Evolving from fee-for-service to capitation

A number of national health plan executives recently commented that they feel the end of fee-for-service is in sight. On that prediction we agree. But I disagree with their prediction that value-based contracting will replace fee-for-service as the dominant form of reimbursement for healthcare providers.

I disagree because value-based contracting is fundamentally unfair to providers. It creates an asymmetrical relationship in which the health plans hold all the cards and can manipulate the metrics to their own benefit. We can already see the evidence of this in the 250 some commercial ACO’s that have popped up around the country.

And I disagree because there is a better substitute for fee-for-service, namely prepaid health plans with capitation. The healthcare industry has an abundance of experience over many decades, some over 50 years, with how to manage care under prepaid financial circumstances. The big advantage in moving to capitated reimbursement is that it eliminates the financial incentive for over utilization. Properly designed prepaid plans encourage physician cooperation and coordination of care. The structure of financial incentives eliminates the physician incentive to duplicate tests or imaging as a source of personal income.

The structure of fee-for-service, even fee-for-service value-based incentives, is to encourage providers to do more, to bill more, to earn more. If we have learned anything since the creation of Medicare in 1965 it is that fee-for-service encourages more health care spending at the personal, corporate, state, and federal level of our economy. While health care reform is still built on a fee-for-service model, albeit with quality and process measures thrown in to steer providers in certain policy directions, I believe that the only hope of success in reforming healthcare will come from a move to capitation.

Reforming the compensation model for providers is an essential ingredient in the reforms that are articulated as the Triple Aim for the Affordable Care Act. Those Aims are to improve the patient experience, to improve the health of populations, and to reduce the per capita cost of healthcare. Capitation is uniquely designed to address the per capita cost of healthcare. Combined with the new tools of population health management capitation can be successful in improving the health of populations by design.

In our next blog guest Rich Williams from Advanced Plan for Health will explain how populations health management tools have made capitation an even more successful way to address clinical quality and health care costs.


Neil Godbey is President of The Godbey Group, Irving, Texas. Since 1999 The Godbey Group has been helping leading hospitals and healthcare systems negotiate favorable managed care and value-based contracts.