FINANCIAL INCENTIVES AS A COST-CONTROL
MECHANISM IN MANAGED CARE
One of the principal ways in which managed-care plans have attempted to control costs is through the use of financial incentives aimed at affecting physicians' behavior. Although widespread, the practice is highly controversial. This chapter discusses the purpose of such incentives, indicates the types and their prevalence, summarizes previous research on their effects, examines how patients and doctors view physicians' financial incentives, and discusses two key policy issues—disclosure of financial incentives and the regulation of these incentives.
To understand why managed-care plans [which throughout this chapter are defined as health maintenance organizations (HMO) or point-of-service (POS) plans, but exclude less-restrictive arrangements such as preferred-provider organizations] employ financial incentives in paying physicians, one must understand the financial incentives faced by the plans themselves. Different payers such as employers, Medicare, and Medicaid, may use different methods in determining how—and how much—they pay health plans, these payers nearly always share one key characteristic: they pay the managed-care plan a fixed amount of money per patient per time period, regardless of how much is ultimately spent on treating the patient. The term usually used to convey this concept is capitation, although