Principal-agent, risk, and market structure effects on health maintenance organization choice of payment method for primary care physicians
Laschober, Mary A.
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Permalink
https://hdl.handle.net/2142/20104
Description
Title
Principal-agent, risk, and market structure effects on health maintenance organization choice of payment method for primary care physicians
Author(s)
Laschober, Mary A.
Issue Date
1996
Doctoral Committee Chair(s)
Arnould, Richard J.
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Commerce-Business
Health Sciences, Health Care Management
Language
eng
Abstract
This research analyzes determinants of HMO compensation (salary, fee-for-service, and capitation) for primary care physicians. First, a theoretical model is constructed to analyze physician preferences for fee-for-service versus capitation based on payment risk characteristics. The analysis shows that capitation can be less risky than fee-for-service. A physician's ranking of payment methods may depend on her utility function, the health distribution of HMO members, and the relationship between payment schedules and the health distribution of HMO members. In some circumstances, an HMO can pay less under capitation and still make a physician as well off as under fee-for-service.
"Second, a principal-agent framework is used to determine optimal incentive contracts between HMOs and physicians, whose relationship is characterized as one of moral hazard with hidden information. The wage-cost minimizing contract for the strategy in which an HMO wants a physician to treat each patient type with appropriate care is downward sloping and concave in treatment. This payment structure is similar to ""mixed reimbursement"" schemes in which physicians receive capitated payment, but incur only a fraction of treatment costs. The results also show that payment methods that maximize HMO profits are influenced by local market conditions, physician preferences, and other factors. There are strong economic reasons for the diverse payment arrangements used by HMOs."
Third, a multivariate logistic regression model is used to estimate the probability that an IPA-model HMO will choose a particular payment method given physician and IPA bargaining power, local market HMO competition, and IPA organizational features. The results indicate that IPAs react more to potential competition than current market conditions in adopting a cost-containment mechanism such as capitation. In addition, the average enrollment-to-PCP ratio and operating age of an IPA have a positive influence on capitation. HMOs can more easily negotiate capitated payments the more patients they can guarantee to PCPs. Age is a factor because HMOs may initially pay physicians fee-for-service to facilitate contracting and expand more rapidly, but they eventually shift risk and cost-containment incentives to physicians through capitation.
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