Marketwatch: Transmission of financial incentives to physicians by intermediary organizations in California

Many U.S. physicians participate in provider-sponsored organizations that act as their intermediaries in contracting with managed care plans, particularly where capitation contracts are used. Examining a survey of 153 intermediary entities in California, we trace the cascade of financial incentives from health plans through physician organizations to primary care physicians. Although the physician organizations received the vast majority (84 percent) of their revenues through capitation contracts, most of the financial risk related to utilization and costs was retained at the group level. Capitation of primary care physicians was common in independent practice associations (IPAs), but payments typically were restricted to primary care services. Thirteen percent of medical groups and 19 percent of IPAs provided bonuses or withholds based on utilization or cost performance, which averaged 10 percent of base compensation. T he not ion of a system in which physicians stand to gain sizable income by restricting access to care shakes consumers’ faith in medical care and offends many practitioners.1 Yet capitation of physician organizations remains prevalent in managed care despite the fact that its adoption has slowed in recent years. More than half of health maintenance organizations (HMOs) use some form of capitation as their predominant method of paying physician groups.2 Proponents of such financial risk sharing argue that it allows physicians to retain autonomy over treatment choices and benefit from the rewards of cost-reducing innovations. Risk sharing also reduces the need for preauthorization and concurrent review by managed care organizations (MCOs). Others worry, however, that capitation may put excessive financial pressure on physicians, resulting in inappropriate efforts to cut costs at the expense of quality of care. Whether or not capitation subjects physicians to excessive financial pressure depends on how payments are structured and how physicians are organized to accept managed M a r k e t W a t c h H E A L T H A F F A I R S ~ V o l u m e 2 1 , N u m b e r 4 1 9 7 ©2002 Project HOPE–The People-to-People Health Foundation, Inc. Meredith Rosenthal is assistant professor of health economics and policy at the Harvard School of Public Health. Richard Frank is the Margaret T. Morris Professor of Health Economics in the Department of Health Care Policy at the Harvard Medical School. Joan Buchanan is a lecturer in health care policy at the Harvard Medical School. Arnold Epstein is the John H. Foster Professor and chair of the Department of Health Policy and Management at the Harvard School of Public Health. care contracts.3 Physician organizations frequently accept capitated payments, but individual physicians are rarely themselves directly “capitated” by MCOs.4 When doctors share financial risk through physician organizations (such as medical groups and independent practice associations, or IPAs), the physician organization plays a key role in transmitting incentives through its compensation system. Several features of that system combine to determine both the amount of risk that is passed to individual physicians and the financial pressure that may affect patient care. The most important are the scope of services for which a physician is “at risk,” the magnitude of the financial rewards and penalties for reducing (or failing to reduce) costs or use, and whether there are countervailing incentives (such as payments for higher-quality care). These details are critical for understanding the likely impact of capitation. Previous research has primarily examined financial incentives from the perspective of health plans or individual physicians, but not of physician organizations that receive incentives from health plans and transmit them to physician members.5 Yet nearly 60 percent of health plans report that this is their most common contractual arrangement.6 Moreover, the American Medical Association (AMA) reported that between 1984 and 1997 the share of physicians practicing in groups increased from 28 percent to 51 percent.7 In California more than 75 percent of all practicing physicians reported membership in at least one physician-owned IPA.8 Studies that have examined compensation in physician organizations have not characterized payment methods in sufficient detail to characterize the magnitude of individual and group (shared) risk.9 In this paper we trace the cascade of financial incentives from MCOs through physician organizations to individual primary care physicians (PCPs). We focus on these physicians because of their central role in resource allocation under managed care.