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Capitation: a physician gets paid a specified dollar amount, for a given time period, to take care of the medical needs of a specified group of people.  

Often used in Health Maintenance Organization (HMO) Insurance Plans and became prominent in the 1980s and 90s.

For example, 

1. A physician is an HMO provider for a health plan paid at a capitation rate of $7.00 per member
2. People who have an HMO plan are required to select a primary care physician, by reviewing a list of physicians in a directory.  This physician has been selected by 250 people to be their PCP
3. This physician gets paid $7.00 for each of the 250 members, or $1,750.00, each month
4. This physician is responsible for providing medical care to any of these 250 people with the $1,750.00 given 
5. If the expenses are more than $1,750.00, the physician must cover the difference out of their own pocket

In other words, there is risk involved.  The $1,750.00 capitated payment is the only amount the physician will receive from the health plan.  Hypothetically, if each visit costs the physician an average of $110.00 (time, nursing, supplies, fixed costs, etc.), then the physician is able to see 16 of these 250 patients during a given month.  If the physician sees more than 16 patients, then the physician is not able to cover the costs incurred for the month, and consequently, begins to lose money from this health plan contract.

Does this payment methodology encourage the physician to do less?  Yes because they receive only a specified dollar amount each month to perform medical services to a group of people.  Fee-for-service, on the other hand, continues to pay for each patient seen, without a specified limit.  A physician may actually be encouraged to bill more to receive additional payments.  (HMOs are often associated with Capitation, while PPOs commonly use the fee-for-service method).

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