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Break Through Value Based Payments

Part 10: Risk Capitation Pros and Cons


Welcome back to THE VBP Blog Series. Continuing our drill-down into risk-sharing in Value Based Payments, in today’s blog we look at the capitation model. As the ever-challenging task of lowering healthcare costs continues to come to the forefront, organizations may look to capitation, which requires that providers take on the full financial risk for the care of their consumers.  

Do keep reading! It’s already shown success in California, where the state’s Regional Health Care Cost & Quality Atlas reveals the capitated-integrated model delivers on all the major VBP scores:  9% lower total cost of care, 14 points higher in quality, and $4,450 less in total cost of care per member per year for those enrolled in Medicare Advantage, as compared to fee-for-service.

Risk capitation is an alternative payment model that puts a “cap” on the amount providers are paid per member per month (PMPM) for individuals enrolled in managed care systems (i.e. Medicaid and Medicare). It is often contracted by groups of physicians and payment is made in advance for a period of time. This differs from the other types of Value Based Models because providers now assume financial risk depending on how they provide the care necessary.[

Let’s dive into an example to explain further.  A woman needs a routine eye exam, so she schedules an appointment. Managed Care Organizations (MCO’s) would set a cap on how much they would provide the provider for this routine visit. For this example, let’s use the round figure of $500. If the doctor accepts this and can provide quality care at $300, they would be able to keep the balance. If the need is $2000, then the doctor assumes the $1500 financial responsibility. 

The rates are carefully analyzed before being decided. According to the American College of Physicians, capitation rates are developed using local costs and average utilization of services and therefore can vary from one region of the country to another. Plus, they assess a risk pool as a percentage of the capitation payment. Also, not every type of care can fall under a capitation model. Examples of some that do[:

  • Preventive, diagnostic, and treatment services
  • Injections, immunizations, and medications administered in the office
  • Outpatient laboratory tests either in the office or at a designated laboratory
  • Health education and counseling services performed in the office
  • Routine vision and hearing screening

The positives of a capitation model include a more stable payment model for providers as well as payers, giving providers the ability to champion quality and cost-efficient care. It also disincentives providers from running unnecessary tests that could trigger higher out-of-pocket expenses for consumers or payers alike.

Of course, there are drawbacks as well, as providers would now be working within a financial window. It is common to hear that patients under a capitation system complain of short visits as the doctor tries to see more patients. It also raises significant questions about how capitation payments should be adjusted to reflect the higher care costs for individuals with chronic conditions. According to an article from, “a 2009 review reported that capitation is the more cost-effective in groups with moderate health care needs, with practices reporting fewer illnesses and more enrollments than fee-for-service practices.” It contrasted that with another study from the center for Studying Health System Change in Washington, D.C that found as many as 7% of doctors actively reduced their services as a result of financial incentives.

So the question is: can it work for my organization? The goal of value-based payments is lower cost and higher quality of care. This is one of the first examples we’ve presented that really puts the doctor at risk financially and not just the providers, in light of the high level of care we’re looking for. In our opinion, capitation can work on both sides of the fence:  more stable risk assessment for the MCO’s and more power in the doctor’s hands to make better treatment decisions while continuing to receive a steady income. Consumers win with this model and value based healthcare is realized.

As we continue to transition into value-based care, capitated payments will become a real option if payment rates stay high enough to allow provider participation. When and if doctors and hospitals lose money on this model, it would force health care providers to try different methods within VBP.

Advocate’s Perspective:  As risk-sharing stakes go, capitation is on the high end of the value-based reimbursement scale, and as we’ve said before about these models, should be considered soberly and very thoroughly before committing to it. It definitely offers the most flexibility, but the caution is to use it effectively. Having funds in advance could allow providers to invest in innovation to streamline and improve care that consumers require, as well as data management tools that organizations need– imperatives for success in any value-based payment model. It should NOT be a blank check for reducing access to care.

This blog is part of the “Break Through Value Based Payments” blog series. Our goal is to share with you the ins and outs of VBP and what to expect soon. While focusing on the facts, we will always stand up for consumers and do our utmost to share an advocate’s perspective.


Fady Sahhar & Mandy Sahhar

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fady sahhar xtraglobex founder and ceo

About the Author

Fady Sahhar brings over 30 years of senior management experience working with major multinational companies including Sara Lee, Mobil Oil, Tenneco Packaging, Pactiv, Progressive Insurance, Transitions Optical, PPG Industries and Essilor (France).

His corporate responsibilities included new product development, strategic planning, marketing management, and global sales. He has developed a number of global communications networks, launched products in over 45 countries, and managed a number of branded patented products.

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