The Difference Between Fee-for-Service and Capitation

Comparing traditional fee-for-service healthcare models with the capitation system ─ a merit-based system defined by outcomes, satisfaction, and compliance.

The traditional model of paying for individual services on a case-by-case basis is being challenged by an alternative model known as capitation ─ a quality-based system measured by health outcomes, patient satisfaction, and clinical compliance. Capitation is a great system for cost-conscious employees, but it might not be for everyone. Let’s examine the fee-for-service model, the capitation model, and how the latter can benefit your clients.

The Fee-For-Service Healthcare Reimbursement Model

Fee-for-service (FFS) models are payment structures in which providers receive fees for each separate service they provide. Therefore, there is an inherent incentive for caregivers to focus more on the number of visits, treatments, procedures, etc. instead of the health and wellness of the patient, which creates a conflict of interest. Likewise, patients with health coverage are more likely to seek out and accept all suggested medical care in the hopes of achieving and maintaining optimal health. Is it any wonder, then, that FFS models are the most prominent payment method in the United States healthcare system, even though it is a quantity-based system that is predicated on profit rather than integrated care? When bills are paid by third-parties (i.e., insurance companies), no one bothers to ask questions ─ well, at least until their monthly premiums continue to increase annually.

The Capitation Healthcare Reimbursement Model

In contrast to the FFS model, capitation is a performance-based system in which caregivers who contract with independent practice associations (IPAs) are financially incentivized to provide appropriate care and treatment that is designed to increase health and wellness rather than excessive treatment and profits. Physicians, nurse practitioners, physician’s assistants, and other healthcare service providers are paid an established amount for every patient they are assigned to within a given timeframe ─ regardless of whether the individual requires or seeks care or treatment. Compensation is based on the expected care the patient will receive, and greater payments are made for individuals with more extensive medical histories.

There are three types of capitation:

  • Primary: Primary care physicians receive payment for their patient members from their HMO
  • Secondary: HMOs broker a relationship between PCPs and secondary providers in which those secondary providers receive capitation payments based on the physician’s number of patients
  • Global: Providers are reimbursed per/member and per/month based on the total number of members in the network

As physicians are incentivized to consider treatment costs, providers in the capitation model are more inclined to focus on preventive care rather than lengthy and costly treatment after the fact. Capitation gives physicians control over their patients’ care instead of payers and also mitigates unnecessary spending. It also increases predictability of cost, administrative efficiency, and the use of telemedicine, which was difficult to bill for under traditional FFS models.

Canopy Health Supports Emerging Reimbursement Models

At Canopy Health, we feel that the capitation reimbursement model allows our network affiliates and physicians to provide better care that is more transparent, more efficient, and more effective. The physicians who contract with our IPAs (Hill Physicians Medical Group, John Muir Physician Network, and Meritage Medical Network) are committed to accepting risk, mitigating costs, and passing on savings to our end users.