Partial or full capitation contracts have become common in primary health care remuneration; for example, in England’s Primary Care Trusts (Keen, Light and Mays, 1999), United States Managed Care schemes (Robinson, 2004; Hagen, 1999) and New Zealand’s Primary Health Care Strategy (King, 2001). Capitation is also used extensively in public sector ‘outcomes-based’ (Honore et al., 2004) and ‘performance-based’ (Martin, 2002) contracting. Reduced emphasis on the consultation as the primary payment determinant is attributed with shifting primary care delivery focus away from interventions in the event of illness towards the promotion and maintenance of wellness (Coster and Gribben, 1999; Cumming, 1999; Malcolm, 1997). Capitation is also attributed with stimulating increased equity, targeting high health need, encouraging a team approach to primary health care, and a change in focus towards a care management model as opposed to a model of episodic intervention with a focus on illness (Crampton, Sutton and Foley, 2001).

However, capitation contracts also have significant limitations. Robinson (2001:4) identifies that capitation is inferior to fee-for-service in that it does not recognise the extent of practitioner effort exerted: “Its payment is determined prospectively without regard to the number of services provided, overpaying physicians who stint on care and underpaying those who provide many complex services.” Capitation also performs poorly in regard to risk management, he says, as it is “imperfectly adjusted for the severity of illness of each covered patient. Even a well-adjusted capitation payment rate fails to compensate physicians who treat patients whose condition deteriorates, leading to greater utilization and cost, for reasons independent of the physician’s own actions.”

This paper explores the ways in which the financial consequences of unpredictable events affecting demand for services are allocated under the capitated contracts used in the New Zealand Primary Health Care Strategy (NZPHCS). Section one discusses the general effect that unpredictable events can have upon capitated practitioners’ incomes. Section two then discusses the particular arrangements of the New Zealand capitation contracts introduced in 2002. The perverse effects arising from the New Zealand contracts are illustrated in section three using two recent exogenous events: a strike by junior doctors in the country’s hospitals, and a decision by District Health Boards (DHBs) to remove all individuals on waiting lists for secondary and tertiary (hospital-provided) consultations and procedures for six months or longer back to their primary care providers for ongoing management. Section four concludes.