Capitation rates in healthcare plans are not set by a single entity. They result from a layered process involving federal agencies, state governments, certified actuaries, and in commercial plans, direct negotiations between insurers and provider groups. The specific parties involved depend on whether the plan is Medicare Advantage, Medicaid managed care, or a private commercial plan.
How Medicare Advantage Rates Are Set
For Medicare Advantage, the Centers for Medicare & Medicaid Services (CMS) is the primary rate-setter. Each year, CMS publishes county-level benchmark rates that serve as the starting point for what it will pay Medicare Advantage plans. These benchmarks are built on fee-for-service Medicare spending data, essentially reflecting what the government would have spent on those same patients in traditional Medicare.
CMS also publishes an annual rate announcement that signals how much payments will change. For the 2025 plan year, CMS projected that payments to Medicare Advantage plans would increase by an average of 3.70%, or over $16 billion compared to 2024. The main driver of that growth is the projected change in per-person fee-for-service spending nationwide.
Once the benchmark is established, individual plan payments are adjusted using a risk-adjustment model called the CMS Hierarchical Condition Category (HCC) system. This model uses each enrollee’s age, sex, disability status, Medicaid enrollment, and diagnosed medical conditions to calculate a risk score. Conditions with similar costs are grouped into categories, and each category carries a dollar-value coefficient estimated from actual fee-for-service claims data. All those coefficients are summed into a single risk score, normalized so that 1.0 equals the spending of an average fee-for-service beneficiary. A sicker patient scores higher than 1.0 and generates a higher payment to the plan; a healthier patient scores lower. This means two Medicare Advantage plans in the same county can receive very different per-member payments depending on the health of the people they enroll.
How Medicaid Managed Care Rates Are Set
Medicaid capitation rates involve a partnership between state governments and CMS. States take the lead in developing their rates, but federal law requires that those rates be “actuarially sound,” meaning they must be projected to cover all reasonable and appropriate costs of serving the enrolled population for the contract period. States must hire a certified actuary to develop and formally certify the rates before submitting them to CMS for review and approval.
CMS publishes a detailed rate development guide each year that outlines what states and their actuaries must include in their submissions. The 2025-2026 guide, for example, specifies that rate certifications must demonstrate compliance with federal regulations, generally accepted actuarial principles, and relevant Actuarial Standards of Practice. CMS evaluates each submission against three core principles: the rates are reasonable and comply with all applicable Medicaid laws, the development process itself follows those laws, and the documentation is sufficient to prove it.
This means states have significant flexibility in how they build their rates, choosing their own data sources, assumptions, and methodologies. But they cannot, for instance, use different rate assumptions across populations in ways that artificially increase the federal government’s share of costs. Any differences in how rates are calculated for different groups must reflect genuine cost differences in providing care to those populations.
How Commercial Plan Rates Are Negotiated
In the private insurance market, capitation rates are determined through direct negotiation between insurers and provider organizations such as physician groups, independent practice associations, or health systems. There is no single federal formula. Instead, the insurer and the provider group agree on a per-member, per-month payment that covers all (or a defined subset of) covered services. In a full capitation arrangement, the provider group accepts financial responsibility for delivering care within that fixed budget, with no additional fee-for-service payments except for specifically carved-out services.
These negotiations typically reference existing benchmarks. A common approach is to base the per-member rate on a percentage of Medicare reimbursement levels, adjusted for the local market, the complexity of the patient population, and the scope of services included. The American Medical Association’s contracting guidance encourages physicians to ask a basic question during negotiations: how exactly is the rate being calculated, and what is it based on? The answer varies from contract to contract.
The Role of Actuaries
Across all of these settings, actuaries are the professionals who actually build the rate models. In Medicaid, a certifying actuary must meet specific federal qualifications and personally sign off that the proposed rates are actuarially sound. In Medicare Advantage, CMS employs its own actuarial staff to develop benchmarks and risk-adjustment models. In commercial plans, both the insurer and sometimes the provider organization will use actuaries to analyze claims data, project costs, and evaluate whether a proposed capitation rate is financially sustainable.
Actuarial soundness is the legal and professional standard that underpins the entire process. A rate is considered actuarially sound when it is projected to cover all reasonable costs for the covered population during the contract period, developed using valid data and methods, and free from discriminatory assumptions that don’t reflect real cost differences.
Global Budgets and Newer Payment Models
Capitation is also evolving beyond traditional managed care. Accountable Care Organizations and similar models increasingly use global budgets, which function like capitation at a larger scale. These programs set a flat payment, either per-member per-month or as an annual fixed amount, and hold organizations accountable for the total cost of care and health outcomes for their assigned patient population. The rate-setting process for these models typically involves CMS (for Medicare ACOs) or state agencies, again relying on historical spending data and actuarial projections to establish the budget target.
State Insurance Department Oversight
State insurance departments add another layer of oversight, particularly for commercial and individual market plans. The National Association of Insurance Commissioners provides model guidelines that states use when reviewing rate filings. These guidelines establish benchmark loss ratios, which represent the minimum share of premium dollars that must go toward actual medical care rather than administrative costs or profit. Rate filings that fall below these benchmarks face additional scrutiny. Under the Affordable Care Act, the federal government also sets maximum out-of-pocket limits that constrain how plan costs are structured. For the 2026 plan year, for instance, Marketplace plans cannot require more than $10,600 in out-of-pocket costs for an individual or $21,200 for a family.
In short, capitation rate-setting is never a single decision by a single party. It is a regulated process that typically involves a government agency establishing the rules and benchmarks, an actuary building and certifying the rate model, and in many cases a negotiation between payer and provider, all subject to state and federal oversight.