Making the Case: Why Healthcare Funding Must Shift from Fee-for-Service to Capitation

I. The Problem: Fee-for-Service Rewards Volume, Not Value

The current U.S. healthcare payment model overwhelmingly relies on fee-for-service (FFS)—a system in which providers are reimbursed for each service, test, or procedure delivered. This model:

• Incentivizes high utilization: More appointments, more imaging, more interventions—regardless of patient outcomes.

• Discourages prevention: There's little financial reward for preventing illness or managing chronic conditions outside of billable encounters.

• Fragment care: Patients bounce between providers, often receiving redundant or conflicting services.

• Ignores social and community needs: FFS does not reimburse for non-clinical interventions (e.g., food access, housing navigation), even when they dramatically impact health.

For underserved communities—especially rural and low-income populations—FFS reinforces inequity. It rewards providers with access to insured, low-risk patients and penalizes those serving complex or marginalized populations.

II. The Solution: Capitation Aligns Incentives with Health Outcomes

Capitation pays healthcare providers a set amount per patient per month, regardless of how many services that patient uses. The model encourages:

• Proactive care: Providers are incentivized to keep patients healthy to avoid high-cost interventions.

• Care coordination: There’s greater incentive to streamline care, share information, and reduce duplicative services.

• Flexibility in services: Capitation allows funds to be used on non-traditional supports (e.g., community health workers, telehealth, food prescriptions) that improve health but aren't reimbursed in FFS.

• Population health management: Providers can focus on entire populations, not just those who show up in the clinic.

By emphasizing outcomes over volume, capitation fosters a culture of prevention, accountability, and innovation.

III. Evidence That Capitation Works

• Kaiser Permanente, a long-standing capitated model, consistently delivers better outcomes at lower cost than traditional FFS systems.

• Maryland’s All-Payer Model uses global budgets (a form of capitation) and has demonstrated reduced hospitalizations, improved quality, and slowed cost growth.

• Medicaid Managed Care (capitated in most states) has shown improved access and care coordination for vulnerable populations when well regulated.

IV. Capitation Supports Equity and Sustainability

Capitated models enable health systems to:

• Address Social Determinants of Health (SDoH): Providers can fund interventions that improve housing stability, nutrition, transportation, and social support.

• Invest in communities: Health systems are financially motivated to build relationships with local organizations and public health departments.

• Support underserved populations: Capitation removes perverse incentives to avoid high-need patients.

V. Considerations and Caveats

To succeed, capitation must be:

• Risk-adjusted: So providers are not penalized for caring for sicker or more complex patients.

• Paired with quality metrics: To avoid under-treatment or patient neglect.

• Phased in thoughtfully: With transitional support for small and rural providers.

VI. Conclusion: Payment Reform is Prevention Reform

If we want health—not just health care—we must pay for it differently. Capitation is not a silver bullet, but it rewards outcomes over output, promotes smarter use of resources, and gives providers the flexibility to meet people where they are. In a system plagued by fragmentation, inefficiency, and inequity, capitation is a step toward sustainability, equity, and accountability.