Exploring Capitated Payment for Primary Care in California

A significant challenge in the pursuit of a high-performing health care system in the United States is the diminishing allocation of resources toward primary care. Experts argue that both the amount and structure of primary care spending has a significant negative impact on patient outcomes. Hybrid payments that include capitation offer a promising alternative to traditional fee-for-service models, focusing on quality over quantity to enhance patient outcomes and system efficiency.

The Case for Capitation

The traditional fee-for-service payment model encourages quantity over quality of care, creating inefficiency within the health care system. By transitioning to a blended payment model that includes capitation, primary care practices can reduce their administrative burden and improve patient outcomes. Capitation provides the flexibility to invest in staff, improve clinical quality, adapt to shifts in patient preferences and most importantly incentivizes quality, not quantity, of patient visits. During the COVID-19 pandemic for example, capitated payment models enabled primary care practices to swiftly adapt to changing patient access preferences, a flexibility not afforded by fee-for-service models.

Understanding the Regulatory Environment

Regulatory oversight for health coverage in California is complex, determined by the characteristics of what entity is paying for care — the purchaser — and whether the coverage is fully insured or self-insured. Clear regulatory guidelines are crucial to ensuring the successful implementation and functioning of any new payment model. An exploration conducted by PBGH’s California Quality Collaborative and its partner Integrated Healthcare Association found that while self-funded plans in California can use capitation for primary care payments under specific conditions, the regulatory guidelines under the federal Employee Retirement Income Security Act (ERISA) of 1974 and the Knox Keene Act (KKA) of 1975 for implementing such payment models are not clearly defined.

An analysis of California’s regulatory framework to determine if self-funded plans can legally pay primary care providers through a capitated model did not yield a straightforward answer. It did, however, clarify the contexts in which capitation is feasible in California. These include scenarios within arrangements where employers partially cover costs through capitation, direct contracts between employers and providers, and through third-party administrators engaging with providers operating under specialized regulatory conditions or assuming financial responsibility for patient care.

Stakeholder Perspectives

The transition to a capitated payment model impacts different stakeholders in the health care industry in unique ways. Self-funded employers, third-party administrators, primary care providers and consumer advocates all have varied considerations when debating the merits of capitated payments. While some see the shift as a potential market differentiator, others may worry that it could not only limit patients’ access to diverse services but also potentially diminish consumer protection safeguards, such as ensuring comprehensive care coverage.

The Path Forward Through Collaboration

Strengthened collaboration among stakeholders, including health plans, primary care providers and purchasers will likely illuminate a clearer path toward a capitation model that advances health care quality, reduces disparities and ensures financial stability. By addressing regulatory uncertainties and fostering a broader dialogue among key decision-makers, we can work toward a hybrid payment model that values and incentivizes quality, supports widespread transformation of primary care delivery and ultimately delivers better health outcomes for all.

For a more detailed look into capitated payment for primary care in self-funded health insurance arrangements in California, read our latest issue brief.