Physician Contracting with Health Plans: A Survey of the Literature

1. Introduction During the 1980s and 1990s, health care markets in the United States have been dominated by two major trends: tremendous growth in managed care and, most recently, a strong movement toward consolidation, both horizontally and vertically (Gaynor and Haas-Wilson, 1999). Both of these developments are characterized by changes in the nature of contracts between physicians and health plans. In this paper we review trends in physician contracting with health plans and other financial intermediaries, describe the characteristics of physician contracts, and review the theoretical and empirical literature on the effect of contractual form on physician practice patterns. Physician contracting with health plans and other financial intermediaries raises a number of questions. How has physician contracting affected physicians' practices, such as their work load and income? How has physician contracting affected patient care, such as the amount of time physicians spend with patients and medical outcomes? Does physician/health plan contracting affect the price of health care? Because health care resource utilization is controlled in large measure by physicians, and because physicians are the cornerstone of managed care organizations, understanding contracting between health plans and physicians, and how contracts influence physicians' behavior is also essential for understanding the potential effects of managed care and for predicting its long run viability. Further, information about the relationship between physicians and intermediaries can inform the debate over policies aimed at regulating these relationships. In the next section, we provide some information on trends in the health care market affecting physician practices, such as the growth of managed care, recent trends toward consolidation in health care markets, and new legislature affecting physician contracts. Section 3 characterizes different types of health plans, managed care arrangements, and physician contracting. Section 4 discusses the incentives presented to physicians by different forms of contracts and reviews empirical evidence on this point. Until the 1980s, most insurance was reimbursement insurance, first predominantly provided by Blue Cross and Blue Shield, and later also by commercial carriers. Under these traditional insurance contracts, a consumer (or more accurately, an employer) pays a premium 1 and after paying a deductible, is reimbursed a predetermined percentage of covered expenses, usually 80 percent. 2,3 This traditional insurance contract is characterized by fee-for-service (FFS henceforth) 1 Note that even if the employer pays the premium, a worker will indirectly share part of the expense through reduced wages. Recent evidence suggests that insurance expenses are shifted almost …