NCPA - National Center for Policy Analysis

Effects of Managed Care Incentives on Quality

June 4, 2002

Health Maintenance Organizations (HMOs) have become the dominant form of health insurance in the United States, based largely on the promise of controlling the cost of care through cleverly designed systems of incentives. Critics of HMOs are concerned that financial incentives cause physicians to alter their treatment at the expense of quality. Proponents counter that incentives are necessary tools to control costs and that cost containment need not compromise care.

Researchers say that the incentive contracts HMOs write with their physicians are powerful management tools, whose impact likely depends on the details of their implementation.

A recent study of one HMO that operates an network of physicians in independent practices found that physicians' clinical decisions do indeed differ from those they would choose in the absence of incentives. At the same time, these same incentives have a measurable effect in controlling costs. Perhaps more importantly, it seems that devices such as "stop-loss" provisions that limit the total amount of medical expenses for which patients are responsible and "incentives for quality" based on treatment outcomes may prove helpful in assuring the quality of care.

  • Researchers estimate that a typical physician in the managed care network gained $0.10 in income for every $1.00 reduction in medical utilization costs.
  • This incentive appears overall to have caused a 5 percent reduction in utilization costs, leading to total annual savings of more than $3 million.

They suggest that physicians respond to financial incentives linked to measures of quality just as they do to incentives linked to cost-containment. Indeed, physician groups that were best at keeping costs below "target" levels were also best at hitting their quality targets.

The findings raise the possibility that properly designed incentive systems needn't produce a reduction in quality.

Source: Tracy Certo, "Incentive Effects of HMO Contracts," NBER Policy Digest, February 2002; based on Martin Gaynor, James Rebitzer and Lowell Taylor, "Incentives in HMOs," NBER Working Paper No. 8522, October 2001, National Bureau of Economic Research.

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