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Managed care, as it relates to the health insurance industry, is designed to reduce the overall expense of medical treatment, increase efficiency within physicians’ offices and ensure that covered members have access to top-quality providers. The concept of capitation as a compensation method for physicians participating with HMOs and similarly structured medical insurance programs continues to spread. While the basic idea remains the same, several types of capitation contracts exist, allowing doctors to choose the arrangement that most appropriately suits their needs and their practice.
Simply put, “capitation” refers to a method of compensating family physicians that is based on the number of patients who list that particular doctor as their Primary Care Physician. Insurance carriers pay physicians a specified dollar amount for every patient covered by one of their managed care policies. These payments arrive every month, and are often referred to as PMPM, or Per Member Per Month.
The easiest capitation method pays physicians a flat dollar amount for every patient covered under one of the insurance company’s managed care plans. Regardless of the patient’s age or sex, the PMPM amount remains the same for everyone. In some cases, the fixed capitation concept is more profitable than other types because the physician receives income from younger, healthier patients who rarely visit the office.
The age-based method is likely the most commonly used capitation compensation strategy. Physicians are paid a flat fee for every insured patient, but the dollar amount varies based on the actual age of the individual. Insurance companies have taken into consideration the statistics demonstrating that younger people tend to visit their doctors less frequently than children and the elderly, and have reduced capitation fees for the relevant age brackets.
The premium-based capitation method is less common than fixed and age-based, but may result in higher income for the primary care physician. Instead of a fixed dollar amount per insured patient, carriers pay doctors a small percentage of the premium charged to patients for their insurance coverage. This method of compensation results in dramatically increased administrative requirements, as the insurance company must verify each member’s monthly premium and calculate the predetermined capitation percentage. Despite the additional administrative requirements and the potential for compensation delays due to patients’ missed payments, premium-based capitation can be very lucrative for physicians with an older patient base as these individuals tend to pay much higher health insurance premiums.
Shared-risk capitation is not a compensation method for physicians, but rather an additional contract feature that many insurance carriers offer to participating doctors. Regardless of the physician’s type of capitation arrangement, a shared-risk clause reduces the potential that a provider’s office will suffer from uncovered treatment expenses that become the doctor’s responsibility under capitation arrangements. If the doctor’s monthly expenses exceed the total capitation payments received from the carrier, a predetermined portion of the overage amount is reimbursed by the insurance company.
Gregory Gambone is senior vice president of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.