First things first, the straightforward definition of capitation in healthcare can be outlined as a payment model where healthcare providers receive a set amount of money per patient for a specific time period, no matter how many services that patient actually uses.
VELLIS NEWS
19 May 2025
By Vellis Team
Vellis Team
Automate your expense tracking with our advanced tools. Categorize your expenditures
Related Articles
Vellis News
30 June 2025
Telehealth is the use of digital tools, such as phones, video calls, and online platforms, to deliver healthcare services without requiring an in-person visit. It encompasses a wide range of care, including virtual doctor appointments, remote monitoring, mental health counseling, and medication management.
Vellis News
11 April 2025
International Financial Reporting Standards (IFRS) are globally recognized accounting rules designed to make financial statements consistent, comparable, and transparent across borders.
Vellis News
30 June 2025
Care shouldn’t stop when a patient leaves the doctor’s office. Thanks to advancements in digital health technology, patients can now stay connected to their providers from the comfort of their own homes.
Whether a patient visits once or ten times, the payment stays the same. The main goal of this system is to control healthcare costs and move away from the traditional fee-for-service model that rewards volume, shifting instead toward a value-based approach that emphasizes outcomes and efficiency. In this article, we’ll walk through how capitation works in practice, explore the advantages it offers, look at potential downsides, and examine how it’s being used across real healthcare settings.
Capitation payments in healthcare refer to a prearranged, per-member-per-month (PMPM) payment that healthcare providers receive for each enrolled patient, regardless of how many services that patient uses. This model gives providers a predictable stream of revenue and encourages them to manage care efficiently. Unlike fee-for-service, where providers are paid for each individual service or procedure performed, capitation focuses on managing overall patient health within a fixed budget. It also stands apart from other value-based care models like bundled payment healthcare, which pays providers a single fee for all services related to a specific treatment episode. In the capitation model, payers, such as insurance companies and Medicare Advantage plans, contract with provider groups to take on the responsibility of delivering care while staying within budget, aligning financial incentives with preventive care and long-term health outcomes.
Put plainly, in the capitation payment system, the financial flow is straightforward: payers, such as insurance companies or Medicare Advantage plans, have to pay healthcare providers a flat fee per patient, per month. This fixed payment is made regardless of how often the patient seeks care. It’s then up to the providers to manage all necessary services for that patient within the budgeted amount. Capitation contracts can vary in scope, ranging from covering only primary care services (partial capitation) to full-risk arrangements that include specialty care, hospital services, and more. Importantly, providers don’t earn extra income for unused services, on the other hand, any savings are theirs to keep. However, if the cost of care exceeds the capitation payment, the financial burden falls on the provider, which can squeeze profit margins. That’s why effective care coordination and operational efficiency are critical, especially when navigating administrative needs like PCI compliance healthcare standards that also impact provider infrastructure.
Surely one of the major advantages of capitation is cost predictability. Both payers and providers know exactly what to expect financially each month, making it easier to budget and plan. Since providers receive a fixed payment, they’re motivated to focus on preventive care and actively manage chronic conditions to avoid costly complications down the line. Capitation also reduces the administrative hassle that comes with billing for each individual service, which means less paperwork, fewer claims, and more time focused on patient care. Most importantly, this model encourages providers to work together and coordinate services efficiently, aiming for better outcomes rather than more visits or procedures.
While capitation offers clear advantages, it also comes with notable risks. One concern is the potential for undertreatment, since providers are paid a flat rate, there may be a temptation to limit services in order to protect financial margins. If patient risk levels aren’t accurately adjusted, providers could end up with sicker populations than expected, leading to losses. Successfully operating under capitation demands strong data analytics, effective care coordination, and strategic resource planning to stay financially viable while delivering quality care. Another challenge lies in clearly defining what services are included in the capitation agreement as any ambiguity in care scope can create confusion, disputes, or gaps in treatment.
Capitation stands apart from other healthcare payment models by shifting focus from quantity to quality through fixed, per-patient payments. Unlike fee-for-service, which reimburses providers for each service rendered and often encourages higher volume, capitation rewards efficient, preventive care. Compared to bundled payments, which provide a single payment for an entire episode of care (like surgery and follow-up), capitation extends beyond isolated episodes to cover ongoing, comprehensive patient care. Value-based care overlaps somewhat with capitation but is typically tied directly to performance metrics and patient outcomes, rather than flat monthly payments.
