Capitation Rate

What is a capitation rate?

Capitation is a method of payment established by a capitation agreement between a healthcare provider, or group of providers, and a health insurance entity, such as a health maintenance organization (HMO). The capitation rate in the capitation agreement refers to a fixed amount that is paid out depending on the number of patients in the health insurance network who have access to the provider’s services.

Capitation rates are paid out regardless of the volume or type of services that patients seek. Capitation payments, determined by capitation rates, are generally paid out monthly, with annual contracts. The specific capitation rate the provider receives is based upon a variety of factors, including but not limited to practice location, historical trends, and number of patients in the capitation agreement.

Why are capitation rates important in healthcare?

Capitation rates provide a safety net to providers by establishing a fixed monthly income. Less financial uncertainty ideally leads to better patient outcomes. Establishing a capitation rate can also reduce bookkeeping overhead, further enabling providers to use their organization’s resources to improve patient care.

In some cases, establishing a capitation rate can come with challenges. For example, if a provider accepts too many potential patients to increase revenue, wait times for patients may get extended, and providers and organizations may seek to cut costs in different ways, which can result in lower-quality patient care.

From the provider's perspective, establishing a capitation rate in a high-population area can be less than ideal because more patients in a capitation agreement can lead to lower capitation rates per patient. An alternative to establishing a capitation rate is working with a fee-for-service model, where healthcare providers are paid for each service they provide for patients rather than a per-patient model.