Running Head: CAPITATION1

Running Head: CAPITATION1

Capitation Payment System

April Vela

Colorado Technical University

HCM410-1301B-03 Phase 1 IP

Professor Randolph

February 25, 2013

Memorandum

To: Chief Executive Officer (CEO) of XYZ Inc.

CC: Chief Financial Officer (CFO) of XYZ Inc.

From: April Vela Student of Colorado Technical University

Subject: To explain capitation as a payment methodology for addressing the potential issues in the next financial year.

Date: February 25, 2013

This memorandum will be helpful for the CEO of the organization to prepare financial strategies for addressing problems in the financial year and providing detailed information regarding capitation payment methodology.

In the next financial year, there can be a number of different critical issues in financial planning of the organization in the last year. For instance, it is forecasted that state Medicaid budget may be reduced. This will be harmful for the organization in the future. In addition to this, the government of the state is directed to diversify and open some new healthcare facilities, which will lead to enhance the overall competition for the organization. In addition to this, establishing an effective management structure for the next year so that the organization can be able to address different issues emerged in the external environment.

For addressing issues related to the financial structure of the organization, capitation as a payment methodology is recommended for the next year. Capitation is regarded as the agreement, which is undertaken for the purpose of paying physicians and nurses for their services. In this system, the payment is made to the health service providers on the basis of visit of per patient. In this system, the doctor is paid per-month or per-patient basis regardless how many times the patient avails services from the doctor. In this system, the payment made to the healthcare service provider can vary based on different variables such as age of the patients, and seriousness of the disease of the patient (Fitzpatrick, 2006).

In addition to this, expected average expected health care utilization by the patient is also one of the major factors while; deciding the capitation contract for doctors and patients. For instance, patients who have detailed medical history, charged with high fees. The prime quest behind the application of this method of payment is reducing the overall operational cost for the institution. In the future, where competition is expected to be enhanced quite significantly, this practice will be helpful in reducing the cost (Culyer & Newhouse, 2000).

Although the capitation payment system offers several benefits to the organization, yet still there are a number of different critical challenges faced by the organization while; working with capitation. For instance, the differentiation in the payment based on demographic characters of the patient will lead to enhance the discrimination within the society, which can induce the government to take disciplinary action against the organization (Culyer & Newhouse, 2000).

Moreover, per patient fee system will also encourage the healthcare service providers to reduce the number services provided to the patient. This will lead patients to get lower quality health service. Owing to this reason, the image and goodwill of the company will be decreased in the eyes of its customers, which are not in the favor of the company in terms of sustainability in the market (Kongstved, 2012).

In recent few years, trends in capitation payments have been changed quite significantly as this has become the most frequently used method of payment in medical services. Number of people enrolled with such kind of payment system arose sharply at the starting of 2000s. For instance, where number of people enrolled in Health Maintenance Organizations (HMOs) was 39 million in the year 1999, this figure has been reached to 74 million by 2002, which indicates the popularity of capitation payment system (Zuvekas & Cohen, 2004).

I will be glad to discuss any of these figures or any concerns you may have at our lunch meeting on Wednesday at12:30 and answer any questions you may have.

References

Culyer, A.J. & Newhouse, J.P. (2000).Handbook of Health Economics.Elsevier.

Fitzpatrick, J.J. (2006). Encyclopedia of Nursing Research.Springer Publishing Company.

Kongstved, P.R. (2012). Essentials of Managed Health Care.Jones & Bartlett Publishers.

Zuvekas, S. & Cohen, J.W. (2004). Trends in Provider Capitation, 1996-2000. Retrieved February 25, 2013, from