In capitation agreements, the physician agrees to assume part or all of the cost of caring for a defined pool of patients. The risk arises because the cash flow through an MCO for the total cost of caring for a patient is much larger than the costs of physician services alone. Individual physicians and small group practices have very high overhead. This makes them very sensitive to even small reductions in patient volume or increased costs of caring for patients. Any agreements that put the physician at risk for the total cost of the patient’s care, without fully compensating for that risk, can bankrupt all but the richest practices. The financial risk is dependent on the character of the patient pool and the number of lives covered. The risk is greatest when a few physicians contract for a portion of an MCO pool. Unless the physicians buy stop-loss insurance coverage on their share of the patient pool, an unexpected clustering of serious illnesses or major trauma could cost them millions in unanticipated medical care.

An inadvertent capitation situation can occur if the MCO becomes insolvent. A survey by the Solvency Working Group of the National Association of Insurance Commissions found that providers are owed an average of $2,005,000 at the time an HMO declares insolvency. [Howard, JM. The aftermath of HMO insolvency: consideration for provider. Ann Health Law. 1995;4:87, 89 (citing National Association of Commissioners 1989–1 NAIC Proc. 344, 362).] Further complicating the recovery of funds is whether the MCO is a debtor, in which case liquidation and reorganization proceeds pursuant to the Bankruptcy Code; or whether the MCO is an insurance company, which will proceed toward liquidation under the direction of the state insurance commissioner’s office. Most states prohibit physicians from trying to collect payments directly from the MCO’s patients because the patients already paid for the care when they paid their insurance premiums.