Capitation
Capitation is a healthcare payment model where providers receive a fixed per member per month (PMPM) payment for each enrolled patient regardless of the volume of services delivered — transferring financial risk from payer to provider.
What is Capitation?
In a capitation model, a health plan pays a provider organisation a fixed monthly amount for each enrolled patient. This PMPM payment is intended to cover all primary care services (for primary care capitation) or all services (for global capitation) that the patient may need during the month — whether they use zero services or extensive care. The provider profits if care costs less than the capitation rate and bears losses if care costs exceed the rate.
Medicare Advantage Risk-Adjusted Capitation
Medicare Advantage plans receive risk-adjusted capitation from CMS based on each enrollee's Risk Adjustment Factor (RAF) score. The RAF-adjusted payment formula is approximately: Base Payment Rate × RAF Score = Monthly Capitation Payment per Member. A member with a RAF of 1.5 generates 50% more capitation revenue than a member with a RAF of 1.0. This creates a direct financial incentive for complete and accurate HCC (Hierarchical Condition Category) documentation — every documented chronic condition that maps to an HCC code increases the RAF score and therefore the capitation payment.
Capitation vs Fee-for-Service
Under fee-for-service, providers are rewarded for volume — more encounters and procedures generate more revenue. Under capitation, providers are rewarded for efficiency — keeping patients healthy and out of high-cost settings generates profit margin. This creates fundamentally different incentive structures: capitation rewards prevention, chronic disease management, and care coordination because avoiding hospitalisation directly improves margin; FFS rewards procedures and visits.
ACO Capitation Models
Some ACO models incorporate prospective capitation elements, paying a fixed PMPM for primary care services while ACOs share in savings on total cost of care. The REACH ACO model (formerly DC ACO) is the most fully capitated ACO model available in Medicare, allowing qualifying ACOs to receive capitated payments for primary care in addition to shared savings participation on total cost.