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Concepts and Introduction

As a means of reimbursing doctors, capitation has been around longer than even third-party FFS, first appearing in the 19th century when railroads used it as means to entice doctors from their big city practices to take care of injured and sick workers in remote places. The idea was pretty simple: give doctors a guaranteed income stream based on the number of potential patient / employees they might see. For the same reason, contractors for big government projects resorted to capitation (like the Grand Coulee and Hoover dams in the 1930’s). They paid doctors, say, 5 cents per employee, per month, and with tens of thousands of employees working on these vast construction projects, during the Great Depression no less, 5 cents was very attractive. It is important to remember, though, that the original impulse was not to put doctors at risk, but to get them to provide medical services in the middle of nowhere, and to this purpose, it worked.

After World War II, and more particularly in the 1980’s and 1990’s with the growth of managed care, capitation was increasingly seen as the antidote to poor quality, inflationary FFS. Kaiser paid its captive physician corps, Permanente, on a capitated basis, as did many other early foundation or staff model HMOs. Capitation has come in many flavors, but it can be essentially boiled down to two basic forms: global capitation for large, integrated health systems that covers entire populations for their comprehensive medical needs, and sub-capitation for primary and specialty care. The idea remains as simple as its origins. Put a health system or practice at risk for a set per member, per month (PMPM) fee, and it will have a strong incentive to manage the care of patients so that a profit can be made. As such, capitation is the polar opposite of FFS.

Lessons Learned

The Pros – Because capitation gives providers a steady, predictable cash flow on a large population basis, there is no doubt that capitated providers have had the means and the capital to invest in more sophisticated care management methods and IT than FFS practices. Where capitated models have been in place for lengthy periods of time, and where they are most popular, such as California and the Twin Cities in Minnesota, large integrated provider systems have emerged that have made substantial investments in electronic medical records, decision support systems, and fully electronic prescribing. There is little doubt that these systems consistently outperform fragmented FFS medicine. It is for this reason that global capitation is enjoying a resurgence, advocated by many as the payment method of choice for ACOs.

The Cons – As a universal payment reform mechanism, capitation has a decidedly checkered past. Once thought to be inevitable in the 1990’s, many capitation arrangements fell into disrepute and were abandoned. While the PMPM concept is simple, it cloaked a lurking risk management problem that proved too much for many providers to handle. Moreover, since capitation assumes that one organization can do all things equally well under the PMPM, the strict “steerage” requirements for patients quickly alienated many consumers. Much of the consumer backlash against HMOs came as a result of limited provider choices under capitation contracts. By the early 2000’s, the term “capitation” had become somewhat radioactive, especially among providers, and thus has been re-issued under new euphemisms like comprehensive payment. Contemporary advocates argue that new and more elegant risk-adustment techniques have solved the earlier unwieldiness of overly risky PMPM calculations, and that ACOs will provide a level of patient-centered quality so high that consumers will engage them happily. For those with long memories, however, it may be recalled that these were the same arguments offered in the 1990’s.