Summary
Summary Module 5: Provider payment incentives
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Summary of the lecture and the corresponding mandatory literature.
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Robinson, James C. (2001). Theory and Practice in the Design of Physician PaymentIncentives. The Milbank Quarterly, 79(2), 149–177. https://doi.org/10.1111/1468-0009.00202
The essence of incentive contracting is the effort by one individual or
organization (the principal) to induce and reward certain behavior by another
(the agent). Mechanisms to elicit the desired behavior → financial rewards,
screening, socialization, threats of contract termination.
Level of payment → the total amount expected to be paid by the principal to the
agent.
Structure of payment → the manner in which payment is linked to specific
measures of performance. It is designed to provide the highest reward to the
agent at the lowest cost to the principal. Variations are interpreted as reflecting
the characteristics of the tasks and the individuals who perform them, including
the extent:
● To which individuals are averse to risk
● To which the desired behavior consists of one or multiple tasks
● To which cooperation among multiple agents is a central feature of the work to be
accomplished.
Forms of payment:
● Piece-rate payment → compensation linked directly to effort. It can be
adapted to quite complex work contexts, so long as the various tasks can
be measured individually and compared to one another in a cardinal
index. They expose the principal to abuse in contexts where the specific
actions undertaken by the agent cannot be monitored, measured or well
understood. It induces the agent to increase the quantity of services
provided beyond the minimum necessary to achieve the principal's goals.
○ Fee-for-service payment
● Prospective methods of payment → pre-bid rates for construction,
Medicare’s DRG system, capitation for primary care services
○ Unlink revenues from cost incurred and hence motivate a more cost-
conscious form of production.
○ New financial risks → to the extent that the costs incurred result not
merely from the effort and attentiveness of the agent but from
factors outside the agent’s control.
○ Actual payments will exceed the amount necessary to induce the desired
behaviour if the exogenous factors prove favorable and will fall short if
exogenous factors are unfavorable
○ Underpaid providers either exit the market or begin to systematically avoid
high-cost patients, while overpaid providers remain in the market and
continue to reap underserved rewards.
In most contexts, the optimal payment structure will blend elements of prospective and
retrospective payment by mixing salaries, commissions, bonuses, profit sharing.
The design challenge facing the principal is substantially complicated in contexts where the
behavior desired of the agent comprises a variety of different tasks, some of which are easily
monitored and some of which are not. The problems generated by multitask settings do not
end here. To the extent that principals seek to avoid incentive distortion by paying agents a
set rate for a bundle of services, they create incentives for strategic unbundling and
,rebundling. A final complexity occurs where the efforts of one agent must be coordinated
with those of other agents.
Two of the four most important dimensions of physician performance are well served by
piece-rate payment, which explains the persistence of fee-for-service, the other two are
poorly served by piece rates, and hence explain the rise of capitation. The salience of all four
explains why neither fee-for-service nor capitation, in their pure forms, are optimal forms of
payment.
● Physician productivity and patient service → fee for service is ideally
suited to this dimension of medicine, since it pays more to physicians who
do more and less to those who do less. Capitation performs poorly since
its payment is determined prospectively without regard to the number of
services provided.
● Risk acceptance → physicians should receive extra praise and
compensation for treating the sickest patients and should not be rewarded
financially for skimming the healthy and avoiding the ill. Fee-for-service
performs well on this dimension, capitation performs poorly to the extent
it is imperfectly adjusted for the severity of illness of each covered patiënt.
● Efficiency and appropriate scope of practice → piece-rate payment
encourages the provision of unnecessary treatment, of care in high-cost
setting, by specialist, and for a scope of practice that may be overly broad.
Capitation and other prospective forms of payment offer a financial
antidote to this supplier-induced demand.
● Cooperation and evidence-based medicine → fee-for-service is
counterproductive, providing no compensation for collaborative
discussion, protocol adaption, or the development of practice styles less
dependent on physician office visits. Capitation offers the potential for
stimulating attention to epidemiological patterns of illness and care, of
being buttressed by clinical protocals and of encouraging resource-
conserving practice innovations.
Fee-for-service encourages and capitation discourages resource consumption; productivity-
based pay encourages and salary undermines productivity.
Blended methods of payment:
● Capitation with fee-for-service carve-outs
○ The most common form continues to pay generalists a flat monthly payment
per enrolled patiënt, adjusted for age and sex and limited by stop-loss
provisions, but supplements this capitation with fees for specified carved-out-
services. These fee-for-service supplements provide a retrospective form of
risk adjustment and encourage a broader scope of practice. Office
procedures requiring costly supplies, such as injectable medications and
durable medical equipment, are paid fee-for-service to offset the disincentive
for their provision. The most important category of carved-out services
comprises consultations and procedures that lie on the border of primary and
specialty care, and hence are obvious candidates for refferal. Here the fee-
for-service payment is consciously designed to attenuate the narrowing of the
scope of primary care practice.
● Specialty budgets with fee-for-service or contact capitation
○ Specialty capitation usually begins with the formation of virtual specialty
departments that can be assigned a predetermined budget for the visits and
procedures performed by member specialists.
○ The total amount of money available for physician services is divided first
, between primary and specialty care and then among the various specialty
departments, usually based on several years of prior claims experience.
○ The amount paid for any given claim is adjusted to ensure that the
department stays within its budget.
○ Contact capitation typically is embedded in deparmental capitation, with the
department’s aggregate specialty budget divided by the number of unique
referrals to determine the rate per referral, after taking into consideration
budgetary set-asides for the carved-out supplementary procedures.
● Case rates for episodes of illness
○ Case rates provide a means to move beyond fee-for-service in market
contexts dominated by broad-panel, open-access managed care products,
where capitation is not possible, and also provide a potential remedy for the
ills of capitation in markets where prepayment is already in place.
○ Probability risk → the incidence and costs of care that are beyond
the control or responsibility of the physician.
○ Technical risk → the utilization and costs of services that are under
the physician’s control.
○ Ideally, probability risk should be spread widely across the population, and
hence held by an insurance company, while technical risk should be held by
the physician or delivery system that has accepted responsibility for the case.
○ Fee-sor-service protects the physician from both types of risk, whereas
capitation exposes the physician to both types.
○ Case rates allocate probability risk to the insurer and technical risk to the
physician, since the case rate is predetermined based on characteristics of
the episode and does not reimburse expenditures on a retrospective, cost-
plus basis.
○ Payment is made on a monthly basis, and front-loaded to account for the fact
that most resource-intensive tests and procedures occur early in an episode
of care.
○ Case rates differ from contact capitation in that the payment rate is fixed and
need not depend on the number of episodes occuring for the health plan’s
enrollment.
The limits of payment incentives:
● The limited ability of payment methods to resolve the complex and
conflicting sets of problems in health care lead to two related effects → the
bias toward simple over complex systems and the reliance on nonprice
mechanisms as an important complement to payment incentives.
● Simplicity in methods of physician payment is a virtue for several distinct
reasons → the administrative costs of complex payment methods impose
another tax on the overburdened system, it is important in the context of
many independent payers, it also supports transparency.
● The limits of payment mechanisms explain the importance of non-price
methods for motivating appropriate behaviour → screening and selection,
monitoring of compliance, inculcation of norms and cultural expectations.
○ Screening and selection → the creation of physician networks with
limited participation creates a supplementary nonprice mechanism
through the potential threat of termination.
○ Clinical protocols and utilization management → efforts to improve
the quality of care, as well as its cost-effectiveness, now invariably
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