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Risk-Based Reimbursement in Healthcare

In most cases capitation is used to cut the physicians’ compensation. However, it can be utilized as a tool for providing proper reimbursement to reduce inpatient hospital stays and specialist procedures which patients may not need (Erdek, 2018). The hospitals where the primary physician work make per diem arrangement with the Health Management Organizations (HMO) or capitation contract. The agreement defines the financial matrix that outlines the medical group’s responsibilities or hospital fund. In most of the (Independent Practice Association) IPA contracts available, the healthcare team caters to outpatient services, both professional and diagnostics, such as CT scans, cardiac testing, and MRI (Falkson, &Srinivasan, 2020). This calls for planning for the expenses of both the facility and professional services.

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Managing Care Organizations (MCOs) Risk Assessment and Capitation Model Functions

The pool of the risk depends on the hospital contracts, most of the time, HMOs have shared risk contracts. Thus, physicians partner with the HMOs to share both the deficits and the surplus (Messer, 2019). The shortfall in the hospital funds results causes the medical group to pay into the health plan. The capitation is calculated and shared between the healthcare team and the hospital in the entire risk contract.

Thus, for a unified deal, the member pays $36 per month as a commercial premium income, which does not break even without retaining the common risk (Messer, 2019). In the unified plan, the challenge is the provision of cost-effective quality services. It is different from IPA design in that only specialists get capitation. The primary care physicians are reimbursed based on fee for service basis which ensures they provide as much care as possible to the patients. It is because overutilization of basic care services has fewer effects on the budget than specialist services’ overutilization.

How Risk-Based Compensation Limits Freedom of Primary Care Physicians

The income limitation ensures that the budget is under tight control. Therefore, it is necessary to obtain the amount spent on ancillary services, primary care, and specialist care. 23% of IPA expenditure is on primary care, 56% on specialists, 14% on ancillary care, and 7% on administrative costs (Messer, 2019). As per the expenditure, specialists spend more than half of the capitation budget. This was the main reason why the united physicians capitated the specialists. Another cause was the dissatisfaction with the traditional utilization method of authorization before the procedure. Prior approval is tiresome and has a more negligible effect on utilization management.

Merits and Demerits of Shared and Group Capitation

Shared capitation regulates specialist’s competition and also offers freedom of referrals to the primary care physician, though it has some shortcomings. It is because productivity is based on a first-come, first-serve basis (Koenecke, 2019). It does not control the utilization healthcare quality across the board. Group capitation has more advantages than shortcomings, some of the merits include specialists having control of their payments, low overhead cost, specialty creates their guidelines, and putting the UR back to providers (Koenecke, 2019). While demerits require single physicians to band together, and also there are selection and deselection of the healthcare providers.

Why HMOs Prefer Monthly Premium Fee

Regardless of the number of services given in a month, the HMO members pay a fixed monthly fee and their medical services are prepaid. In return, the HMOs provide a wide variety of services. Except for the exceptional cases, the members must receive physician and specialist services within the facilities that are in the HMO network. The practitioner is tasked with providing all the medical care needs and must be consulted before one (a member of HMO) sees a specialist. Due to these control systems, the healthcare costs tend to rise less rapidly than other insurance companies.

Pay-for-Performance (P4P) Method as a Better Model

Capitation or P4P bases payments on the outcomes, and it has a high potential for improving the quality of care. The existing payment methods do not consider the quality of services given in determining reimbursements (Erdek, 2018). The incentives of the current techniques promote poor quality care. The fee for service method pays the providers based on the complexity and number of the services provided without considering the quality, efficiency, and patient outcomes, and P4P is meant to correct this deficiency.

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Most insurers, have incorporated P4P as one of their elements. However, the program is being introduced to the market by a variety of stakeholders, which is done through various demonstrations and public statements (Erdek, 2018). Through these declarations, the Center for Medicare and Medicaid Services (CMS) has made its intentions clear on introducing P4P among physicians, hospitals, and other providers. While there are some objects for P4P as countering professionalism by paying twice for the same job done, it is the best refinement of pay-for-fee for service method and capitation. The P4P will not replace the current payment structure though. It will allow payers to consider several quality indicators and the volume of services given to patients or the number of lives covered in case of capitation (Erdek, 2018). It is a mechanism to correct some of the distortionary incentives in the fee-for-service method. For instance, reimbursing activities connected to individuals’ health, such as screening and managing chronic illnesses that have been under reimbursed relative to the specialized care, improves quality.

Evidence of Pay for Performance

Many studies have been done on P4P methods of reimbursement. Before the increase in P4P, there were few controlled research in the healthcare literature. Two of the analysis found significant improvements in evidence-based measures of quality in P4P plans (Powell,2019). The recent reviews on the evaluation of the programs have been mixed up. Therefore, it reasonably corrects to conclude that P4P has positive effects on the quality of care, although the payor has a lot to learn about effective ways to implement it.

Limitation of Pay for Performance

The critical challenge of pay-for-performance from a patient care point of view is dealing with diverse patient populations to minimize incentive. Many objecting physicians argue that quality measures of the payment are based on are confounded by differences in the severity of the patients’ illness and behavior. Physicians who treat more ill-patients and less compliant ones are likely to elicit poor outcomes despite their efforts to improve quality (Powell, 2019). The challenge of the payment method is risk adjustment or other approaches to account for these differences.

Rewarding specific and easy to document quality measures discourages unrewarded services that may be important in patients but challenging to measure. Meaningful experiences are lost when the assessors focus too much on the test performance. Similarly, the P4P emphases on few clinical areas which can be measured on a quality basis, and other equally important areas are likely to suffer (Powell,2019). The payers can address this by introducing broad quality measures that constitute patient experiences and the whole health care process.

The future of Pay-for-Performance

It is an inevitable refinement in healthcare quality and reporting. It will be possible to convince all stakeholders, that there are quality healthcare system issues in the US. This will result in the widespread need to reform the payment systems. P4P will remove most distortion in the giving incentives and focus on the quality-of-service delivery (Powell,2019). To succeed in critical aspects of population health, the system should devise ways of curbing the earlier mentioned shortcomings and also meet the objective at a low cost.


Erdek M. A. (2018). Pay-for-Performance Reimbursement for Clinicians: Common Sense or a Wolf in Sheep’s Clothing?. Pain medicine (Malden, Mass.), 19(11), 2106–2108. Web.

Falkson, S. R., & Srinivasan, V. N. (2020). Health Maintenance Organization (HMO). StatPearls [Internet]. Web.

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Koenecke A. (2019). A game-theoretic setting of capitation versus fee-for-service payment systems. PloS one, 14(10), e0223672. Web.

Messer, T. (2019). Provider Risk Sharing and Random Noise. Web.

Powell S. K. (2019). Choosing Medicare Advantage Plans Versus Traditional Fee-for-Service: Is This Change the Tipping Point?. Professional case management, 24(1), 1–3. Web.

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