The Effects of Medical Group Practice and Physician Payment Methods on Costs of Care

Health Services Research, August, 2000 by John E. Kralewski, Eugene C. Rich, Roger Feldman, Bryan E. Dowd, Terence Bernhardt, Christopher Johnson, William Gold

Objective. To assess the effects of payment methods on the costs of care in medical group practices.

Data Sources. Eighty-six clinics providing services for a Blue Cross managed care program during 1995. The clinics were analyzed to determine the relationship between payment methods and cost of care. Cost and patient data were obtained from Blue Cross records, and medical group practice clinic data were obtalned by a survey of those organizations.

Study Design. The effects of clinic and physician payment methods on per member per year (PMPY) adjusted patient costs are evaluated using a two-stage regression model. Patient costs are adjusted for differences in payment schedules; patient age, gender, and ACG; clinic organizational variables are included as explanatory variables.

Data Collection. Patient cost data were extracted from Blue Cross claims files, and patient and physician data from their enrollee and provider data banks. Medical group practice data were obtained by a mailed survey with telephone follow-up.

Principal Findings. Capitation payment is correlated with lower patient care costs. When combined with fee-for-service with withhold provisions, this effect is smaller indicating that these two clinic payment methods are not interchangeable. Clinics with more physician compensation based on measures of resource use or based on some share of the net revenue of the clinic have lower patient care costs than those with more compensation related to productivity or based on salary. Salary compensation is strongly associated with higher costs. The use of physician profiles and clinical guidelines is associated with lower costs, but referral management systems have no such effect. The lower cost clinics are the smaller, multispecialty clinics.

Conclusions. This study indicates that payment methods at both the medical group practice and physician levels influence the cost of care. However, the methods by which that influence is manifest is not clear. Although the organizational structure of clinics and their use of managed care programs appear to play a role, this influence is less than expected.

Key Words. Physician compensation, medical group practices, managed health care

BACKGROUND

The effects of alternative payment methods on physicians' practice styles and their use of resources are fundamental issues in most proposals for health care reform, as well as in the design of managed health care programs. Several studies have shown that physicians who practice in HMOs use fewer resources than those in fee-for-service programs, but it is not clear if this relates to the way physicians are compensated (Dowd, Johnson, and Madson 1986; Arnould, Debrock, and Pollard 1984; Miller and Luft 1994). In some staff model HMOs, physicians are compensated by a fixed salary, but in others some form of fee-for-service is used (Hillman, Pauly, and Kerstein 1989; Gold, Nelson, Lake, et al. 1995). The issue is further complicated in network HMOs and their managed care offspring, since those organizations often pay medical group practices (or networks of practices) some form of capitation payment per enrollee but the practices compensate their physicians on a different basis (Hillman, Welch, and Pauly 1992; Go ldfield, Berman, Collins, et al. 1992; Kralewski, Wingert, Knutson, et al. 1996). Moreover, outside of staff model HMOs, a medical group practice seldom provides services exclusively for one HMO or managed care plan, and therefore the practice may have a mixture of revenue streams ranging from capitation payment to fee-for-service billed charges. In these practices, it is doubly difficult to untangle the separate effects of practice payment and physician compensation on resource use (Gold, Nelson, Lake, et al. 1995; Kralewski, Wingert, Knutson, et al. 1996). One of the first studies that successfully untangled these payment methods was recently conducted by Conrad, Maynard, Cheadle, et al. (1998) in the state of Washington. Although that study was a major contribution to a better understanding of the effects of physician compensation within medical group practices on the utilization and costs of health services, the lack of variance in health plan payment to the clinics limited the analysis.

The fact that some form of medical group practice is central to the HMO and managed health care concept also raises issues regarding the separate effects of organizational controls at the practice level versus practice payment on the savings achieved by HMOs. For example, the reduced use of hospital inpatient days by HMOs may reflect overall HMO or group practice organizational policy rather than a physician's response to his or her compensation method.

Although considerable evidence supports the contention that payment methods have a significant influence on physician practice styles, the studies providing that evidence often are unable to identify the separate effects of payment and other organizational, physician, and patient attributes. Hellinger (1996) summarizes this best in his extensive review of the physician compensation literature. He concludes that: each of these studies is subject to potential biases. ... To accurately measure the impact of financial incentives confronting physicians on utilization, future studies must include more information about enrollee, physician, health plan, and market characteristics that affect utilization.