Incentives to physicians: Wise policy or risky temptation?

Expert: Managed care tool encourages cost savings but can impede care

With the advent of managed health care came the need for managed care organizations (MCOs) to develop ways to convince physicians of the need to cut unnecessary medical costs. The resulting growth of incentives to physicians — both real and perceived — brought on debate that has yet to abate among health care professionals, legislators, and the public.

At the heart of the issue is what has always been patients’ and physicians’ complaint about managed care — who really determines the course of health care?

In a recent Massachusetts case, a jury awarded $1 million to the family of a 46-year-old man after finding that the man’s doctor had been negligent in failing to order tests or prescribe medications for the man’s stomach pains during several years of treatment, which ended with the man’s death from gastric cancer.

The attorney for the patient’s family, Max Borten, MD, JD, said in a press release after the verdict that records uncovered during the progression of the lawsuit showed the physician was paid bonuses by the patient’s health maintenance organization (HMO) to keep costs down and was motivated by those bonuses to not order tests Borten says could have resulted in the patient being diagnosed much sooner.

Although the Massachusetts case arose from a death in 1999, the issue of how much influence HMO incentives have over patient care has not changed in the ensuing years.

"I published an article in the Journal of Law and Medicine on this in 1996, and hardly anything about it has changed since then," says Stephen R. Latham, JD, PhD, director, Center for Health Law & Policy, at Quinnipiac University School of Law in Hamden, CT.

"There aren’t any regulations out there about limiting incentives, but while managed care organizations in general are still using bonus and incentive schemes, they don’t use the harsh kinds they used in the 1980s," he points out.

Latham says incentives are a tool that encourages cost control while giving physicians what they most want — autonomy over their patients’ care.

"If there’s anything physicians in managed care don’t like, it’s someone looking over their shoulder. With financial incentives, the physician doesn’t have to give in to them, so they leave the physician with much more responsibility and autonomy, while giving [him/her] a way to control costs and provide a steady stream of referrals."

While physicians might understand that incentives are one way to provide cost-effective yet appropriate care, the person potentially most affected by a physician-MCO relationship — the patient — may not understand them at all.

Building a better incentive plan

Latham says that while there are many different versions of incentive plans used under managed care, none of them are ideal.

"The core problem is this: We want to keep costs down, and we want the physician to prescribe the most cost-effective course of treatment — the thing that will do the job, but at the least cost," he explains. "But nobody has figured out how to structure an incentive that pushes them to control costs but also pushes them to make decisions not to withhold necessary care when they are faced with a tough call."

There are better and worse ways to go about building an incentive plan, Latham says, but "every way is designed to push physicians, when they have a close call, away from ordering that marginal procedure. So the health plans have to depend on the individual physicians not to give in to financial incentives when that marginal procedure is what the patient needs."

Depending upon state law, MCO policy, and the physicians themselves, incentives from MCOs can take several forms.

In the United States, most physicians who contract with MCOs fall under two models that define their relationship with the MCO. The individual contracting arrangement exists when an MCO maintains its own network of physicians and allied services, and pays for those services and physicians directly. The other main category is the group-contracting model, under which an MCO contracts with a group or groups of physicians that receive payments to cover enrolled patients’ care.

Under the individual contracting model, if the cost of providing health care is greater than the premiums paid by patients, the MCO loses money; under the group-contracting model, if the cost of care exceeds the agreed-upon reimbursement from the MCO, the physician or physicians group loses money.

To help control costs, MCOs generally offer or demand incentives that can include bonuses and penalties. And, according to Douglas A. Mains, DrPH, of the department of health management and policy at University of North Texas Health Science Center School of Public Health, when balanced with a patient’s best interest, contracts and incentives can be good things, controlling expenses and ensuring oversight of clinical outcomes that can provide better service.

"Providers must consider the economic effects of individual clinical decisions at the same time that they must protect their traditional role of maximizing clinical benefit to patients regardless of the cost," he says.

Latham offers some features that can make incentive plans beneficial to patients and the health care system as a whole, and some traits of incentive plans that almost guarantee a crisis of choice for the physician.

"Some health plans are very sophisticated, and will give physicians bonuses if they do a lot of preventive care, make sure their patients are completely vaccinated, and that sort of thing," he says. "This helps the patient and keeps health care costs down by using screening and prevention to keep patients healthy.

"Also, they might reward the physician if [he/she] gives cost-effective care that is reviewed by a physician peer group. Or, they might reward the physician’s entire practice group, rather than just one physician, so that if one physician draws a lot of high-cost patients, [he/she] won’t feel under pressure to withhold care, because the costs, as far as the reward system goes, will be spread out over the whole group."

