How Capitated Payments Prompt Payer, Provider Innovation

The challenges of lowering care costs and improving healthcare quality may lead payers to consider the use of capitated payments as part of their value-based payment model strategies.

Capitated payments are pre-arranged payments for healthcare providers to deliver services on a per member per month (PMPM) basis.  Providers are paid a set amount for each patient they see, regardless of the costs each individual actually incurs.  

Under a capitation contract, providers cannot receive more than the established rate for care whether or not a patient’s care exceeded the capitation amount, otherwise known as the “cap.”    

While shared savings models and accountable care organizations (ACOs) tend to include variable upside and downside financial risks, capitated payments are full-risk models that hold providers completely accountable for all spending.  

Providers sign a capitation agreement that awards a fixed payment per patient over a set period of time. The ratio of the payment amount to the period of time is known as the capitation rate.

A capitated payment model may include provider incentives if physicians reduce costs, lower utilization, and improve patient outcomes, but typically offer less flexibility than other alternative payment structures.

Payers sometimes create a risk pool for providers in by withholding a certain percentage of payments. Payers then wait until the end of the fiscal year to either repay physicians that performed well financially or withhold funds to make up for financial losses.

Capitation may seem like an extreme strategy for cutting costs, but fixed payments offer significant benefits to payers and have started to find a new life in the modern value-based care ecosystem.

Payers can couple capitated payments with value-based insurance design, prior authorization, and provider performance incentives to take advantage of new cost reduction opportunities. Payment models that use capitated payments are likely to help public payers with a large population of high-risk beneficiaries manage costs and limit the growth of healthcare expenses.

Both private and public payer payment models incorporate capitation payments into accountable care programs in order to address specific healthcare challenges.

For example, Vermont’s OneCare Medicaid ACO capped provider payments at $626.91 per member per month (PMPM) during 2016, but agreed to increase the payments after reviewing average costs and beneficiary social risk factors. For 2017, the Medicaid program increased PMPM payments slightly to $632.71.

The private sector has also used capitated payments to create promising financial results.

In 2010, the California Public Employees' Retirement System (CalPERS) Sacramento ACO launched a capitation model managed by Blue Shield of California. According to HHS, the ACO was designed to encourage coordinated care and reduce unnecessary care utilization.

Blue Shield contracted Dignity Health hospitals and Hill Physicians IPA practices within the Northern California/Sacramento area to provide care.

Blue Shield of California used capitated payments for primary care and multi-specialty group services. Historical fee-for-service claims data helped to set capitation rates for providers.

CalPERS Sacramento ACO spending was 10 percent lower than other CalPERS providers during the first year of operation. In addition, Blue Shield of California estimates that the ACO saved $95 million dollars from 2010 to 2014.  

Capital District Physicians’ Health Plan (CDPHP) of New York experienced similar returns by leveraging the use of capitated payments, HHS stated.

In 2008, the CDPHP Enhanced Primary Care (EPC) model launched with a risk-adjusted PMPM capitation rate for primary care services. The EPC also provided practices with a $20,000 yearly stipend to participate in learning collaboratives and value-based care educational assessments. Providers received a 20 percent payment bonus if they reduced spending on high-cost services.

In 2014, CDPHP generated a cost savings of $20.7 million. The combination of capitated payments and provider performance incentives saved the payer 60 percent of care costs for commercial members and 20 percent for the highest-risk Medicare and Medicaid members.

Additionally, CDPHP contained primary care costs with PMPM rates of $9.46 for primary care services and $3.35 for prescription drug treatments.

Payment models that rely on capitated payments are also ideal for commercial payers that want to promote provider participation in value-based care payment agreements.

Humana offers a global capitation payment model for provider organizations that have the personnel and technology capabilities to assume 100 percent of financial risk. Providers in global capitation payment models may can earn higher compensation than practices participating in lower-accountability value-based models, according to the payer.

A capitation payment model is likely to help payers control high spending and wasteful healthcare utilization, but can also create several opportunities to promote quality of care. Capitation payments incorporated into a payer’s value-based programming can spur greater provider accountability, reduced care costs, and stronger healthcare outcomes for members.