Physician Incentive Payments by Prepaid Health Plans Could Lower Quality of Care

HRD-89-29: Published: Dec 12, 1988. Publicly Released: Dec 12, 1988.

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Pursuant to a congressional request, GAO evaluated various types of physician incentive plans that health maintenance organizations (HMO) offered to control health insurance costs, focusing on the: (1) potential of these incentives to result in inappropriate service reductions; and (2) characteristics of those incentives posing the greatest risk to quality of care for Medicare beneficiaries.

GAO found that HMO: (1) received a fixed per-capita payment from Medicare to provide all Medicare-covered services; (2) typically deducted an amount from the Medicare payment for administrative costs and allocated the remainder to funds for primary, specialty, and institutional services; (3) primarily compensated physicians through salary, fee-for-service, or capitation arrangements; (4) offered such incentives as annual bonuses or physician financial liability for care, based on individual or group cost performance or overall HMO profitability; and (5) used credential checking, grievance procedures, membership surveys, physician practice profiles, and medical record reviews to ensure quality of care. GAO also found that incentive plan characteristics that most threatened quality of patient care involved: (1) shifting financial risk of patient care to physicians; (2) distributing incentives according to individual physician cost performance; (3) paying a percentage of HMO savings on patients; and (4) measuring physician cost performance over a short time period.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Omnibus Budget Reconciliation Act of 1990 prohibits Medicare from contracting with HMO whose physician payment plans induce physicians to withhold necessary services or place physicians at substantial financial risk for services furnished by other providers.

    Matter: If the Health Subcommittee, House Committee on Ways and Means, considers modifications to Medicare to permit certain HMO physician incentive payments, it may wish to retain a ban on arrangements that closely link financial rewards with individual treatment decisions or expose the primary care physician to substantial financial risk for services provided by physicians or institutions to whom he or she refers patients for diagnosis or treatment.


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