PMPM

Capitation is a payment arrangement for health care service providers such as physicians or nurse practitioners. It pays a physician or group of physicians a set amount for each enrolled person assigned to them, per period of time, whether or not that person seeks care. These providers generally are contracted with a type of health maintenance organization (HMO) known as an independent practice association (IPA), which enlists the providers to care for HMO-enrolled patients. The amount of remuneration is based on the average expected health care utilization of that patient, with greater payment for patients with significant medical history.

Primary capitation is a relationship between a managed care organization (MCO) and primary care physician (PCP), in which the PCP is paid directly by the MCO for those enrolled members who have selected the physician as their provider.

Secondary capitation is a relationship arranged by the MCO between a PCP and a secondary or specialist provider, such as an X-ray facility or ancillary facility such as a durable medical equipment supplier whose secondary provider is also paid capitation based on that PCP’s enrolled membership.

Global capitation is a relationship based on a provider who provides services and is reimbursed per-member per-month (PMPM) for the entire network population.

Under capitation, physicians are given incentive to consider the cost of treatment. Pure capitation pays a set fee per patient, regardless of their degree of infirmity, and gives physicians an incentive to avoid the most costly patients.

Providers who work under such plans focus on preventive health care, as there is a greater financial reward in the prevention of illness than in the treatment of the ill. Such plans divert providers from the use of expensive treatment options.

The financial risks providers accept in capitation are traditional insurance risks. Provider revenues are fixed, and each enrolled patient makes a claims against the full resources of the provider. In exchange for the fixed payment, physicians essentially become the enrolled clients' insurers, who resolve their patients' claims at the point of care and assume the responsibility for their unknown future health care costs. Large providers tend to manage the risk better than do smaller providers because they are better prepared for variations in service demand and costs, but even large providers are inefficient risk managers in comparison to large insurers. Providers tend to be small in comparison to insurers and so are more like individual consumers, whose annual costs as a percentage of their annual cash flow vary far more than do those of large insurers. For example, a capitated eye care program for 25,000 patients is more viable than a capitated eye program for 10,000 patients. The smaller the roster of patients, the greater the variation in annual costs and the more likely that the costs may exceed the resources of the provider. In very small capitation portfolios, a small number of costly patients can dramatically affect a provider's overall costs and increase the provider's risk of insolvency.

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