The purpose of this chapter is to discuss the methodological and practical issues that arise when developing empirically based capitation formulae for public services. It concentrates on capitation payments, although many of the arguments are also relevant to case payment methods. The chapter starts with a summary of some of the important modelling issues that arise when seeking to develop a capitation funding formula using statistical methods, and Section 5.4 then develops a general theoretical model of the supply of and demand for public services.