Why Capitation Contracts Can Benefit Providers, Payers, and Patients

By Lynn Carroll, COO, HSBlox
Twitter: @HS_Blox

The dramatic loss of revenue by healthcare providers during the COVID-19 pandemic was a sobering reminder that healthcare organizations rely on the traditional fee-for-service (FFS) revenue model at their own peril. In response, more provider groups are implementing alternative payment models (APMs) built around financial incentives to deliver high-quality care efficiently and cost-effectively.

One of those APMs is capitation, a system under which payers reimburse providers with a global fee for delivering services over a fixed period of time or episode of care. Capitation is designed to support the goals of value-based care (VBC) to improve patient and population outcomes while reducing costs of care.

Global capitation contracts ensure cost predictability (because they are paying a fixed amount) for payers and reduced administrative costs. For providers, capitation offers a stable revenue flow and improved administrative efficiency. However, capitation also presents risk to provider organizations because they are financially accountable for outcomes and cost control.

Aligning incentives

Capitation is not a new reimbursement model; Medicare began experimenting with capitation payments in the late 1970s. Now, though, we are seeing payers and providers support traditional global capitation contracts – which might cover primary care, behavioral health, or some types of specialty care – with greater coordination between primary and specialty care. These newer capitation models are designed to better align incentives between primary care providers and specialists.

Patients who are polychronic routinely see multiple physicians or perhaps a particular specialist who treats the patient’s most severe condition. Over time these patients will receive more care from specialty providers than their primary care physicians. But if specialty care under value-based or fixed-price types of programs isn’t harmonized with primary care, providers may fail to meet their cost containment or program goals and could order unnecessary or duplicative services.

This lack of harmonization even can result in patients not receiving appropriate care. HealthScape Advisors warns that “primary care physicians (PCPs) are less able to manage the health of polychronic members without very strong engagement from specialists.” In addition, the healthcare consultancy writes, payers “continue to struggle with empowering risk-bearing PCPs with the actionable data and information necessary to inform clinical interventions and optimize referral patterns to efficient specialists, particularly when those services are delivered outside of a singular system of care.”

While primary care is foundational and well-suited to capitation models, a blend of primary care plus specialty components is being integrated into these contracts, particularly through Medicare. These hybrid arrangements require more clinically oriented care coordination activities that impact which entities participate in a network model and where referrals go from primary care to different specialists.

Capitation challenges for patients and providers

Patients’ concerns regarding capitation models involve their ability to choose. Will I receive the specialty care I need? And will I be able to see the specialist of my choice? As healthcare organizations continue to migrate to more narrow networks and assume risk for a particular population under a fixed payment model, they have a greater stake in understanding referral patterns and consumption of services and are motivated to be judicious about how they deploy resources.

The challenge for providers is delivering a set of services that meets patient expectations under these program designs. Though care is more aligned (and theoretically more effective) under these types of programs, elements of patient choice are taken away. This makes patient/member engagement and the consumer experience even more critical to provider/payer efforts to retain customers. If patients/members must forgo choice under a plan, providers/payers must compensate through superior engagement and efficient care coordination. Those should help to ensure better outcomes and satisfy patients/members.

Consistency of contracts is a major advantage of global reimbursement programs. Nonetheless, providers with contracts across different lines of business – Medicare, Medicaid, commercial, employer-direct components – must be able to manage the nuances of each program.

An administrative strategy for a successful capitation program is to develop a more consistent view of the included services and guidelines. This approach can make it easier to administer multiple programs across payer contracts.

Capitation contracts are clearly aligned with the goals of VBC, creating incentives for collaboration and stronger care coordination between primary and specialty care providers. “For many patients, the primary care clinician is the first point of contact with the healthcare delivery system,” the Centers for Medicare and Medicaid Services (CMS) writes. “CMS’s experience with innovative models, programs and demonstrations to date has shown that when incentives for primary care clinicians are aligned to reward the provision of high-value care, the quality and cost effectiveness of patient care improve.”

Preparing your organization for capitation

To fully support capitation reimbursement models, it is imperative that healthcare organizations ensure:

  • Primary care and specialty care are aligned
  • Patients/members have a good experience that includes appropriate delivery of care according to quality measures associated with outcomes
  • They have a digital infrastructure that supports a network of multiple stakeholders, which may include hospitals and physician groups, payers, social service networks, and community-based organizations (CBOs)


Providers, payers, and patients can derive benefits from capitation. But these contracts require thoughtful planning, careful alignment between PCPs and specialists, a commitment to optimizing the patient/member experience within a narrower network of providers, and a robust and scalable digital infrastructure.