Managed Care Capitation and Where We Are Headed

Lawrence R. Huntoon, MD, PhD
Article Type: 
Medical Ethics and Managed Care
Summer 1997
Volume Number: 
Issue Number: 

The October 2, 1996 issue of the Journal of the American Medical Association (JAMA) was devoted to the theme of managed care. I wonder how many people noticed the title of the painting on the front cover? The painting is by Max Beckmann and is titled “The Sinking of The Titanic.” How fitting!

In reading through the articles, I couldn’t help but notice that many of the pro-managed care studies and articles seemed to be supported by such organizations as the Robert Wood Johnson Foundation. If one looks at the fine print at the bottom of the first page of each article, one will find the following:

“Health Care Utilization and Outcomes Among Persons With Rheumatoid Arthritis in Fee-For-Service and Prepaid Group Settings.”(1) Kaiser Permanente and Institute For Health Policy Studies. Conclusion: “We could find no evidence that persons with RA in fee-for-service and prepaid group practice setting received different quantities of health care or experience different outcomes on either an annual or long-term basis.”

“Health of the Public: The Private-sector Challenge.”(2) Supported by grants from the Robert Wood Johnson Foundation, Pew Charitable Trusts and the Allina Foundation. One of the authors is an “officer and shareholder in United HealthCare Corporation (a large HMO). Conclusion: “Managed care systems present an important opportunity. Working together, they are positioned better than other organizations to improve the health of the communities they serve. Regardless of for-profit or not-for-profit status, managed care systems can be good corporate citizens and contribute to the economic and social well-being of their communities.”

“Managed Care: A Work In Progress.”(3) The author of this article is president of The Jackson Hole Group and owns stock in Medical Logic, Oxford Health Plan, and Physicians Health Services (large HMOs). Conclusion: “The first phase of the health maintenance strategy was a bold and successful experiment that focused on and produced lower-cost health care...from the enormous savings that have been made through this revolution, we also will be able to find an incremental way to provide access to basic health care for all of our people.”


What Effect Is Managed Care Having On Residency Training?


The following are a few quotable quotes from the Resident Forum(4) by Holly Mattix, M.D., RPS Chair, American Society of Internal Medicine.

“Managed care has already penetrated many teaching institutions, and its presence in academic institutions is growing. In 1995, Duke University merged with New York Life Insurance Company and announced a plan to cut residency slots by 25%.”

“Resident physicians from across the country have voiced their concerns on how managed care has affected their residency training. Several have told me of reduced supervision from attendings in merged programs. Because physicians working for MCOs are often salaried and do not receive financial support for teaching and rounding on their inpatients, they often lack an interest in teaching.”

“Hospital/HMO merger downsizing has also caused problems. With fewer residents, fellows and attendings, the ‘workload must then be shared among fewer residents.’ ”

“Managed Care Organizations are starting to monitor each resident’s ‘style of practice’ — i.e., how much each resident spends in treating patients. HMOs are using this economic profiling to decide which residents to hire upon graduation. ‘Using such profiles to hire residents seems unfair, since residency training is a learning experience and a resident physician’s style of practice is still evolving.’ ”


Capitation or Decapitation: Can You Read The Writing On The Wall?


“Capitation or Decapitation: Keeping Your Head In Changing Times”(5) is an excellent article for anyone trying to understand all of the new terms and strategies HMOs are using to make sure that doctors get the “dirty end of the stick” every time. Managed care presents physicians with “opportunities” indeed. The authors tell us that under capitation, for example, physicians now have the opportunity to “lose money, earn less money, or spend more time without additional payment.” The authors go on to explain the difference between straight capitation arrangements and “capitation-plus-bonus” arrangements. Under the former, doctors mainly have the opportunity to work harder and longer with no additional pay. Under the latter arrangement, physicians’ livelihoods are at stake. The latter is the more common HMO arrangement in the United States today.

After HMOs have withheld a certain amount of the HMO physician’s capitated payment to be placed in a risk pool for other expenditures (specialists, tests, procedures, etc.), the physician is left with a “base capitation payment.” HMOs have managed to manipulate the “base capitation payment” to a level so low that, in many instances, the physician’s entire income is often totally dependent on how much medical care he or she denies to patients. “Under some managed care arrangements, the base capitation payments may be sufficient only to cover a physician’s office overhead; the physician’s take-home income may completely depend on the bonus payments he or she receives.” The “bonus payments,” of course, represent what is left over in the risk pool at the end of the year, having not been spent on medical care. The authors aptly refer to this as “intense pressure to restrict patient access to expensive specialty and diagnostic services.”

Sometimes, the end of the year “bonus payments” also depend on how well the physician does on patient satisfaction surveys. If one’s entire income depends on the bonus, which in turn may be impacted by patient satisfaction surveys, one can see the door opening to such practices as physicians paying (bribing) patients to give them good marks, or agreeing to waive the small co-pays in return for good marks on the surveys so as to enhance one’s ability to survive financially. HMOs may also reward doctors with higher bonuses who agree to limit their participation to a single HMO exclusively. This insures the HMO even tighter control over how the physician practices medicine.

Terms like “carve outs” also belie a certain political “shell game” that is used to determine financial winners and losers in the capitation game. Those in control of the IPA or PHO will act in their own interest to “carve out” the procedures that they perform at the direct expense of those physicians who are fewer in number or who lack the political clout to have a say in the process. Skimming “administrative expenses and profits” off the top is a common strategy used not only by HMOs, but by the power elite who run the IPA or PHO organization. This leads to a few wealthy elite, and a whole lot of “working slaves.”


