Direct Contracting’s Capitation Model Is Better for Providers’ Bottom Line

Pearl Health


Direct Contracting’s new population-based reimbursement model

For decades, the Center for Medicare and Medicaid Services (CMS) has embraced a fee-for-service reimbursement model, just as the rest of the US healthcare system has. Doctors and hospitals caring for Medicare and Medicaid patients have received compensation based on the volume and complexity of the services they render. In constructing provider reimbursement this way, the system incentivized emphasis on the number of patients seen or procedures performed. At times, this did not yield high-quality or coordinated care to those patients who most required it. It also hasn’t done a good job of containing costs. Over time, it has become clear that a fee-for-service reimbursement model is simply not sustainable. 

This realization has led CMS to test a number of different models to achieve greater efficiency in managing patient care while maintaining access and high quality, the latest of which includes Direct Contracting’s capitation approach. Direct Contracting is CMS’ new population-based reimbursement model that pays Medicare providers a set monthly amount proportional to the size and disease burden of their patient panel, while also incorporating the regional cost of care. It also lets providers potentially boost their income further when they provide high-quality, cost-effective care and beat a target benchmark on the total-cost-of-care of the patients they manage. This is why providers should embrace CMS’ new model and develop strategies to adapt to this new world.


Dr. Rushika Fernandopulle Chair of Direct Contracting, America's Physician Group

Understanding Direct Contracting’s Capitation Program

The capitation model that CMS is pursuing is quite different from a fee-for-service reimbursement model. Rather than receiving compensation for each patient visit or procedure, providers get a set reimbursement based on the population served. This population only involves Medicare patients currently. But many hope that Direct Contracting’s capitation model will precipitate a proliferation of similar fixed payments in the commercially-insured space. Direct Contracting’s capitation approach better aligns economic goals with clinical outcomes, while freeing providers from the pressure to generate visit volume. 

In order to determine spend targets and establish the appropriate capitation payment, CMS calculates a benchmark target for providers participating in a given Direct Contracting Entity (DCE) by evaluating historical spending for a specific patient population. The DCE can then receive up to 7% of this benchmark over time, in monthly installments, distributing a pre-agreed amount to the primary care providers that are aligned to the DCE. A subset of this (generally 2-4% of benchmark, depending on provider and their panel’s utilization of primary care services), is meant to account for the cost of providing primary care services to the patient population. The remainder is intended to be an investment in the changes and improvements a practice must undergo to transition into a value-based care paradigm, and is trued up against shared savings when a given performance year ends. Through obviating the need to achieve volume to generate income, and by incentivizing providers to lower the total-cost-of-care, this model better incentivizes value-based healthcare compared to a fee-for-service reimbursement model.


Valinda Rutledge

Investing in Providers’ Success Up Front

Direct Contracting’s capitation approach encourages providers to better utilize healthcare resources. Moreover, capitation models give providers additional resources up front when compared to a fee-for-service reimbursement model. Because providers receive predictable monthly payments based on the population they serve, they avoid billing and collections delays, creating a dependable, steady income stream. In turn, this lets them invest in specific strategies to provide higher quality and cost-effective care. This may mean they are more likely to pursue preventative care or spend greater time with complicated patients. Or it may encourage greater collaboration with other providers to realize better outcomes. 

At the same time, Direct Contracting’s capitation model also reduces costs for providers directly. Because capitation payments are made regularly, there are reduced ongoing billing requirements for providers. Compared to a fee-for-service reimbursement model, this means providers have fewer administrative tasks to perform, allowing for these resources to be deployed toward patient care. Ultimately, this means providers can boost their bottom line further through lower administrative costs and/or enhanced shared savings bonuses. This is another way that Direct Contracting’s capitation approach outshines a fee-for-service reimbursement model.

David Pittman Senior Policy Advisor

Dealing with Capitation’s Risk

While Direct Contracting’s capitation model is advantageous in many ways, it does carry some risks. Providers can choose the level of risk they wish to take under these new models. For those with experience with Accountable Care Organizations (ACOs), a higher degree of risk may be considered. But other providers used to a fee-for-service reimbursement model may wish to proceed more cautiously. Taking less risk upfront may reduce the opportunities for additional revenues from shared savings, but it also reduces the chance for financial losses if providers don’t beat the target benchmark.

Dr. Rushika Fernandopulle


1. Lagasse, J. (2021). Providers, payers see direct contracting’s capitation as an important move to value-based care. Healthcare Finance News. Retrieved from

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