Experience gathered to date confirms that capitation of Medicare does not necessarily decrease quality of health care and may in fact encourage an improvement in health care quality. Incentives inherent in capitated reimbursement are threefold. First, practitioners, by not receiving more payment for more service, are discouraged from providing unnecessary treatment. Second, capitation rewards the provision of needed services in the most efficient model possible. Finally, under capitation, underservice financially disadvantages the provider thus discouraging practitioners from avoiding necessary treatment. The very poor elderly who cannot afford to participate in most Medicare capitation programs also cannot afford the fee-for-service Medicare alternative. While the needs of the very poor should be met by the government, capitated systems can help to prevent or ameliorate poverty. Many of the frail elderly are in need of caring, rather than curative, services. Capitated systems offering coordinated services may efficiently address the needs of this population. The greatest single risk for financial catastrophe is the risk of institutionalization in a nursing home. Capitated systems may be able to develop and implement an effective insurance plan for long-term care. There is a need to direct attention first to creating effective means of monitoring quality that assure identification and correction of problems and second to adapting health programs to the needs of an aging population. (NB)