Chapter 20: Capitation Economics

Rethinking Capitation Reimbursement Economics

[Sub-Capitation, Micro-Capitation and other Emerging Models]

By David Edward Marcinko

She didn’t know it couldn’t be done, so she went ahead and did it Mary’s Almanac


The accounting numerics that physicians should know regarding capitated medical provider insurance reimbursement contracts may still be underappreciated by some doctors. The mathematic methodology for evaluating the potential impact of these contracts on practice economics may also be vague. Therefore, simple financial stochastic modeling is demonstrated to illustrate the impact on a proto-typical solo family practice physician’s office. The modeling however, is applicable to most any medical specialty or to small and medium group practices.

Historical Review

According to Richard Eskow, CEO of Health Knowledge Systems of Los Angeles, capitated medical reimbursement has been used in one form or another, in every attempt at healthcare reform since the Norman Conquest. Some even say an earlier variant existed in ancient China. 

Initially, when Henry I assumed the throne of the newly combined kingdoms of England and Normandy, he initiated a sweeping set of healthcare reforms. Historical documents, though muddled, indicate that soon thereafter at least one “physician,” John of Essex, received a flat payment honorarium of one penny per day for his efforts. Historian Edward J. Kealey opined that sum was roughly equal to that paid to a foot-soldier or a blind person. Clearer historical evidence suggests that American doctors in the mid-19th century were receiving capitation-like payments. No less an authoritative figure than Mark Twain, in fact, is on record as saying that during his boyhood in Hannibal, MO his parents paid the local doctor $25/year for taking care of the entire family regardless of their state of health.

Later, Matthew Holt of the Health Care Blog writes that colleague Jon Stewart the historical archeologist, opines that Sidney Garfield MD [1905-1984] as one of the great under-appreciated geniuses of 20th century American medicine stood in the shadow cast by his more celebrated partner, Henry J. Kaiser. Garfield was not the first physician to embrace the notion of prepayment capitation, nor was he the first to understand that physicians working together in multi-specialty groups could, through collaboration and continuity of care, outperform their solo practice colleagues in almost every measure of quality and efficiency. The Mayo brothers, of course, had prior claim to that distinction.

What Garfield did, was marry prepayment to group practice, providing aligned financial incentives across every physician and specialty in his medical group, as well as a culture of group accountability for the care of every member of the affiliated health plan. He called it “the new economics of medicine,” and at its heart was a fundamentally new paradigm of care that emphasized – prevention before treatment – and health before sickness.  Under his model, the fewer the sick – the greater the remuneration. And, the less serious the illness, the better off the patient and the doctors.

Such ideas were heresy to the reigning fee-for-service, solo practice ideologues of the mainstream medical establishment of the 1940s and ‘50s, of course. Throughout the period, Garfield and his group physicians were routinely castigated by leaders of the AMA and county medical associations as socialistic and unethical. The local medical associations in Garfield’s expanding service areas – the San Francisco Bay Area, Los Angeles, and Portland, Oregon – blocked group practice physicians from association membership, effectively shutting them out of local hospitals, denying them patient referrals or specialty society accreditation. Twice in the 1940s, formal medical association charges were brought against Garfield personally, at one time temporarily succeeding in suspending his license to practice medicine.

Of course, capitation payments made a comeback in the first cost-cutting managed care era of the 1980-90s because fee-for-service medicine created perverse incentives for physicians by paying more for treating illnesses and injuries than it does for preventing them — or even for diagnosing them early and reducing the need for intensive treatment later.

Nevertheless, the modern managed care industry’s experience with capitation wasn’t initially a good one. The 1980-90s saw a number of HMOs attempt to put independent physicians, especially primary care doctors, into a capitation reimbursement model. The result was often negative for patients, who found that their doctors were far less willing to see them — and saw them for briefer visits — when they were receiving no additional income for their effort. Attempts were also made to aggregate various types of health providers — including hospitals and physicians in multiple specialties — into “capitation groups” that were collectively responsible for delivering care to a defined patient group. These included healthcare facilities and medical providers of all types: physicians, osteopaths, podiatrists, dentists, optometrists, pharmacies, physical therapists, hospitals and skilled nursing homes, etc.

However, the healthcare industry isn’t collective by nature, and these efforts tended to be too complicated to succeed. One lesson that these experiments taught is that provider behavior is difficult to change unless the relationship between that behavior and its consequences is fairly direct and easy to understand.

Today, the concept of prepayment and medical capitation is to uncouple compensation from the actual number of patients seen, or treatments and interventions performed. This is akin to a fixed price restaurant menu, as opposed to an “à la carte” eatery. It is based on more modern Health 2.0 market dynamics and the Cost Volume Profit Analysis calculations outlined below.

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4 thoughts on “Chapter 20: Capitation Economics

  1. “Micro-Capitation”

    More than a few medical providers and healthcare facilities have a natural aversion to capitated reimbursement, as it has always been associated with the worst components of managed care; hurried office visits and soul-less physicians.

    A decade ago, astute physician executives and healthcare administrators were averse to the idea that they should accept pre-payment for unknown commitments to provide an unknown amount of services. It seemed to create an unnatural and difficult set of incentives where fewer patients were seen and less care rendered for more compensation.

    Curiously, Stark Laws I, II and III were created to eliminate concerns that self-referral could lead to excessive care and fee-for-service payments, though this system had long been perfectly acceptable. Many also never understood how a commitment could be made with little or no actuarial information.

    Hence frustration was the initial reaction of many medical providers to capitated reimbursement. Since that time, it can be seen that capitation has some advantages.

    For example, it can create and align incentives that help patients, providers, and payors by limiting their contingent fiscal liabilities. Capitation might be viewed in a more positive way, going forward.


  2. Dr. Arnold Relman’s focus is on the fee-for-service nature of medical care payment. His proposals are to compensate healthcare providers with capitated payments. It’s a good idea, but isn’t obviously right or wrong either. There are some merits and some problems.

    Fortunately, it has some similarity to the accountable care organization (ACO) concept that will soon be tested in Medicare and Medicaid.


  3. Matthew Holt is Kaiser Permanente’s Health Care Blog Brat, who rents himself and his blog out to the highest bidder for speeches at pharmaceutical conventions and other health industry lobbyist galas. He and his blog are industry shills, who cover up Kaiser’s patient privacy fraudulent scheme, “Kaiser Permanente Plunders Patients’ Piece of the Pie,” in concert with the Rawlings Company. Original investigation posted on YouTube and HMO hardball.

    Robert D. Finney, Ph.D.

  4. Readers,

    This was an excellent chapter. But, did you know that Massachusetts seems hell bent on showing the nation that its’ healthcare model can work?

    The state just boasted that capitation rates will actually go down in 2012, allowing the program to grow enrollment without additional funding.

    So, it’s not difficult to imagine the feeling of responsibility weighing on administrators and Democratic officials there as they work to pull the levers of payment reform to reign in Partners HealthCare and other misbehavers.


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