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Models for paying providers: Capitation

This series of briefings has been designed to help you understand the different ways in which providers can be paid for seeing and treating patients. Block contracts have been widely used throughout the UK, and continue to be the main payment system for hospitals in Scotland, Wales and Northern Ireland.

In recent decades NHS payment systems have evolved, particularly in England, where the national tariff (‘payment by results’) currently dominates payments made to the acute sector. But increasing emphasis on new, integrated models of care means that other ways to pay providers, such as through capitated budgets, may become more dominant in the future.

  • What is capitation?

    Capitation is a payment system where lump-sum payments are made to care providers based on the number of patients in a target population, to provide some or all of their care needs. Crucially the capitation payment is not linked to how much care is provided.

    The scope of the system – which care services are covered by the payment – is vital to its success and will vary locally.

  • How does it apply to the NHS?

    Capitation is used to determine core funding for UK general practice. It is very uncommon however outside of primary care, although this is changing in England.

    The NHS vision ‘the five year forward view’ specifically proposed capitated budgets as the future payment system for two of its new models of care, multispecialty community providers (MCPs) and primary and acute care systems (PACS). Most sustainability and transformation plans in England also aim to move towards an outcome based capitated budget.

    NHS England are developing the approach for the payment system for the MCP and PACS models, which is based on capitation. A capitated, whole population budget forms the basis of the new payment approach, along with an improvement payment scheme and a gain/loss share arrangement. Together, these elements are intended to enable longer-term planning and a more flexible use of resources to best meet the needs of the whole population, with targeted financial incentives. A number of sites have begun to test elements of the model, although it is unlikely that any will go fully live until April 2018. 

    For more information on this proposed approach, see our briefing Payment models for integrated care: A capitated payment approach

  • What are the pros?

    As a capitated payment is not linked to how much care is provided, providers have the flexibility to spend money on services they think will secure the best outcome for the patient. This encourages investment in preventative care and care delivered outside of the hospital, for example in primary and community settings.[i]

    For more information on shifting care into the community, see our briefing on integrated provider models

    One of the other main advantages to capitation systems is that they have the potential to facilitate more integrated care and there is evidence[ii] that professionals work more closely together when working under a capitated budget. This is because one budget is used to fund all of a patient’s healthcare needs.

    Evaluations of the Alzira programme in Spain[iii],[iv] and numerous capitation-based systems in North America[v],[vi] have also shown capitation systems to be more cost-effective than other payment systems, in particular fee-for-service[1] models. However, there is very little evidence comparing capitation payments with mixed payment models (for example, capitation plus payment for performance), or comparing capitation with a national tariff payment system such as in England. This makes it difficult to determine the best model in terms of cost-effectiveness.

    Find out more about the national tarriff

    In addition there is evidence that capitation systems provide higher-quality care, as measured by process and clinical process indicators.[vii],[viii] For example, American capitation systems consistently show lower bed usage figures[ix] when compared with other payment systems and Dutch capitation systems have resulted in greater adherence to clinical guidelines.[x]

    However, there is very limited evidence that they improve patient outcomes (for example mortality and readmission rates). This is probably because of the inherent difficulties in measuring outcomes in healthcare and attributing those outcomes to a payment system. These difficulties are not limited to capitation systems and overall, according to a report by the Nuffield Trust, there is ‘currently limited evidence to support financial incentivisation of outcomes’.[xi]

    [1] Fee-for-service is a payment model that is particularly popular in the US but is rarely seen in a UK setting. It refers to individual doctors billing for activity as opposed to the national tariff in the NHS in England, which sets prices for provider activity that are used nationally.

    [i] Whelan and Feder 2009.

    [ii] Struijs JN & Baan CA (2011). Integrating Care through Bundled Payments – Lessons from the Netherlands. N Engl J Med, 364:990-991. March 17, 2011.

    [iii] Bes M (2009). ‘Spanish health district tests a new public-private mix’. Bulletin of the World Health Organisation, No. 87, 892-93.

    [iv] de Rosa Torner A (2012). Lessons from Spain: The Alzira model. Presentation to the King’s Fund International Integrated Care Summit London, 1 May 2012.

    [v] Feachem RGA, Sehri NK & White KL (2002). ‘Getting more for their dollar: a comparison of the NHS with California’s Kaiser Permanente’. BMJ, 324 135-43.

    [vi] Ashton CM, Souchek J & Petersen NJ (2003). ‘Hospital use and survival among Veterans Affairs beneficiaries’. New England Journal of Medicine, 349, 1637-46.

    [vii]> de Rosa Torner A (2012), op. cit.

    [ix] Perlin JB, Kolodner RM & Roswell RH (2004). ‘The Veterans Health Administration: quality, value, accountability, and information as transforming strategies for patient centred care’. American Journal of Managed Care, 10:11 (pt 2), 828-36.

    [xi] Marshall L, Charlesworth A & Hurst J (2014). The NHS payment system: evolving policy and emerging evidence. Research Report. Nuffield Trust, February 2014.

  • What are the cons?

    Under capitation, the fact that providers are paid regardless of what they deliver potentially creates a negative incentive to provide as little care as possible in order to minimise costs. There is some evidence[i] from Dutch capitation models of this taking place and whilst commissioners can set minimum delivery standards to combat this, regulation will always be imperfect and the potential for providers to skimp on care will remain.

    Capitated budgets do not necessarily take in to account changes in levels of demand, as has been seen in general practice. It is important that quality data on demand levels is used to develop capitated budgets to ensure the system can cope.

    Another disadvantage is that capitation systems that include services delivered by different organisations require significant capabilities on the provider side.[ii] In particular, they require the ability to coordinate between different providers (between primary, secondary and social care for example) as well as sophisticated information systems in order to track individual patient activity and costs across different sectors.

    When one provider delivers all of the services under a capitated budget, as is the case with the more successful schemes run by Kaiser Permanente in the US, the arrangements are simpler. But where there are multiple providers, unless care can be effectively coordinated between providers, and fairly reimbursed, then a capitated budget designed to facilitate integration across different providers will become problematic. And the advantages outlined in the ‘pros’ section above may not be achievable.

    [i] Struijs JN & Baan CA, op. cit.
  • What are the implications for doctors?

    Doctors should be aware of the new models of care and their payment systems that are starting to be developed. 

    NHS Improvement and NHS England have been working with MCPs, PACS and other sites to develop a capitated based approach, which currently remains a voluntary approach and may be subject to further refinement.

    However, in time, it is likely to become part of the national tariff process. Most sustainability and transformation plans in England aim to move towards an outcome based capitated approach.

  • What is the BMA’s policy on this?

    The BMA does not support the national tariff, payment by results, as the main way for paying acute providers in England.

    Instead we would prefer to see a new payment model introduced that facilitates and encourages closer working between different parts of the health service, around the needs of patients. Current payment reforms that focus on capitation look, at present, to be the most realistic way of achieving these aims.

    We do have some concerns on aspects of the new proposed approach for MPCs and PACS. For more information see our see our briefing: Payment models for integrated care: A capitated payment approach

    It is essential that any capitated budget is sufficient to fund services and accommodate local variations (eg in population health).