Capitation vs. Fee-For-Service:  Ethical Dilemmas

(© Michelle Sahl 1998)

 

Are capitation and fee-for-service plans just different ways of compensating providers, or do these two types of health plan payment schemes impact health care delivery in other ways?  How do the incentives and disincentives of each type of system make health care delivery better or worse than the other for the people receiving care?  Are these systems, in fact, mirror images of one another?  To address these questions, we can begin by defining the terms, providing some background, and looking at both sides of the argument by citing pros and cons from the literature.

 

The Terms:  The first step in responding to these questions is to define the terms being used.  Both systems make payments to providers (health care practitioners and facilities) for delivering health care services to individuals who are covered by the respective health plans.  Either system can be paid for by individuals themselves, by a government program, or by an individual’s employer as a benefit.  Capitation is defined as “prepayment for services on a per member per month (PMPM) basis.”[i]  The term is most commonly used in relation to managed care plans or health maintenance organizations (HMOs).  Such a payment system represents coverage for current and future (per term of contract) services as defined by the health plan’s scope (description) of covered services. Fee-for-service (FFS) systems make payments for each unique and discreet service rendered.  Fee-for-service systems had been the most common type of health plans in this country until the 1980s.

 

The Background:  In 1997, 92% of the nation’s physicians worked under some form of managed care contract, according to the American Medical Association, as compared with 61% in 1988.  The percentage of physician income from managed care, during the same time period, rose from 23% to 44%.[ii]    The transition from fee-for-service to managed care capitation has not been an easy one.  Compensation plans for physician practices that receive both fee-for service and capitation payments are particularly difficult to develop, because the two different types of payments also reflect two different types of reward systems for physicians’ patient care behavior. Traditional fee-for-service compensation plans have usually been either salary-based, or productivity-based (i.e., the more patients a doctor sees, the more fees are charged and the higher the potential reimbursement income)....