Paying for HMO care: Issues and options in setting capitation rates

G. F. Anderson, E. P. Steinberg, J. Holloway, J. C. Cantor

Research output: Contribution to journalArticlepeer-review

12 Scopus citations


In this article we have discussed the circumstances under which risk selection is most likely to occur, the problems that arise when risk selection does occur, and the attributes of a capitation pricing system that would be least likely to promote risk selection. We have also reviewed the methods HMOs actually use to establish capitation prices, as well as the price-setting methodology employed by HCFA to establish payment rates to HMOs for providing care to Medicare beneficiaries under risk contracts. Our analysis suggests that organizations, such as HCFA or corporations, that offer beneficiaries or employees a choice among competing health plans face the prospect of increased health care expenditures as a result of risk selection. This is particularly an issue for the Medicare program, which uses its monopsony power and the regulatory authority granted by Congress to set payment rates. In addition, certain providers may receive windfall profits if capitation prices are not established appropriately. In the process, total health care expenditures would increase. In order to minimize the probability of any of these events occurring, capitation prices should be set to reflect the expected costs of providing care to specific individuals or groups of individuals.

Original languageEnglish (US)
Pages (from-to)548-565
Number of pages18
JournalMilbank Quarterly
Issue number4
StatePublished - 1986

ASJC Scopus subject areas

  • Health Policy
  • Public Health, Environmental and Occupational Health


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