The payment system for primary care should take account of provider altruism, the risk imposed on providers, and the incentives for supplier inducement of demand, efficiency in production, selection of patients, and gaming of reporting. The theoretical literature suggests that a mixed payment system is likely to be optimal, combining elements of fee for service and capitation payments related to patient characteristics (see McGuire, (2011) for a summary of the arguments). We do not attempt to derive an optimal payment system but our results are relevant in that they show that the estimation of patient cost models for the capitation component will be greatly improved by including detailed clinical morbidity measures but that the choice of particular morbidity scheme will have marked effects on capitation for individual patients. We also illustrate the magnitude of potential incentives for both patient selection and gaming of reporting of patient morbidity.