Is Paying Physicians By Capitation Wrong?

The concerns of Oregon anti-capitation crusader Gordon Miller draw a surprising degree of sympathy from managed care experts. But they say he’s tarring good and bad health plans with the same brush.


See also MANAGED CARE’s cover story for November 1996, Will States Ban Capitation?

Oregon voters had occasion this month to consider a moral question with enormous bearing on the delivery of health care in the United States. They were deciding the fate of Salem, Ore., ophthalmologist Gordon Miller’s attempt to ban capitated payment of physicians (see article on page 26). Though the campaign for his voter initiative didn’t seem to be gathering enough steam for victory as Election Day approached, the question Miller raised deserves consideration: Is capitated payment of doctors wrong?

“It violates agency,” Miller claimed. “You can only be the agent of one party in a dispute at one time. An attorney, for example, cannot represent both the defendant and the plaintiff. When a physician works for the managed care company and, in effect, splits the profits with it, he becomes its agent–not the patient’s. And it is so easy to withhold care and not tell people.”

In recent conversations with four authorities on the theory and practice of managed health care, Managed Care found no one ready to second Miller’s blanket denunciation. But no one dismissed his concerns outright, either.

When it’s a single doctor

“It is widespread, but that doesn’t make it right,” says Arnold Relman, M.D., editor emeritus of the New England Journal of Medicine, about the practice of capitating individual physicians. “I think the public should be, and is, concerned about the economic pressures that are on doctors who find themselves under that kind of an arrangement. It may prevent doctors from using their best professional judgment in an individual case.”

But Relman adds that his is “a quantitative, not a qualitative, concern.” Rather than rejecting capitated payment on absolute grounds because it compromises agency, Relman will accept it if it’s applied to a large enough group with a large enough patient pool and “if the physicians are self-regulated, if the guidelines they follow and the decisions they make are professionally based, if physicians have the controlling voice in how they’re going to use their capitated budget–and if there is no profit taken out of the system.”

Relman considers the Oregon anti-capitation initiative “too extreme.” “If you want to outlaw capitation,” he says, “you want to be sure you don’t outlaw capitation of large groups of not-for-profit doctors, because I believe in the long run that’s where we’re going to have to be if we’re going to be able to afford health care in the future.”

John La Puma, M.D., a Chicago-area internist who writes Managed Care’s Ethics column each month (see page 49), joins Relman in disapproving individual capitation of physicians. “Although our calling is altruistic,” he says, “weighing your mortgage payment or your daughter’s education against a person’s need for an MRI is just too great a personal problem to be surmounted by an individual doctor–or anyone else.”

There are different incentives inherent in every method of paying physicians, says La Puma, “but incentives matter only if they distort judgment.”

True, says, La Puma, “we’ve heard horror stories in the media–and we’ll probably hear more –that individual patients have been denied treatment because someone wants to save money for someone else, usually a plan for its shareholders. And those stories are deeply disturbing.” But that doesn’t mean any payment mechanism is inherently right or wrong.

“The question is, when is a group big enough to diffuse the risk of distorted judgment, yet still small enough to let the incentives do their work in encouraging cost-effective care?”

A matter of choices

Gerald Musgrave, an economist and president of Ann Arbor, Mich.-based Economics America, uses a restaurant analogy to characterize the anti-capitation measure. “I don’t think there should be a law that forces everyone to go to all-you-can-eat restaurants for a fixed fee,” he says. “I’m also very disturbed about any plan that would outlaw all-you-can-eat restaurants. When people want to start managing the restaurant trade by forcing people into one kind of restaurant and outlawing another kind, I think they’re crazy.”

That metaphor may offer a kind of entrée into the minds of Oregon voters. Once resented as a regimenting force, managed care has now become so much a part of the landscape in the Beaver State that it is Gordon Miller’s proposed new law that is seen as the unwanted regimenter that would narrow everyone’s health care options.

Actually, capitated payment of individual physicians on a large scale is a relatively new phenomenon, says Emily Friedman, a health policy analyst and a contributing editor of Healthcare Forum Journal, who studies the history of health care. Capitated pay does date back to sugar plantations in Hawaii in the 1830s, where landowners helped to ensure that their imported Asian laborers stayed functional by contracting, sometimes on a capitated basis, with local physicians to provide their health care. But a more typical design of managed care’s early prototypes, says Friedman, involved “giving capitated payments to a group practice that either owned or had a relationship with a hospital, and that paid each individual doctor a salary.”

Today, a different motive

In the 1970s, capitated payment of individual physicians became more common, says Friedman, because “the health care system in most markets did not have the infrastructure to respond to employer demands for managed care with integrated group-practice models.” By then, she argues, the goal in expanding managed care was to save money, a motive different from the “messianic zeal of a new way of organizing services” that earlier had spurred the creation of early prepaid group practices, “often by leftists” who were shunned by the medical establishment.

“Health plans today that are capitating individual physicians are doing so to extract the lowest possible price from a disorganized provider sector,” says Friedman. “But capitation itself is not the enemy. People are up in arms about capitation because we have broker-type, nonprovider health plans, virtually all of them stockholder-held, that have been behaving badly.

“The Oregon initiative would make it impossible for organizations such as Kaiser Permanente to operate, because it makes no distinction between traditional, honorable, well-operated plans and bandits,” concludes Friedman. “That’s what so sad about it. It focuses on capitation as the enemy because Americans simply believe that they should not be denied anything.

“But its supporters are shooting at the wrong target. And I think it’s going to be very, very sad if these initiatives pass, because when it is done well, managed care is a superior way to organize health care services.”

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