another potential issue with risk-sharing is that providers may limit the disease types
they will cover within the plan.  As described in the articles The Future of Capitation and Patient
Protection and Risk Selection, the provider in capitation programs can decrease their financial
risk by influencing subscribers to utilize different insurance plans.  These articles argue that
physicians often give advice to patients on which insurance plans they should subscribe to.  By
encouraging sicker patients out of their plans, they are creating a pool of patients with lower risk
thus increasing the financial benefit to the provider. (Goodson et al., 2001) (Wynia, Zucker,
Supran, & Selker, 2002)

Both capitation and fee-for-service plans pose both benefits and risks for patients.  In a capitation
model, the patient may benefit from physicians motivated to keep them at optimal health,
however, they may find it difficult to seek care from a specialist when needed.  A patient
utilizing fee-for-service care may find providers willing to perform any and all services whether
or not they are medically necessary.

 
 Grace Franz Assignment 2
Healthcare Economics 10/21/2020
XHAD 6230 500

References
Alguire, P. (2019). Understanding Capitation. Retrieved October 21, 2020, from
https://www.acponline.org/about-acp/about-internal-medicine/career-paths/residency-
career-counseling/guidance/understanding-capitation

Dotson, P. (2013). CPT® Codes: What Are They, Why Are They Necessary, and How Are They
Developed? Advances in Wound Care, 2(10), 583-587. doi:10.1089/wound.2013.0483

Goodson, J. D., Bierman, A. S., Fein, O., Rask, K., Rich, E. C., & Selker, H. P. (2001). The
future of capitation The physician role in managing change in practice. Journal of General
Internal Medicine, 16(4), 250-256. doi:10.1046/j.1525-1497.2001.016004250.x

Hagland, M. (2014). Financial Incentives - How Does Your Doctor Get Paid? | Dr. Solomon's
Dilemma | FRONTLINE. Retrieved October 21, 2020, from
https://www.pbs.org/wgbh/pages/frontline/shows/doctor/care/capitation.html

Henderson, J. W. (2018). Health economics and policy. Boston, MA: Cengage.

James, B. C., MD, & Poulsen, G. P. (2016, November 07). The Case for Capitation. Retrieved
October 21, 2020, from https://hbr.org/2016/07/the-case-for-capitation

Wynia, M. K., Zucker, D., Supran, S., & Selker, H. P. (2002). Patient protection and risk
selection. Journal of General Internal Medicine, 17(1), 40-47. doi:10.1046/j.1525-
1497.2002.10349.x