Capitation vs Fee-For-Service

Apr 9, 2015

Capitation and fee-for-service (FFS) are different modes of payment for healthcare providers. In capitation, doctors are paid a set amount per member per month, FFS pays providers based on the service provided to a patient. Both systems are in widespread use in the U.S. healthcare system, with capitation increasing in the past two years.

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 the provider is paid by a health plan for what was done. Capitation arose as an alternative form of payment, with the intent of spreading exposure (risk) of health care, thus reducing the average individual cost per patient. In the U.S. health care is paid for primarily based on FFS by health insurance plans. However, as mentioned, capitation is increasing, particulary for Medicare and Medicaid members and will be one of the main forms of payment within three to four years for members under the ACOs.

Capitation Systems

Under a capitation system, healthcare service providers (physicians/hospitals) are paid a set amount for each member assigned to that provider by the health plan. The provider is paid the “cap” whether or not that person seeks care. Basically acting as a small health plan. For example, an IPA may be assigned 5,000 members and will be paid $35 per member per month. This would equate to $175,000 guaranteed income per month. If total charges incurred during that month was $50,000, then the IPA would keep the $125,000 remaining.  If the total charges incurred was $200,000, then the IPA would need to pay the additional $25,000.

The amount of capitation fee is usually based on a percentage of the premium the health plan recieves per member per month, or based on average cost per member per month on that specific 5,000 population.

The capitation system provides a financial guarantee to the providers (doctors, hospitals) and financial certainty to the payers (insurance companies). For the payers they know they will only be paying the fee amount per member per month. For the providers they are guarenteed that the agreed amount will be recieved in their office. The providers risk is if the aggregate of all claims exceed what they are paid on a capitaton basis or if one or two members are “catastrophic.”

Fee-for-Service Systems

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 IPA, a FFS plan would provide for the health plan to pay a doctor for the services required to tend to the member. Some may require only one or two visits for the physician, 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 an up and coming form of providing healthcare payments by the health plan for medical care. HMOs with Medicaid and Medicare have been using this form of payement for decades. Recently both the Federal government (Medicare and Medicaid) have been moving away from FFS systems because of 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.”

Explanation of Provider Excess Loss Insurance

Provider Excess Loss coverage is coverage for catastrophic claims incurred based on a capitation agreement between the health plan and a provider.

The HMO transfers risk to a provider via a capitation agreement. The provider is now paid on a per member per month basis rather than a fee-for-service basis. Services that are not the responsibility of the provider are shown in the capitation agreement and frequently under an exhibit titled “Division of Financial Responsibility” matrix (DoFR). The stop-loss coverage provided protection for charges incurred by the capitated provider for individual members who exceed a specific dollar amount in charges.  The services that are eligible under the stop-loss policy are shown in the Schedule of Insurance.

McPhee & Associates are leading healthcare specialty brokers and have 30 years experience with HMO Reinsurance and Capitation Stop-Loss insurance.

Susan Kattoo
Executive Vice President
McPhee & Associates

(818) 541-7900