Blended Payment Methods in Physician Organizations Under Managed Care

CONTEXT: Independent practice associations (IPAs) are developing new methods of physician reimbursement to balance the objectives of encouraging individual productivity and clinical cooperation. The economic literature on payment incentives, derived from nonhealth industries, predicts that methods blending elements of fee-for-service and capitation will outperform exclusive reliance on either form of payment. OBJECTIVE: To identify emerging payment methods within IPA physician groups that contract with managed care organizations. DESIGN AND SETTING: Case studies of 7 large IPAs in the San Francisco, Calif, metropolitan region that served 826000 health maintenance organization (HMO) patients during the summer and fall of 1998. MAIN OUTCOME MEASURE: Payment methods of IPAs for primary care physicians, specialists, and physicians grouped by specialty department within the overall IPA structure. RESULTS: All the IPAs contracted with multiple HMOs for the full range of primary and specialty care physicians' services but paid member physicians using methods that blended elements of fee-for-service and subcapitation. For primary care, most IPAs used monthly capitation adjusted for patient age, sex, and selected diagnoses, supplemented with fee-for-service payment for a wide range of visits and procedures, including patient visits in subacute, skilled nursing facility, emergency department, or home settings; for preventive care services; for office procedures requiring expensive supplies; and, most importantly, for borderline primary care procedures that either could be performed directly or referred to specialty care. All the IPAs paid specialty departments on a capitated basis and delegated to the departments responsibility for allocating the budget among individuals. Allocation mechanisms for individual specialists included adjusted fee-for-service, referral-based capitation, and blends of both. CONCLUSION: Our results and case studies indicate that IPAs are developing payment methods that blend elements of fee-for-service and capitation in innovative ways for primary care and specialty physicians.