Capitated Contract

A capitated contract is a healthcare plan that allows payment of a flat fee for each patient it covers. Under a capitated contract, an HMO or managed care organization pays a fixed amount of money for its members to the health care provider. Capitated contracts are also referred to as capitation agreements, capitation contracts and managed care capitated contracts.

Within a capitated contract, the healthcare provider is paid a set dollar amount per month to see patients regardless of how many treatments or the number of times the physician or clinic sees the patient. The agreement is that the provider will get a flat, prearranged payment in advance per month. Whether or not the patient needs services in a particular month, the provider will still get paid the same fee. The more treatment a patient needs, the less money a health provider makes per treatment.

Traditionally, payers have reimbursed healthcare providers for the costs of services delivered or for the volume of services delivered. However, new types of healthcare plans are moving from paying for volume to paying for value – incorporating cost, consumer health outcomes and consumer experience – with capitation rates based on performance at the “most advanced” end of the scale.

Capitation-style healthcare contracts were created with the intention of creating better incentives for efficiency, cost control and preventive care in healthcare. Given that most individuals enrolled in a health plan will never use the services in any given month, capitation arrangements should naturally balance out high-frequency users with plan members who use little or no healthcare every month. Also, because the physician, hospital or health system are responsible for the enrolled member's health regardless of cost, in theory, capitation motivates the healthcare provider to focus on health screenings (mammograms, pap smears, PSA tests), immunizations, prenatal care and other preventative care that can help keep plan members healthy, with less reliance on costly specialists.

Consider a capitated contract issued by Company ABC that might pay a doctor $100 per month for every patient it covers in XYZtown. If Company ABC has 200 patients with a doctor, his practice will get $20,000 a month. It doesn't matter whether the patients actually see the doctor or not. On the other side of it, the doctor will receive only $100 per month, per patient, no matter how many times a given patient decides to see the doctor.