Keeping Costs Low.

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June 5, 2000 -- Most HMOs use financial rewards and penalties for health care professionals to achieve cost-effective treatment. They argue that containing costs is the underlying principle of managed care.

But the case against Health Alliance Medical Plans currently before the Supreme Court argues that such incentives create a conflict of interest between patient and doctor that can compromise the quality of care.

According to the American Association of Health Plans, 80% of U.S. doctors have contracts with one or more HMOs. Experts say the financial incentives offered to doctors are wide-ranging and often quite complicated. They can, however, be broken into four main types:

  • The most common method is "capitation," in which a physician is paid a relatively small flat fee ($20 per month, for example) for each patient enrolled through the health plan. The theory is that most patients won't need care in a given month, so the flat fees for the entire group should adequately cover the doctors' costs for the fraction that needs actual services. However, doctors cannot charge the health plan more money if an above average number of patients happen to be seriously sick one month. Physicians (or groups or doctors) therefore shoulder the financial risk for their patient's care. This creates an economic incentive to limit services provided.
  • Certain doctors are rewarded for their performance, including cost-cutting, by financial payments from a "risk pool." A risk pool is an amount of money set aside by the health plan or from the health plan's payment to a medical group (a "withhold"), which is later distributed to select physicians who meet specified "targets" regarding the ordering of tests or overall utilization of health services.
  • A financial disincentive used by HMOs to reduce costs involves lower fee schedules for specialists to make them less willing to take on patients with HMO coverage.
  • Health plans can also pay cash bonuses directly to doctors, administrators, executives, and claim reviewers at the end of the year for lowering costs, keeping patients out of hospitals, and denying coverage. In physician contracts, bonuses are called "efficiency payments" or "net revenue payments."


A 1998 survey of 776 California managed care physicians by the New England Journal of Medicine found that nearly 40% of the doctors said their contracts included some form of bonus or incentive to cut costs. The median amount of the incentive was $10,500. Of this group, 28% said they felt pressure to limit what they told patients about treatment options. More than half said they felt pressured to restrict their referrals to specialists, and nearly a third of these said the pressure was severe enough to compromise the quality of care.

The American Medical Association's ethical guidelines state that patients must be informed of financial incentives that could affect the quality of care they receive. The group also says large incentives can create an "untenable position for physicians" and their first duty must be to the patient, regardless of personal compensation.

Still, the practice of offering incentives remains widespread, says health care consultant and economist Albert Lowey-Ball of Sacramento, Calif. Indeed, says Ball, such payments "are common and in most instances perfectly legal."

Loren Stein, a journalist based in Palo Alto, Calif., specializes in health and legal issues. Her work has appeared in California Lawyer, Hippocrates, L.A. Weekly, and The Christian Science Monitor, among other publications.

WebMD Feature
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