Payment Model | How Providers Are Paid | Incentives | Financial Risk | Administrative Complexity |
Capitation | Fixed amount per patient per month | Preventive care, cost control | High (especially under full capitation) | Low (no per-service billing) |
Fee-for-Service | Payment per individual service provided | High service volume | Low (payer bears the cost) | High (detailed billing, claims) |
Bundled Payments | One payment for all services in a care episode | Efficiency within an episode | Moderate (episode-based risk) | Moderate |
Value-Based Care | Variable payments tied to quality/outcomes | Improved outcomes, efficiency | Varies (based on performance) | Moderate to High (reporting needs) |
Surely, each model has strengths and challenges, and the best choice often depends on organizational goals, patient population, and infrastructure readiness.
Capitation is commonly used by Medicare Advantage plans and Medicaid Managed Care Organizations to manage costs and care at scale. Accountable Care Organizations (ACOs) may adopt capitated models to gain flexibility and share financial risk. Private insurers also use capitation when working with large medical groups or integrated systems capable of managing comprehensive patient care efficiently.
To succeed under capitation, providers need strong care coordination across teams and specialties to avoid gaps or duplication in treatment. Leveraging EHR systems and data analytics helps track patient risk, monitor service use, and identify care opportunities. A strong focus on prevention, patient education, and chronic disease management is key to keeping costs down while improving outcomes. Finally, having clear, transparent contracts that define covered services and payment terms helps prevent disputes and ensures all parties understand their responsibilities.
Capitation is gaining momentum as healthcare shifts toward value-based, cost-controlled models. With rising pressure to manage spending, more payers are testing capitated arrangements, especially in Medicare Advantage and Medicaid. Still, barriers like provider readiness, data system limitations, and concerns about undertreatment slow wider adoption. While not perfect, capitation is becoming a key part of the future payment landscape.
Capitation is a payment model where providers receive a fixed amount per patient for a set period, no matter how many services are used.
It allows for predictable revenue, promotes preventive care, and reduces administrative work associated with fee-for-service billing.
Risk of under-treatment, loss of income on high-utilization patients, and the need for strong data and care management systems.
Not always. It can apply to primary care, specialty care, or comprehensive services depending on the agreement.
Patients usually don’t pay differently; capitation is an agreement between providers and payers.
American College of Physicians: Understanding Capitation
ForSee Medical: The Advantages of Capitation Contracts
https://www.foreseemed.com/blog/advantages-of-capitation-contracts
VeryWellHealth: How Capitation in Healthcare Works
https://www.verywellhealth.com/capitation-the-definition-of-capitation-2615119
GovUK: Capitation: An Introduction
Ready to transform your financial management?
Sign up with Vellis today and unlock the full potential of your finances.
Related Articles
Vellis News
30 June 2025
If you’ve ever pulled a muscle, suffered a sports injury, or undergone surgery, chances are you’ve experienced physical therapy. But did you know there’s a way to receive the same expert care without stepping into a clinic?
Vellis News
25 March 2025
In the era of sprucing digital advancements, users have found it particularly practical to rely on wire transfer regulations for speed, safety, fraud prevention, money laundering, and many more. Plenty of individuals and businesses across the globe have found it particularly easy, practical, and safe to send money abroad through international wire transfers. In addition, non-compliance may lead to transaction deals, dissatisfaction, and even heavy fines for business.
Vellis News
23 June 2025
One of the most powerful yet least understood players is the Pharmacy Benefit Manager (PBM). These organizations operate behind the scenes, yet they have a major impact on how much you pay for prescription drugs, which medications are covered by your insurance, and which pharmacies you can use.
We use cookies to improve your experience and ensure our website functions properly. You can manage your preferences below. For more information, please refer to our Privacy Policy.
PCI DSS-certified and listed on Visa’s Global Registry – verified security you can trust.
© 2025 Vellis Inc.
Vellis Inc. is authorized as a Money Services Business by FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) number M24204235. Vellis Inc. is a company registered in Canada, number 1000610768, headquartered at 30 Eglinton Avenue West, Mississauga, Ontario L5R3E7, Canada.