Capitation and fee-for-service (FFS) are different modes of payment for healthcare providers. In capitation, doctors are paid a set amount for each patient they see, while FFS pays doctors according to what procedures are used to treat a patient. Both systems are in widespread use in the U.S. healthcare system, but FFS has been in decline over the past decade.
How Capitation and Fee-for-Service Payments Work
The traditional system of health care is that of fee-for-service. A patient visits a doctor or healthcare facility, is evaluated and treated, and pays for what was done. Capitation arises as a form of insurance for groups of people, with the intent of spreading exposure (risk) of health care, thus reducing the average individual cost per patient. In the U.S., health care paid for without private insurance remains primarily based on FFS, with health insurance plans, including those created under the Affordable Care Act, relying mainly on capitation.
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. For example, a pediatrician may be paid $30 for each of the 120 children under his/her care, per month, even though the doctor may end up seeing only 35-40 of them (35-40 visits) in an average month. In other words, the doctor receives an average of about $90 per each child's visit in an average month.
The amount of remuneration is based on the average expected healthcare utilization of that patient (more remuneration is paid for patients with extensive or complicated medical histories). Other factors considered include age, race, sex, type of employment, and geographical location.
The capitation system provides financial certainty to both providers (doctors, hospitals) and payers (insurance companies) in the aspects of care delivery. Providers assume the risk of more patients than expected falling sick and needing care. In the case of the pediatric example, if a flu breaks out amongst the doctor's patients, he/she may end up seeing 55-60 children three or four times in that month, a total of over 200 visits, for the same payment, averaging about $18 per visit.
As the name implies, FFS 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.
Continuing the example of the pediatrician, a FFS plan will pay the doctor for the services required to tend all the children who visit. Some may require only 1-2 tests, while others may need several tests, procedures, and follow-up visits. The projected cost per patient can thus vary from a few dollars to hundreds or even thousands of dollars.
Over the past decade, capitation has become the preferred form of providing health care payments for medical and health plans. Medicaid has been using capitation as its base system since the 1970s, though aspects of the plan, such as mental health treatments and dental care, remained as FFS. Large insurance companies moved away from FFS systems because the rising costs of lab tests, diagnostic procedures, and medication were severely curtailing profits.
Effects on Healthcare Quality
As covered extensively in healthcare industry publications, such as Modern Health Care and Managed Care, FFS programs are seen as being "excessive cost" systems, as they encourage doctors to order a higher number of tests and procedures. The basic incentive (for health care providers) in the FFS system is to generate more ways to get paid, instead of focusing on what the patient truly needs. To doctors in these systems, the rationale is that they are doing everything they can to help patients and "playing it safe" with tests and procedures. Doctors also point to medical malpractice lawsuits and high damage awards as a reason for making sure they have done everything possible to help their patients. This is known as "defensive medicine."
A 2011-2012 study by the Health Research and Education Trust revealed that Quality of Life Measures (QLM) in mental health patients were higher during and after treatment within managed health (capitation) systems than for those in FFS systems. Although initial treatment costs were roughly equal, there was a significant difference in follow-up and further extended treatment costs, as patients under capitation systems reflected a 22% lower cost of care than those in the FFS systems. Patients in the capitation systems reported an average QLM 19%-28% higher, and health care practitioners were 26% more satisfied with the care they could provide under the capitation systems' guidelines.
However, some patients see FFS systems as useful, for they do get a broader range of health care services. But the tendency of these systems is to require pre-approval of tests and procedures, which creates delays in patient care. For patients, these delays are stressful and create an adversarial environment with their health plan or insurer.
Another criticism of FFS systems is that they encourage later interventions in health care, avoiding or downplaying preventive care in favor of greater and more profitable efforts (for doctors) when the patient's health breaks down. However, private enterprise insurers are not focused on preventive care, as these health efforts are considered to be largely outside the realm of direct health care.
Capitation systems are criticized by health care practitioners for focusing more on quantity of health care, i.e., moving more patients through the system, than on true quality of health care. As capitation pays a set fee per month (or trimester), patients are essentially offered a low-cost option to visit their doctors as often as they feel is necessary. Some capitation systems place limits on patient visits or medical interventions (house or institutional calls), but neither health care practitioners nor patients find these limits truly helpful.
Capitation systems in health management organizations and other similar health plans often reduced costs by "cherry picking" patients. Their focus was on selecting healthy people and offering a lower fee to these patients to join the plan. Or if a patient suddenly developed a condition requiring major medical costs, the plan or insurer would cease coverage on that person (prior to changes instituted by the Affordable Care Act).
Medicaid's Blended System
By combining capitation for basic services and FFS payments for less-required health care needs, Medicaid is able to reduce operational costs and absorb the growing number of patients that have risen from the Baby Boomer generation (the largest population growth period in U.S. history). Capitation incentivizes preventive health care, including in-home services, while the limited FFS treatments allow for cost analysis and adjustments between doctors, service providers, and Medicaid.