Unbiased Analysis of Today's Healthcare Issues

Physician Payments in the 1990s

Written By: Jason Shafrin - Dec• 05•12

One of my favorite health economists and bloggers is Austin Frakt of the Incidental Economist.  In a recent paper, he examines whether new Health Reform provisions have learned from the mistakes in the 1990s from shifting provider reimbursement to a capitation based-system.  To find the answer, you’ll need to read his commentary (with Rick Mayes) in Health Affairs.  Today, however, I summary some of his work be reviewing trends in provider compensation in the 1990s.  If you’re interested how physicians fought back against capitation and lower payment in the 1990s, read on.

Some excerpts from the Frakt and Mayes article:

Defining Capitation

Originating in California and spreading across the country, capitation emerged in the mid-to-late 1990s as an instrument used by managed care organizations to control skyrocketing health care spending. Under capitation, the managed care organization paid providers a fixed annual or monthly lump sum per patient. If a provider organization could deliver health care services to a specified patient or group of patients that cost less than the lump sum, it made a profit; otherwise, it lost money.

The Rise of Capitation

By 1999 approximately one-third of physicians had capitation contracts. Among those who did, revenues from these contracts accounted for 21 percent of their total revenues.

The Rise and Fall of Physician Practice Management Companies

Growth in physicians’ acceptance of the capitation model coincided with the rapid expansion of physician practice management companies—corporate entities designed to operate physician practices efficiently. As for-profit, investor-owned companies, these firms purchased physician practices and linked them together in large networks to gain economies of scale and scope as well as to enhance bargaining power against managed care organizations. The three largest companies—Phycor, MedPartners, and FPA Medical Management—went public in the mid-1990s and saw their stock prices and revenue skyrocket in their early years…their earnings were short-lived, as stock prices increased initially because of the belief that market growth would later translate into more efficient care—and not because of improved management. By 1998 Phycor and FPA Medical Management declared bankruptcy, while MedPartners sold off its physician groups to become a pharmacy benefit manager only.

Physicians Strike Back

…physician practices grew through acquisitions and mergers. The larger the provider group, the more leverage it would have to secure better terms in contract negotiations with managed care organizations. Thus, as providers regained the upper hand in their annual negotiations with insurers in the late 1990s, they canceled their capitation contracts. A less positive consequence of larger provider organizations, though, was that many became saddled with conflicting physician and administrative cultures, resulting in diseconomies of scale and unmanageable entities. The consolidation that capitation encourages increases provider market power. As their negotiating leverage relative to that of insurers increases, providers can demand and obtain better contracting terms, including higher payments and even a departure from capitation itself.

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