Integrated Delivery Systems


In the same article, Drs. Bodenheimer and Grumbach point out that the political maneuvering and negotiations that take place when deciding how a hospital risk pool is divided up at the end of the year in an Integrated Delivery System (IDS) are “major events in the capitated medical marketplace.” Huge sums of money are involved in this dog-eat-dog type of negotiation with hospital administrations, and we are told that “hospitals tend to view these risk pools as their money.” We also note that hospitals typically “relieve the risk pool” of a per diem amount for covered hospitalized patients, a practice which insures that the hospital doesn’t have to take any kind of a discounted fee (like physicians are expected to take) in this integrated delivery arrangement. pHO-physician contracts (the little “p” is intentional) also typically specify a “downside risk” such that the physicians, not the hospital, are financially responsible for any hospital expenditures above the hospital capitated amount. Ideally, most hospital administrators would like to run an integrated delivery system where physicians are reduced to low paid employees under their complete control. The authors explain payment under this system as “the capitation payment from HMO to provider is not split into a hospital and physician portion, but comes as one lump sum to the integrated delivery system. The board of directors of the integrated system determines how the capitation money is split among hospital, primary care providers, and specialists.” Since many hospital boards are essentially controlled by the hospital administration, this translates into the hospital administration deciding how little to pay each of its physicians. Those who have licked the boots of hospital administrators over the years would do well, and those who haven’t gone along with everything that the administration wanted to do to them would not do well. This, of course, is why so many hospitals have been pushing so hard for “Integrated Delivery Systems.” It has nothing to do with a more efficient, economical system. It’s entirely about controlling the system — power and profit. “The common practice of physicians belonging to multiple IPAs and contracting with several HMOs, each with its own referral and authorization requirements, has blunted the idea of an efficient, quality-oriented group practice culture.” Hospital administrators, just like HMOs, want physicians to be totally dependent on bonuses at the end of the year. “Many HMO contracts are structured such that physicians can only maintain their traditional level of income if they garner substantial bonuses from hospital risk pools.”

In the ultimate scam, HMOs are selling “Stop-Loss Coverage” to capitated physician groups. The HMOs are “buying back” some of the risk by taking it out of the physician’s capitated payment. The result is nothing more than a planned downward spiral in physician payments. “Risk Adjustment” is another area where HMOs have declared this methodology “too expensive to implement” just as they have demonstrated their disinterest in “carve outs” for high cost diseases like AIDS. The HMOs have no financial interest in such things as risk adjusted capitation payments and carve outs for diseases, since these things reduce their profits and shift some of the risk back to the HMO where it isn’t wanted. This leaves the non-risk adjusted capitated physician groups in the position of having a significant financial incentive to discriminate against sick people by not enrolling them. Taking on too many sick people in a capitated practice means the physician will work harder and longer for no additional pay. An open door policy in this type of system is a declaration of a willingness and ability to work for nothing.

The latest strategy HMOs are employing is specialty capitation. Specialty capitation leads to a special kind of patient management which functions so as to shift the patient back and forth quickly between primary care physician and specialist like a “hot potato.” The one left holding the “hot potato” too long, and who ends up actually having to provide medical care gets burned.

Specialty capitation reduces the risk of primary care doctors at the cost of lower capitation payments to the primary doctor. The incentive in this type of system is for the primary care doctor to do little or nothing for the patient and to refer as many patients as possible to a specialist since the specialist is on capitation. The specialist under this system, in turn, must do as little as possible for the patient and send the patient back to the primary doctor as quickly as possible or the specialist loses money. The end result is nothing more than “patient churning” where doctors collect capitated payments and shift the patient back and forth quickly providing as little medical care as possible. The politics of specialty capitation also seem to depend on only certain specialists contracting with this churning scheme at the exclusion of others. Clinical expertise and quality of medical care have nothing to do with success in this type of system. It’s whether or not you are a good “churner,” and how much additional professional liability you are willing to assume for not providing medical care.

The article ends with a discussion of ethics vs. economics in the form of Dr. Jekyll and Mr. Hyde, and “Homo medicus” and “Homo economicus.” It is fairly clear from the article that HMOs are operating under the assumption that financial incentives alone can dictate physician behavior. Unfortunately, many physicians are proving them right. For many, professional ethics, it seems, is no longer relevant, and therefore, expendable.




1. Yelin EH, Criswell LA, Feigenbaum PG. Health care utilization and outcomes among persons with rheumatoid arthritis in fee-for-service and prepaid group practice settings. JAMA 1996;276(13):1048.

2. Showstack J, Lurie N, Leatherman S, et. al. Health of the public: the private-sector challenge. JAMA 1996;276(13):1071.

3. Ellwood P, Lundberg, G. Managed care — a work in progress. JAMA 1996;276(13):1083.

4. Mattix H. Resident Forum. JAMA 1996;276(13):1092c.

5. Bodenheimer TS, Grumbach K. Capitation or decapitation: keeping your head in changing times. JAMA 1996;276(13):1025-1031.


 Dr. Huntoon is a neurologist in Jamestown, New York, and a member of the Board of Directors of the AAPS. His address is 560 West Third Street, Jamestown, NY 14701.

Originally published in the Medical Sentinel 1997;2(3):112-114. Copyright ©1997Association of American Physicians and Surgeons (AAPS).

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