What Is Capitation In Medical Billing – How it works in the healthcare industry?

Capitation in medical billing describes a set payment made to a doctor by the government or a health plan. Each healthcare plan participant receives these payments once a month. No matter how frequently the member visits the provider during the year, the payment amount is fixed.

Capitation payments, as opposed to a fee-for-service billing method for medical services, can help reduce waste and stop healthcare costs from rising. The healthcare industry now bears the financial risk, not the insurance industry. To better understand the advantages and disadvantages of this type of medical billing, let’s take a deeper look at capitation.

Definition of Capitation In Medical Billing

A capitation is a predetermined amount of money that a state or health plan pays a doctor in advance for a predetermined time.

•           Alternate spelling: It includes capitalization rate and capitalization fee.

•           Abbreviation: PMPM stands for “per member, per month.

Several healthcare organizations and governments enter into capitation decisions with medical providers. In accordance with this system, the medical practice gets paid a predetermined sum each month for each registered member, known as the capitation payment.


The doctor agrees to give each member all necessary medical treatment in exchange for a capitation fee. The payment is still made even if a member doesn’t need the provider’s services throughout the allotted period. The price does not change even if the member requires medical care more than once.

How Capitation Payments Works

Capitation payments are frequently made in health maintenance organizations (HMOs) and Medicaid-managed care organizations (MCOs). In exchange for receiving a specific sum for each member who enrolls in the health insurance plan, the primary care physician commits to caring for the member’s covered medical needs.

The payout amount is specified in the capitation agreement. This figure is based on local medical prices, which may differ by location. Gender, age, and other characteristics can all influence capitation rates.

Every month when a member is enrolled, the provider receives money.


Capitation payments are frequently risk-adjusted as well. As a result, providers can earn more money for some members, particularly those more likely to require more complicated medical care.

What Are Covered by Capitation Payments?

What Are Covered by Capitation Payments?

The services that must be offered to each member as part of the capitation payment are specified in the capitation agreement. While the particular services differ from contract to contract, the following few are typically covered:

•           Diagnostic and preventive services

•           Vaccinations and injections regularly

•           Regular eye and ear exams at a licensed lab or the doctor’s office

•           In-office counseling and health information

The capitation agreement does not cover all medical procedures. Depending on the terms of the contract, these “carve-out services” are billed differently. The following services are typically excluded:

  • Dental care
  • Mental and behavioral health
  • Vision
  • Pharmacy

The provision of unknown services is routinely “carved out” by healthcare professionals. Public health care providers, who typically specialize in specialized treatment, are likewise protected by these services.


Patient care may cost more than the money allocated, even if the carve-out services are managed separately.

Capitation Agreement Types

There are three types of capitation agreements, depending on how the company paying the payment interacts with the beneficiary:

1.         Primary – Direct payments are made to doctors by managed care organizations, such as HMOs.

2.         Secondary – This relationship is negotiated between an HMO and a primary care physician, such as a diagnostic or imaging service provider, specialist, or other healthcare service provider.

3.         Global – This term can refer to various configurations.

Healthcare providers or organizations can also be paid a set amount for whichever services their patients may require during the contract term, regardless of how many services are rendered. The amount may vary based on the severity of the patient’s illness. It’s similar to the fundamental definition of capitation, according to the American Academy of Family Physicians (AAFP).

Global capitation, in contrast, is a concept where hospitals and physicians work together to receive a single fixed monthly payment from enrolled health plan members; under this system, providers sign a single contract with the health plan for the treatment of groups of members and then choose how to divide the capitated cheque.

Benefits of Capitation

Benefits of Capitation

Capitation benefits payers, providers, and patients alike.

1. Financial Predictability: The financial certainty of the capitation model benefits payers and healthcare providers alike. Payers can more precisely plan their healthcare expenditures, while providers can more easily predict their revenues and expenses.

2. Encourages Preventive Care: This tactic may persuade medical professionals to concentrate on preventative treatment rather than only treating diseases or problems as they manifest. Doctors can aid patients in maintaining their health while preventing future expensive operations by doing this.

3. Lowering Administrative expenses: Capitation’s capacity to reduce administrative costs may benefit payers and providers. With a capitated approach, payers may do away with the need for claims processing and adjudication while providers can simplify managerial procedures and save expenses.

4. Encourages Resource Efficiency: Since capitation places the responsibility of controlling the expenses of patient care on doctors, it motivates them to use their resources better. More appropriate healthcare service utilization can lessen the risk of unneeded or duplicate testing and treatments.

5. Encourages Value-Based Care: Capitation supports value-based care, which emphasizes improving patient outcomes rather than just providing healthcare services. By encouraging clinicians to focus on quality and results rather than volume, capitation can help to improve overall treatment quality while reducing costs.

Bottom Line

Payments provided to healthcare professionals for providing services to patients are referred to as capitation in medical billing. These payments are set and typically made monthly (on an annual basis, i.e., capitation contracts). This approach assists doctors in lowering their bookkeeping, accounting, and other operations costs. Capitation also benefits the HMO or IPA by preventing physicians from doing more services than required. The notion is that it lowers the possibility of overbilling.