Capitated Contracts and Fee for Service Plans

For decades, healthcare systems, insurance carriers, and providers have used various systems to pay providers for the care they deliver. Two delivery systems that are widely used today are Capitated Contracts (Capitation) and Fee for Service. Under Capitation, providers are given a flat rate to manage a population of members. This strategy has been around for decades and was made popular back in 1970's under Health Maintenance Organization (HMO) models. In 1973, legislation was passed encouraging the creation of HMO's. At that time, it was widely believed that these types of arrangements would take over the healthcare delivery system. By 1990, HMO's accounted for about 15% of delivery systems. That number, according to Kaiser Family Foundation Employer Health Benefit Survey in 2023, is about 13%. In contrast, the Fee for Service system pays a provider for each procedure that is done. This model is widely used under a Preferred Provider Organization (PPO) arrangement.?

Both systems have pros and cons. Many Americans have unfavorable opinions on capitated plans because of the close association they have with HMO's. While HMO's do operate under a capitated contract model, there are other capitated contracts outside the typical HMO space that are extremely cost effective and user friendly. One of those delivery systems is Telehealth. Under many telehealth programs, members can access care from a provider via phone or video chat. In many cases the doctor can diagnose and prescribe medications over the phone. Members frequently have unlimited access to this care with no copayment. Another capitated plan that is becoming more and more popular is a capitated lab contract. Much like telehealth, capitated lab contracts frequently offer unlimited access to lab services through one vendor with no copayments. With a partially self-insured health plan, these types of plans are excellent in controlling costs for the member and the plan.

When these types of capitated plans are implemented in a partially self-insured health plan, the employer can see the cost of care decrease. These lower costs will usually help to project expected claims and keep renewal rates lower. These plans also enhance the overall member experience by the expanded access to care and no out of pocket expense for these services.

Patrick Thornton is a former HCA Hospital CFO and currently works as a risk management consultant for employee benefit programs. He is passionate about the healthcare delivery system and helping brokers and employers find solutions to the rising costs of health insurance.