There are different forms or methods of payment to healthcare providers. A third-party payment is a system whereby healthcare agent(s) contracts with providers to pay for the medical care of patients. Second-party payment, according to Nowicki (2011), is a payment structure whereby healthcare payment is made from the person receiving the medical services. One example to the different forms of payment would be “capitation.” Capitation is a payment method on a single- person basis, for a specific bundle of services during a specific period of time—normally a month or a year. Capitation is usually used in the Health Maintenance Organization (HMO), as a self-funded health care benefit plan. For example, A physician is an HMO provider for a health plan paid at a capitation rate of $7.00 per member. The real amount of money paid in the capitation system is determined by the types of services that are provided, the number of patients involved, the period of services during which the services are provided. In determining how capitation rates work, according to the American College of Physicians, “Capitation rates are developed using local costs and average utilization of services and therefore can vary from one region of the country to another.” Capitation and decapitation have nothing to do with each other, but you could hardly tell the difference when observing the intense debate over the value and risks of capitation in health care payment. Those who favor capitation seem to regard it as the sine qua non of effective containment of health care costs; those who oppose it suggest that it will spell nothing less than the end of medicine’s commitment to patient advocacy and the Hippocratic oath. Meanwhile, health care coverage for more and more Americans is paid for in this way. In terms of the costs and benefits of using capitation; According to Nowicki (2011), “if the costs to care for the covered population fall below the capitated amount, the healthcare organization makes money. If the costs exceed the capitated amount, the organization does not profit (p. 78).”
Payment on a per-person basis, for a defined package of services during a fixed period – usually a month or year. Commonly, a per-person fixed rate is paid to a general practitioner based on the number of individuals enrolled in that practice for the time regardless of whether they use services and the type of service rendered. Capitation is generally used to pay outpatient providers including GPs and less often specialists. Capitation shifts the financial risks to providers, as they are responsible for any costs above the capitation rate and are able to keep any unused funds. The risks vary by the specific terms of the contract and organizational arrangements. Incentives under capitation tend towards risk selection, enrolling only healthy patients (unless the capitation payments are adjusted to adequately reflect the relative expected cost of treating different categories of individuals), under-providing services and tests, limiting drugs (if drugs fall under the capitation), referring sick patients on to specialists (if it is the primary care doctor who is subject to capitation), but it also provides stronger incentives than FFS to become more efficient, control costs. To prevent negative effects including under-provision of care and exclusion of high risk patients, capitation often comprises some sort of case-mix adjustment and output-based incentives such as FFS payment for delivering specific services.
Nowicki, M. (2011). Introduction to the Financial Management of Healthcare Organizations. Chicago, IL: Health Administration Press.
