Capitation versus fee-for-service

The correct answer: B. Capitation; the primary care group carries the risk because its payment does not rise when members use more care

✅ Why this answer

The key phrase in the question: a fixed amount for each enrolled member every month, whatever the number of visits. This is capitation, usually calculated “per member per month” (PMPM).

Because the income is fixed, every extra visit or test is paid out of the same amount. So utilization risk moves from the payer to the provider: if members use more services, the group loses, and if they stay healthy, it gains.

❌ Why the other options are wrong

• (A) Fee-for-service (FFS): each visit or procedure is paid for separately, so income rises with the number of services. This is the opposite of the fixed amount described in the question.
• (C) Bundled payment: one amount for a defined episode of care (such as a surgery and what follows it), not a monthly amount per member. Nor is the risk in it necessarily split “equally”.
• (D) Cost-based reimbursement: it repays actual costs, so the amount is not fixed in advance. It is a model Medicare uses with special categories of hospitals, not with primary care groups that have enrolled members.

💡 Key concept

Payment models differ in who carries the risk and in the incentive they create:

• FFS: the risk is on the payer, and the incentive is to increase the number of services (volume).
• Capitation: the risk is on the provider, and the incentive is prevention and keeping members healthy. Its possible danger is providing less care than needed.

That is why capitation is usually tied to quality measures, so the savings do not come at the patient’s expense.

In the exam: phrases such as “a fixed amount per member”, “PMPM” and “whatever the number of visits” mean capitation. In risk questions, the useful question is: whose income does not rise when use rises? That party carries the risk.

🔗 Related facts and questions

• The risk ladder of payment models: from the least to the most risk for the provider: fee-for-service (FFS), then pay-for-performance (P4P, FFS with a bonus or a penalty based on quality), then bundled payment for an episode of care, then shared savings in accountable care organizations, then global capitation.
  Practice question: one group is paid a fixed monthly amount per member for all of the member’s care. Another group is paid one fixed amount for each knee replacement and the 90 days after it. Which group carries more financial risk? → The first group: it is under global capitation, at the top of the ladder, while the second is under bundled payment, which puts only one episode of care at risk.
• Risk adjustment: if the same amount is paid for a healthy young member and for an older member with diabetes, the group may avoid the sickest patients. So the amount is adjusted to the member’s health status, and this adjustment depends on accurately documented and coded diagnoses.
  Practice question: two groups under capitation have equally sick members. The first codes every chronic diagnosis on its claims; the second codes only the reason for each visit. Which group receives the lower amount per member, and why? → The second group: risk adjustment sees its members as healthier than they are, so it does not raise the amount.
• Stop-loss: protection for the provider against the few very expensive cases, such as an organ transplant. Above a set threshold, the payer or a separate insurance carries part of the cost. It is a provision added to risk contracts such as capitation, not a separate payment model.
• Partial versus global capitation: partial capitation covers defined services, such as primary care only, as in this question. Global capitation covers all care, including the hospital and specialists, so the risk is much larger.
• The information a provider needs under capitation: an up-to-date list of members for each physician (the panel), risk stratification of members, chronic disease registries, care gap follow-up and utilization analysis from claims. Under capitation, these tools cut avoidable care and so protect the group’s margin directly, as in a related question in the full bank.
• Accountable care organizations (ACOs) sit halfway between the two models; payment in them is often FFS with a share in the savings: a related question in the full bank.
• Using quality data when the facility is at risk: a related question in the full bank.
• Practice question: a group under capitation has members of average health, so the monthly amount it receives is adequate. This year one premature baby needed months of intensive care, at a cost far above anything the group expected. Which would have protected the group: risk adjustment or stop-loss? → Stop-loss: risk adjustment sets the monthly amount by the members’ documented health status; it does not pay for one unexpected, very expensive case. That is what stop-loss does.