Altering Capitation to Reduce the Incentive to Undertreat Patients Inappropriately

Abstract

Capitation, the payment of a fixed monthly fee for covered people, is being used by insurers to eliminate the financial incentive for over-provision of services that is present in fee-for-service plans. Physicians typically respond by forming groups to manage the financial risk associated with capitation. These groups institute methods of sharing the “cap” dollar among the involved primary care practitioners and specialists. To reduce utilization groups commonly “subcap” each specialty, giving them fixed payments per month regardless of the mount of care they provide to the covered members. Thus, individual physicians are rewarded with a payment per unit of work that rises towards infinity as work declines towards zero. This inappropriate incentive is counterbalanced by the internalized norms we assume all physicians gain as part of their professional education and experience. Unfortunately, it appears that this financial incentive can overwhelm these internalized norms in a number of physicians to the point of not only reducing care below levels associated with what an individual patient would regard as appropriate, but also below levels associated with maximal societal gain. In this paper I present a compensation method that can be adjusted to provide a financial incentive to reduce services when they seem to be excessive, while reducing or eliminating the incentive to reduce services when utilization is already low. It uses a payoff function to adjust fee-for-service payments based on utilization. The function allows maximal incentive (measured as the derivatives ofthe functio fee [utilization]) to be placed where it judged most appropriate, with little additional incentive at already-low untilization levels.