Some signs that an incentive program might spell trouble for both physician and patient could include a requirement that if a physician’s total costs of referral for his or her patients are kept below a specific dollar amount within a set period, he or she will get a cash bonus.

"The problem is that you go along, making your decisions, using your best judgment, and then right at the end of the year, your decisions could make a $20,000 difference," Latham says. "So you start making close decisions, or you might defer a referral until after the first of the year.

"Concrete cutoff points can get dangerous; whereas, if you have a bonus program that is scaled, rather than a cutoff point of a certain amount within a certain time period in which your bonus gets bigger or smaller based on how you do, then no one case can make or break the entire bonus."

Ultimate responsibility is the MD’s

Just talking about incentives from MCOs "makes physicians crazy," Latham says.

"Their common response is that they don’t pay attention to these [incentives]," he says. "Some really don’t pay attention, because they see patients with eight different health plans with eight different incentive structures, and when that patient walks in, the physician doesn’t know where [he/she] stands with any one of the plans, so [the physician] just administers care as [he/she] thinks best."

But there is some research has shown that there is a "tipping point," particularly when a physician is dealing with a patient enrolled in a plan that the physician is very familiar with, at which the incentive structure does influence the administration of care.

If physicians are perceived as rationing care to the detriment of patients because MCOs require them to do so, they can find themselves named in lawsuits when outcomes go bad. Several states have given patients the right to sue HMOs, but the issue is still being debated on the congressional level, and ultimately, patients view their physician as the arbiter of their care.

And physicians not MCOs — should be the ones who determine care, according to the American Medical Association (AMA).

"Under no circumstances may physicians place their own financial interests above the welfare of their patients," states the AMA’s conflict of interest guidelines. "If a conflict develops between the physician’s financial interest and the physician’s responsibilities to the patient, the conflict must be resolved to the patient’s benefit."

According to Mains, "Central to the discussion of the ethics of managed care is the potential tension between doing what is best for the patient and allocating scarce resources."

Michael Goldrich, MD, chairman of the AMA’s Council on Ethical and Judicial Affairs, says that the past five years have seen positive change in managed care, with physicians regaining some freedom and leeway in deciding on patient care.

AMA policies approved in the past several years, he says, reaffirm that regardless of MCO contracts, physicians have the ultimate responsibility for their patients.

"No matter what outside forces the physician has to weigh, the obligation to the individual patient has to run to the top of the physician’s various thoughts," he says.

The AMA’s guidelines on financial incentives and the practice of medicine state that while the broad goals of managed care — to control health care costs and help ensure the administration of good care to a large population — should be considered when making treatment decisions, "[W]ithin the context of the patient-physician relationship, [the physician’s] first duty must be to the individual patient. This obligation must override considerations of the reimbursement mechanism or specific financial incentives applied to a physician’s clinical practice."

Who’ll tell the patient?

Lawsuits in recent years forced courts to determine whether physicians should be responsible for explaining to patients the payment arrangements they have with MCOs, and the verdict is that it is up to the insurer — not the physician — to disclose that information to patients.

Nevertheless, the AMA says that physicians have an ethical, if not legally mandated, duty to make sure their patients are informed of all pertinent information that impacts their treatment.

So-called "gag clauses," once pervasive in physician-MCO contracts, were sometimes so restrictive that they barred physicians from disclosing payment information to patients under penalty of violating their contract. While courts have stated that insurers have the right to protect proprietary information, such gag clauses have almost entirely been dropped from managed care contracts. But a study published last year indicates that some physicians may be gagging themselves because of MCO restrictions.

A study published in the July 2003 Health Affairs reported on findings of a survey of 720 physicians nationwide who were asked in 1998 how often they decided not to offer useful services to patients because of health plan rules.

Nearly one-third (31%) said that they sometimes did not offer services to patients because of coverage restrictions. Of those physicians, 35% said they withheld information on uncovered services more often than they did five years previously.

"People want financial incentives in place to keep costs down," Latham says. "Employers want to keep insurance costs down, and patients who are responsible for copayments and minimum out-of-pocket expenses want to keep costs down, so there is value to offering incentives to physicians.

"But there’s inevitable risk that goes with it, so the only solution relies in constant tinkering with the process."


  • Stephen R. Latham, JD, PhD, Director, Center for Health Law & Policy, Quinnipiac University School of Law, 275 Mount Carmel Ave., Hamden, CT 06518. Phone: (203) 287-3334. E-mail:
  • Michael Goldrich, MD, Chairman, American Medical Association Council on Ethical and Judicial Affairs, 515 N. State St., Chicago, IL 60610. Phone: (312) 464-4823.
  • Douglas A. Mains, DrPH, Department of Health Management and Policy, University of North Texas Health Science Center School of Public Health, Fort Worth. Phone: (817) 735-0473. E-mail: