Three Methods of Developing Capitation Rates


Capitation is a payment method for medical services where the doctor or the hospital is paid a certain fee for each patient enrolled as a member of the insurance contract. The fee paid to the hospital is usually fixed as outlined in the contract between the hospital and the insurance company. The amount paid by the insurance company constitutes the capitation rate. There are three primary methods for developing capitation rates.

Capitation Rate

To compute the monthly capitation rate, the annual total cost of treatment and the total profit realized by the hospital should be divided by the size of the population and then further divided by 12. To validate the capitation rate, the hospital should then compare its results with capitation rate surveys across the country.

Cost Accounting Method

Under the cost accounting method, capitation rates are developed based on the underlying cost of each treatment a hospital offers each patient. A fixed rate is then calculated that the insurance company and the hospital may accept to use in settling health care service payments. The doctor or the hospital will then be paid a fixed rate for health care services they offer each person enrolled in the insurance company’s plan. Regardless of the type of treatment a person will be offered by the hospital, the insurance company will pay the hospital the fixed rate as stated in the contract.

Fee-For-Service Method

Under the Fee-For-Service approach (FFS) to develop capitation rates, the fee for each health care service offered by the hospital or the doctor is paid directly by the person receiving treatment. The medical fee charged to the patient is decided by the doctor and can be negotiated by the patient. Therefore, the more patients the doctor treats, the more revenue the doctor will receive. However, depending on the state, fee-for-service rates may not be determined by the doctor or the hospital. A Health Maintenance Organization (HMO), which provides health care insurance coverage to its members through doctors or hospitals with which it has a contract, may use a fixed fee schedule to reimburse a patient; this fee schedule will vary from one state to another but is usually based on rate schedules outline by Medicare. The patient will then have to ask the insurance company for reimbursement.

Demographic Approach

Under this method, a doctor or the hospital determines the capitation rate based on the age or gender distribution of the population in the area of practice. For example, the insurance plan may offer larger payments to hospitals for individuals who are 70 years of age or older, whose population is low within the location and who require more medical services.

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