Prepayment with office-based physicians in publicly funded programs: results from the Children's Medicaid Program

This paper is a report of the results of a demonstration designed to provide empirical evidence regarding the effects of alternative approaches to paying physicians for serving children in the Medicaid program: (1) visit fees set at twice regular Medicaid fees in return for physician agreement to manage utilization and (2) capitation and financial risk-sharing along with the same physician agreement to manage utilization. Participating physicians were assigned randomly to either of the two payment groups. Comparisons of utilization and expenditures were made between these two plans and the regular Medicaid program (fee-for-service, low fees). Results showed no adverse effect of capitation payments on primary care visits to office-based physicians. Capitation physician referrals to specialists decreased relative to all other groups studied, consistent with the theory that the financial incentives in capitation will lead primary care physicians to reduce referrals to specialists.