Many authors believe that we can reduce high, often excessive and inefficient, costs of health care by transferring insurance risks to health care providers. I usually call such transfers ``Professional Caregiver Insurance Risk'' but use ``capitation'' in this paper, though many different insurance risk transfers exist. Capitation replaces frequency and intensity related, fee for service payments, with fixed provider payments (Bourdon, Passwater, and Priven, 1997; Bourdon, 1998; Cox, 2001, 2006, 2010, 2011). Capitation supporters (Arrow, 2009; Gapenski and Pink, 2011) find capitation appealing; simple; easy to explain to politicians, the public, and health care providers. I will show that capitation is far too deeply flawed to accomplish these goals.
Capitation is about magical thinking. Advocates suggest that insurance risk assuming health care providers do not become their patients' insurers, managing ``performance risk'' rather than insurance risk. This is untrue. Advocates incorrectly imply that insurance risk assuming health care providers will manage patients' claims for health care services more efficiently than those transferring these risk. This is not true. Capitation turns health providers into their patients' inefficient insurers and we lose health care (finance) system capacity in the process. I show that all small insurers, including risk assuming health care providers, must cut benefits or risk financial ruin, compared to larger, more efficient insurers.
Capitation health care finance mechanisms are common in the United States (Gold, Hurley, and Lake, 2001; Mayes, 2005) and evolving in Great Britain and Canada. The exchange of amounts close to the average cost, per patient, is the basis for all health provider risk sharing/bearing models. Unfortunately, this approach works best in only one direction, as risks move to, and are managed by, entities larger than the entity transferring the risks. Most health care finance literature fails to properly analyze insurance risk transferring health care finance mechanisms that fix health providers' revenues, while provider costs vary from patient to patient, encounter to encounter, and year to year.