Capitation and fee for service are different modes of payment for healthcare providers.
edit Payment in capitation vs fee for service
edit Capitation payments
Under a capitation system, healthcare service providers (physicians) are paid a set amount for each enrolled person assigned to that physician or group of physicians, whether or not that person seeks care, per period of time.
The amount of remuneration is based on the average expected health care utilization of that patient (more remuneration for patients with medical history). Other factors considered include age, race, sex, type of employment, and geographical location.
The capitation system provides certainty to both providers (doctors, hospitals) and payers (insurance companies) as to the financial aspects of care delivery. The providers assume the risk of more patients than expected falling sick and needing care.
edit Fee for service payments
As the name implies, fee for service payments are made based on invoices for services delivered. In this system, neither the healthcare provider nor the payer have any certainty as to medical costs. The risk of cost overruns caused by more people than expected needing healthcare is assumed by the payer (insurance company) and not the providers.
edit Fee For Service in the healthcare debate
Some critics believe that the fee for service system provides healthcare providers (doctors, hospitals) incentives to do unnecessary medial procedures. They argue that since providers get paid more for delivering more services, rather than for outcomes, they tend to run tests and procedures that may not otherwise be necessary. This drives up the cost of healthcare.