What is capitation and fee for service balance billing

fee schedule

The fee determined by an MCO (managed care organization) to be acceptable for a procedure or service, which the physician agrees to accept as payment in full. Also known as a fee allowance, fee maximum or capped fee.

• Capitation Payment:-

Specified amount paid periodically to the provider for a group of specified health services, regardless of quantity rendered. This is a method of payment in which the provider is paid a fixed amount for each person served no matter what the actual number or nature of services delivered. The cost of providing an individual with a specific set of services over a set period of time, usually a month or a year. It is a payment system where managed care plans pay the health care providers a fixed amount to care for a patient over a given period. Providers are not reimbursed for services that exceed the allotted amount. The rate may be fixed for all members or it can be adjusted for the age and gender of the member.


With capitation scheme providers are paid a fixed amount of money on the basis of number of  patients for delivering a range of services. The predominantly tax-based health financing systems in Italy and the UK have adopted this payment method for general practitioners (GPs) to provide primary care to the population.

Underprovision of services within the risk group, for which a particular flat-rate capitation amount is applicable, is a problem to be dealt with. Adjusted capitation payment according to patients' profile such as age and sex can help guaranteeing quality of service and equitable access, by stimulating GPs to accept and treat patients with various characteristics rather than shifting a number of them to specialists or hospitals. In the US, capitation payments are pervasive in both outpatient and inpatient care, especially within the framework of Health Maintenance Organizations (HMOs) or managed care plans.

The shortcomings of FFS have long been known, leading some countries to adopt capitation, a radically different reimbursement model.  Under capitation, providers receive a fixed amount per patient per year and are responsible for all of that patient’s medical needs.   Because provider revenues are independent of the specific quantity and types of treatments performed, capitation is presumed to motivate providers to be more efficient and invest more in the cost-effective preventive, diagnostic, and maintenance care that lower downstream costs.  

Capitation, however, has its own major disconnects with value.  With a fixed overall revenue for a patient, providers (and payers) may ration or deny access to expensive procedures and services even if the services can lead to better long-run outcomes.  It is difficult to fully risk adjusted patient popluations so capitated payers and providers can boost margins and profits by targeting healthy populations and avoiding unhealthy ones. Capitation payments also create a disconnect between the payment and what a provider actually controls.  Under capitation, providers assume the actuarial risk of which conditions and circumstances they will be required to treat, not just the clinical risks, costs, and outcomes they can better control.  Providers are poorly equipped to manage this actuarial risk, especially when they do not have sufficient patient volume to mitigate it.  Capitation, then, distracts providers from focusing on what really matters – improving patient value through excellent care at the medical condition level.  

Once capitation is thrust upon them, providersbecome motivated to take steps that actually work against value.  They are drawn to broaden service lines so as to capture all the revenue from their covered populations, even if they do not deliver the best value for every condition.  Rather than developing and growing areas of excellence, providers attempt to be “all things to all patients.” Patients get locked into a single provider for all their services, regardless of the expertise and the value it delivers.  

Providers also attempt to expand their covered populations so that the “law of large numbers” smooths out unexpected variations in patient disease burdens.  Yet volume for volume’s sake does not produce higher value to patients.  And, consolidation in a region through mergers and acquisitions can potentially work against healthy competition.  

In effect, by forcing providers to act as insurance companies, capitation payments distract them from becoming excellent at treating specific medical conditions.  These very issues are emerging as a result of the ACA’s focus on Accountable Care Organizations (ACOs), that are sometimes implemented through capitation or global budgets


How will value-based bundled payments transform health care delivery?  Today, payers and providers treat reimbursement as a zero-sum game in which each attempts to get a bigger share of a fixed or shrinking pie.  In this game, providers acquire others or merge to assemble greater bargaining power.  Payers attempt to drive down costs by not covering some medical services, requiring prior approval for expensive treatments, cutting reimbursement levels, implementing global budgets, or reimbursing through capitation payments that shift insurance risk to providers.  Suppliers of drugs and devices spend heavily on sales and marketing to get onto approved lists, secure coverage at attractive prices, and persuade physicians to adopt their products.  None of these actions increases the value delivered to patients.

fee-for-service (FFS) payment system

A benefit payment system in which an insurer reimburses the group member or pays the provider directly for each covered medical expense after the expense has been incurred.

• Fee for service Balance Billing:

It is the difference between the billed amount and the amount approved by insurance. Once the claim payment had been made by the primary insurance and if there is any balance pending for the claim then the balance is either sent to the secondary payor or to the patient.

If the patient is enrolled with the secondary payor then the balance is billed to it. Generally for secondary billing the claim must be submitted along with the primary payor’s EOB. Only then the secondary payor will pay for the claim. In secondary billing primary payor EOB is the most important document. Some insurance like Medicare automatically transfers the pending balance to the secondary payer (Medicare Supplementary) if the patient has any. This procedure is termed as Crossover which reduces the work of the billing office.

If the patient is not enrolled with the secondary payor then the balance is billed to the patient. Patient billing cannot be done at all the cases. For certain cases we need the client’s approval for patient billing. Periodic patient statements are sent to the patient in order to intimate the balance which is pending from patient.

Denial :

Denial is the technical term used for the non-payment of a claim by the insurance. The insurance usually pays the claim if the details presented to them are sufficient enough for processing. If there is any lack of information then the insurance quotes a reason for which the claim is not considered for payment which is known to be the denial reason. These reasons are found in the EOB. Some insurance like Medicare follow a general set of denial codes which is uniform across all the states. But some commercial insurance follow their own set of reasons codes for the denials which will be clearly mentioned in the EOB.

For Example:-

If the claim has gone to the insurance without the patient date of birth then the insurance will not pay the claim stating a denial reason code to it.


windee said...

this more of a question really, in a capitation agreement is transport by ambulance covered by the Primary or the HP? I believe i have a situation if Balance billing but not sure yet can;t seem to get the EOB

windee said...

looking for some answers

Medical Billing Popular Articles