The Mechanism of Capitation Payment - Research Paper Example

The Mechanism of Capitation Payment Capitation Introduction Technically, capitation can be referred to a tax of a fixed amount per individual. In a heath care context, capitation is a major method used by insurance companies for the purpose of compensating healthcare providers. Hence, capitation pertaining to healthcare insurance can be defined as a fixed per-person payment made by the insurance company in advance to the healthcare provider. When an individual enrolls in a health maintenance organization, the insurance company makes fixed advance payment to the healthcare provider for that individual’s care regardless of how frequently that particular individual utilizes healthcare services. This paper will analyze different aspects of capitation pertaining to healthcare insurance. The Mechanism of Capitation Payment As Santerre and Neun (2009, p. 304) point out, Under an HMO plan, the capitation payment method is mainly used to compensate primary care physicians or medical groupsi. Authorized physicians generally negotiate with insurance companies and fix a specific capitation fee amount which is validated for a particular period of time under contract. Once the validity of this initial contract expires, either party to the contract may renegotiate the capitation fee. Health insurance companies believe that the capitation payment method can be effectively practiced to control healthcare costs since healthcare providers will not prescribe unnecessary procedures if they are responsible for the costs of the services delivered. Past data is used to determine the needs of an average patient and thereby to set a supposedly fair and balanced payment for both the physician and the insurance company. Healthcare policymakers strongly argue that the capitation method of compensation greatly promotes preventive healthcare, and encourages better interaction between doctor and patient (Healthcare economist)ii. Obviously, insurance companies would be more willing to agree relatively higher fees for this network because the number of providers available to their plan members is a central element in attracting new plan members. In case of global capitation contracts, the insurance company pays off the huge monthly sum to the global network who then subdivides the payment to healthcare providers that constitute the larger network. Capitation for Healthcare Insurance In order to take advantages of a fixed payment per enrolled client, healthcare providers agree to offer unknown future benefits to the respective beneficiaries and absorb all associated costs. Large providers effectively deal with their health insurance risk forecast better than small providers by efficiently managing their cost predictability, service demand variations, and overall liquidity. As compared to large insurers, even large healthcare providers are inefficient risk managers since their annual costs greatly fluctuate as a percentage of their annual cash flow. When the volume of patients is smaller, the chances of variation in annual costs would be greater as the future costs may exceed the available resources of the provider under such a situation. Hence, larger roster of patients is better for providers in terms of insurance risk management. Since HMOs and insurers are not willing to offer risk adjusted capitation payments, healthcare providers cannot afford reinsurance. Sometimes, the healthcare providers suffer huge losses arising out of capitation risk. Strategies and provisions are being still developed to such risks of each unique provider group. “Specific excess loss insurance, aggregate stop loss protection, alternative risk financing vehicles, and administrative management services” (Bourdon, Passwater, and Priven) are some of the policies developed for providers to finance and manage their financial risk related with the capitation method of compensationiii. Illustration of Capitation Method of Compensation The following example would help one to clearly understand the capitation method for compensating healthcare providers. Assume that the JM manufacturing company has 100 employees and each of them has two dependants. As part of the company’s welfare program, it provides health insurance coverage to all 100 employees and their dependants. In order to effectively manage this program cost, the company is interested to pay annual medical costs on a per-person basis. The Mother Care, Inc is a reputed healthcare provider and it provides comprehensive annual physicals to all age groups. The JM manufacturing company’s representatives or insurance carrier makes a formal agreement with Mother Care, Inc. As per the terms of the agreement, the Mother Care, Inc will provide annual healthcare services to the 100 employees and their dependants of JM manufacturing company. The company agrees to pay the Mother Care, Inc at the rate of $150 per-person (either employee or dependant) for a total of $45,000 to be paid in semiannual installments. Under this capitation reimbursement agreement, the Mother Care, Inc is obliged to deliver healthcare services to all the 300 beneficiaries for the contracted