Does Payment Drive Procedures? Payment for Specialty Services and Procedure Rate Variations in 3 HMOs

Published Online: March 01, 2004
Barry G. Saver, MD, MPH; Debra Pearson Ritzwoller, PhD; Michael Maciosek, PhD; Michael J. Goodman, PhD; Douglas A. Conrad, MHA, MBA, PhD; Eric Finkelstein, PhD, MHA; Martin Haase, MHA; Paul Barrett, MD, MSPH; and Kevin C. Cain, PhD

Objectives: To study how payment for specialty services affects the rates of performance of invasive procedures by physicians in a number of specialties.

Study Design: Observational study.

Patients and Methods: Administrative data from 1996-1997 and 1997-1998 from 3 large health maintenance organizations (HMOs) in the Midwestern and western United States were used to study variations in procedure rates associated with different methods of paying for cardiology, gastroenterology, ophthalmology, orthopedic, and ear, nose and throat services within each HMO. The age-, sex-, and comorbidity adjusted probabilities of undergoing selected, potentially discretionary procedures, were compared within each plan by payment method.

Results: After adjustment, rates under fee-for-service payment tended to be higher than those under capitation or salary payment, whereas there was no clear pattern for salary versus capitation payment. Even within a single specialty in a single plan, however, rates did not always follow the same pattern for different procedures.

Conclusions: The payment method for specialty services used by these 3 health plans was variably associated with how likely patients were to undergo a variety of invasive procedures. The effects of contract payment methods for specialty services on health care costs, quality, and outcomes should be further studied, but such studies will challenge the capabilities of health plan data systems.

(Am J Manag Care. 2004;10:229-237)

Financial incentives are clearly among the more powerful motivators of human behavior, and there is no reason to believe that physicians are somehow immune. Indeed, part of the rationale for staff- and group-model health maintenance organizations (HMOs) is that salaried physicians should provide less expensive care in the absence of fee-for-service (FFS) incentives. However, the literature on the effects of financial incentives on physician practice style and costs of care has been mixed. Most studies of physician payment mechanisms and incentives have focused on payment of primary care providers1 "because of the central gatekeeper role."2 One study found no association of primary care physician compensation method in medical groups with utilization or costs of care.3 Another study found that capitation payment to clinics resulted in lower costs and salary payment of physicians resulted in higher costs4; a third suggested a modest decrease in primary care costs when primary care practitioners in an independent practice association (IPA) were subject to a substantial withhold and eligible for a bonus when expenditure targets were met or exceeded.5

Few published studies of the effects of HMO financial incentives have focused on specialist physicians, despite the facts that direct charges for specialty care are at least as high as those for primary care6,7 and that primary care physicians comprise a minority of physicians in the United States.8 It seems at least as important to focus on what happens after specialty referrals are made as on incentives affecting primary care physicians? referral patterns. Researchers have noted that HMOs "should consider the incentives facing affiliated specialists in order to achieve reductions in the amount of hospital resources used for hospitalized patients" and that "the role of specialists might be scrutinized if savings from different payment mechanisms are to be more substantial."9 In one study, a variable in a survey of HMOs indicating the presence of any specialist risk incentives was not significant in predicting hospitalization rates, annual visits per enrollee, or HMO breakeven status.10

Historically, use of capitation for paying specialists lagged behind use of capitation for paying primary care physicians, with specialists primarily getting FFS payments, often with a discounted fee scale.11,12 Through the mid-1990s, there appears to have been a trend toward capitation payment. Only 13% of HMOs paid specialists partly or fully by capitation in a 1987 survey.13 This figure rose to 25% in a 1990 survey,14 and in a 1994 survey, 69% of staff/group-model HMOs versus 47% of network/IPA-model HMOs paid for at least some specialty services by capitation.15 Whether the "managed care backlash" has reversed this trend is not certain, although a study in 1999 found that only 14% of health plans used capitation to pay specialists16 and the proportion of all physicians with capitation contracts was reported to have decreased slightly between 1996 and 1999.17

