Physician responses to fee-for-service and capitation payment

The ability to achieve reductions in health care costs is determined in part by physician payment mechanisms. This study observes the response to a change in the reimbursement mechanism by a group of physicians who participated in a fee-for-service plan and then formed an IPA using capitation payment for primary care physicians and a reduced fee schedule for specialists. Patient benefits were similar under the two plans. Analyses of data for a group of continuous enrollees show that the change in the physician payment mechanism was associated with a reduction in hospitalizations but increases in length of hospital stay and number of ambulatory visits. These increases may have occurred because capitation for primary care physicians and a reduced fee schedule for specialists led to a greater number of referrals with no incentive in place for reductions in length of stay for specialty admissions.