period regardless of how many times individuals need services. Hence, if only 150 JM manufacturing employees need physical examinations for the contracted period, the Mother Care, Inc still receives the full payment of $45,000. Advantages of Capitation According to Cleverley, Cleverley J, and Song (2010, p. 165), improved patient care is the most significant benefit of the capitation reimbursement methodiv. Under this contract, when a patient becomes ill as a result of lack of preventive healthcare, the doctor is responsible for the patient’s excess treatment costs and hence he will surely emphasize on early prevention methods in order to take advantages of the capitation payment method. Similarly, doctors would not recommend unnecessary surgeries and other treatments since such practices may cause them a financial loss. In addition, this method would be useful to minimize clinical errors as doctors are full responsible for their patients for the contracted period. Increased clinical autonomy is one of the major benefits for the physicians from the capitation payment method. The promising provisions of this method eliminate the need for external review of physician’s actions. Therefore, medical practitioners can dispose their duties efficiently without external pressure; it aids them to attain job satisfaction. The capitation reimbursement method also offers physician extensive exposure for unlimited incomes if they effectively implement early prevention and treatment techniques. The most fascinating feature of the capitation payment method is that it assists the United States’ Federal Government to trim down health care expenditure to a great extent. Moreover, it also encourages the people to seek medical assistance at the initial stages of their illness. Disadvantages of Capitation Although the capitation payment method offers far reaching benefits to the United States, it has some demerits also. As we discussed earlier, physicians receive fixed fee per-person for the contracted period and hence sometimes doctors may hesitate to give proper care to patients. From the view point of healthcare providers, the chances of financial loss involved in this method is relatively higher as physicians do not have access to larger client groups as in the case of insurers. If providers have larger groups of non-healthier individuals to serve than healthier persons, they cannot effectively offset the financial burden. Mullner (2009, p. 123) opines that under this payment method, physicians may choose patient groups that are easier to care for than others as providers are paid on a per-person basisv. As a result, patients who need more care including elderly patients are rejected from mainstream of the healthcare. Similarly, individual patient and provider choices may be limited under this capitation reimbursement method. While considering capitation payment method, it must be emphasized that this practice is cost-effective only to the society but not necessarily for the third party payers. For instance, a screening program would benefit a third party only if the money saved over the prevention of diseases is greater than or equal to the expense of the program. Another major disadvantage of capitation payment is that it discourages providers from following costlier disease prevention techniques which are essential in certain situations. In short, a physician gets comparatively lesser incentive to deliver good quality service. Finally, this method gives option for the patients to change their providers and this provision may often put physicians in financial problems. Conclusion From the above discussion, it is clear that the capitation method of payment to healthcare providers raises potential opportunities for the US healthcare sector. Under this method, insurance companies and healthcare providers form formal agreements by which providers receive fixed fee per-person regardless of the number of services delivered. Since physicians are obliged to carry excess health care costs, they would give enough attention to early prevention and treatment methods. At the same time, this payment policy allows providers to choose patient groups and this provision may adversely affect individuals who need relatively more care. However, the capitation reimbursement method has attained wide popularity in the United States. Works Cited Santerre, Rexford E & Neun, Stephen P. Health Economics: Theory, Insights, and Industry Studies. USA: South-Western Cengage Learning, 2009. Print. “Capitation: Does Physician income increase from treating more complex patients?.” Healthcare Economist. (2011). Web. 23 September 2011. http://healthcare-economist.com/tag/capitation/ Bourdon, Theresa W, Passwater, Keith & Priven, Mark. “An introduction to capitalization and health care provider: Excess insurance.” (n.d): 97-140. Web. 23 September 2011. http://www.casact.org/pubs/dpp/dpp97/97dpp097.pdf Mullner, Ross M. Encyclopedia of health services research. USA: Sage Publications, 2009. Print. Cleverley, William O., Song, Paula H & Cleverley, James O. Essentials of Health Care Finance. USA: Jones & Bartlett Learning, 2011. Print. End Notes: Read More