Capitation is a fixed monthly payment that is calculated on the average cost of an enrollee's health care and is paid in advance of any care being rendered. Capitation may be made to a provider or to a network of providers, usually referred to as a care system. It is then the responsibility of the capitated entity to manage the health care needed by its enrollees and to provide all necessary health care services to the enrollees. If the cost of providing care is less than the capitation amount, the capitated entity realizes a profit. On the other hand, if the cost exceeds the capitation amount, the deficit is absorbed by the capitated entity.
Capitation requires a sufficiently large patient base so that risk can be assumed.
In addition to straight capitation, managed care organizations may use various forms of risk sharing that provide incentives for providers to provide quality care within cost targets. Part of the capitation may be withheld pending end of year settlement, based on how close the provider came to the established targets. Physicians and other licensed providers are bound by codes of ethics. There are also laws in Minnesota that grant regulatory oversight in the areas of utilization review and quality assurance to specific state agencies. Consumers and employers were finding it impossible to afford health insurance.