Few studies have actually compared specialist performances under different payment systems in the same plan or setting. A study of cataract surgery among Medicare beneficiaries receiving care in a large HMO in Southern California found lower rates among both staffmodel and IPA-model enrollees than among Medicare beneficiaries receiving FFS care in the same geographic region.18 However, ophthalmologists in the IPA-model component received discounted FFS payments and the referring primary care physicians were capitated and at risk for specialty services, so the lower rates of cataract surgery in these IPA-model HMO patients may have been driven by effective gatekeeping, nonfinancial incentives, or other, unmeasured factors. Another study found lower rates of elective sterilization when gynecologists were shifted from FFS to capitation payment.19

A variety of factors could affect observed activities of specialists, including both type and amount of compensation, other incentives, and differences in the populations of patients served. This paper reports on whether payment method (ie, salary, capitation, FFS) for specialty services was associated with different rates of performance of invasive procedures for 5 different specialties in 3 large HMOs. The study took advantage of payment variation for each studied specialty within each plan and compared results both across specialties and across HMOs. We hypothesized that procedure rates would be highest under FFS payment, intermediate under salary, and lowest under capitation.


We obtained encounter and claims data from 3 large, well-established HMOs located in the Midwest, the Rocky Mountain region, and the Pacific Northwest. All 3 HMOs were mixed-model plans with large staff/groupmodel components as well as other structures such as contracts with IPAs, employment of primary care providers with providers of specialty care under contract, and so forth. Each HMO used at least 2 different methods of paying for services of at least 2 of the studied medical specialties. In 2 of the HMOs (subsequently referred to as HMOs A and B), the payment variation was geographically based—some areas had salaried primary care physicians and most specialty services were provided by salaried specialists, while other areas used FFS (the term "fee-for-service" is used to denote any type of payment contingent upon performing a service, such as a negotiated fee schedule payment) and/or capitation (population-based capitation payment) payment for the same specialty services, with primary care providers predominantly or exclusively salaried. In the third HMO (HMO C), payment for specialty services was by either capitation or FFS and was not geographically based, but rather was determined by contractual agreements between providers of specialty services and the primary care clinics for enrollees in specific insurance product lines. Primary care providers all were paid under capitation arrangements in HMO C. Analyses used data from 1996-1997 for HMOs A and B and, because of data system changes, from 1997-1998 for HMO C.

We chose 5 specialties for study, based on the presence of payment variation within 1 or more of the HMOs for the specialty and the existence of common, reasonably expensive procedures performed exclusively by these specialists, the performance of which seemed likely to allow for significant provider discretion. Specialties and procedures studied are shown in Table 1. For HMOs A and B, where we analyzed cardiology procedures, we also gathered data for coronary artery bypass graft (CABG) surgery as a potential substitute for percutaneous translumenal coronary angioplasty/stenting/ atherectomy (PTCA). HMO A also had variation in payment for cardiothoracic surgery services, including CABG, whose geographic basis exactly matched the variation in payment for cardiology services. HMO B had no variation in payment for cardiothoracic surgery services but we analyzed variation in use of these services according to the manner in which cardiology services were paid for to look at overall revascularization rates according to payment for cardiology services. Procedures were identified by Current Procedural Terminology, 4th Edition (CPT-4)20 and International Classification of Diseases, Ninth Revision (ICD-9) procedure codes in the encounter and claims data. In one plan, information from claims and encounter databases had to be supplemented with information from operating room and special procedure laboratory logs because professional claims were not always generated; this source accounted for 5% to 18% of the studied procedures in this plan, except for ear, nose, and throat surgery (otorhinolaryngology), where 80% of the procedures were identified in this fashion.

Table 1

To calculate population-based procedure rates, it was necessary to classify every HMO member into 1 of the 3 specialty payment groups (FFS, capitation, or salary), not just those members who received a procedure. This was possible in HMO C because the type of contract a member had determined whether specialty services would be paid for by FFS or capitation if such services were needed. However, no such information was available on individual members for the 2 HMOs with geographically based variation. Therefore, for HMOs A and B, members were classified according to the predominant specialty payment method at the primary care clinic to which they were assigned. For primary care clinics where more than 80% of the specialty procedures were paid for by 1 method, all of the patients assigned to that clinic were classified as belonging to that specialty payment group. Any clinic with fewer than 80% of studied procedures paid for by a single method was dropped from analyses for that procedure.

We attempted to learn how plan payment for procedures translated into physician payment but the response rate to our survey of the medical groups contracting with the health plans was too low for meaningful analysis.

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Issue: March 2004
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