Structure of Financial Incentive Systems for Providers in Managed Care Plans

Abstract

Managed care plans, health maintenance organizations (HMOs) in particular, rely on a variety of financial incentive systems to induce providers to control health care expenditures. Based on the theory of incentive contracts, this study examines the unique nature of effective incentive systems for health care providers; applies the conceptual framework to managed care plans, viewing the incentive and payment system as the contract between the insurer and the provider; and analyzes the determinants of the structure of incentive systems in HMOs. This study shows that the group incentive scheme provides an essential control over the perverse incentives associated with excessive referrals by primary care physicians. The relative market power of an HMO and providers also affects the aggressiveness of incentive systems for providers. An analysis of the structure of physician incentive systems in HMOs provides valuable policy implications for cost containment because within the HMO market, various innovative incentive and payment systems are applied to providers to reduce expenditures.