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A capitation payment is a set dollar amount per patient per month that a managed care organization (MCO) pays to a physician or physician group to cover a specified set of services, without regard to the actual number of services provide to each patient. The capitation may cover the physician's own services, referral services, or all medical services and/or administrative costs. If patient costs exceed the capitation amount, the physician must absorb these additional costs. If costs are below the capitation, the physician may keep the additional money.


The integration of physician, hospital and ancillary health care providers into a single provider organization, by contract or otherwise, has provided an opportunity for payors to shift the risk of a wide array of health care services to such organizations through a global capitation payment arrangement. Through a global capitation payment, a payor pays an Integrated Provider Organization (IPO) a set rate per patient per month for each patient who elects to receive services from the IPO's panel of providers. The payment rate encompasses all of the health care services that are rendered through providers who are under contract with the IPO, including physician and hospital services, and may include services rendered by noncontract providers as well. The IPO is financially responsible for the compensation of all providers and will incur losses if the total compensation paid to such providers exceeds the aggregated global capitation payment.

Excerpt from Douglas A. Hastings, Capitation, Risk Sharing, and Managed Care Issues, AHLA Seminar Series, (1994).

As discussed, capitation arrangements typically involve a flat amount to be paid by an MCO to a contracting provider each month for each MCO member entitled to receive contract covered health care services from (or through) that provider during the month to which the capitation payment applies. However, “capitation” arrangements also include compensation based on a percentage of the premiums collected by the MCO. Under such arrangements, the provider is entitled to receive monthly a percentage of the premium dollars received by the MCO each month for each member entitled to receive contracted health care services from (or through) the provider during that month. Percentage of premium compensation is inherently more risky for the provider than traditional capitation compensation because, under percentage of premium compensation arrangements, the provider assumes not only the risk of overutilization of health care services, but also the risk that the MCO has underpriced its product, or mispredicted its share of the market.


It goes without saying that a provider should not enter into a capitation arrangement until it has thoroughly assessed the financial, liability and other business risk associated with such an arrangement, and conducted an actuarial analysis separately with respect to each patient population to be covered by the capitation arrangement. Where multiple MCO patient populations are to be covered by the provider under a capitation arrangement, the provider also may want to ensure that aggregate or per-patient-population enrollment levels are achieved before capitation compensation becomes applicable.

Excerpt from Angela A. Mickelson, Capitation, Risk Sharing, and Other Managed Care Issues, AHLA Seminar Series (1994).