Medical Service Risk and the Evolution of Provider Compensation Arrangements

Medical Service Risk and the Evolution of Provider Compensation Arrangements Page 1003 Gloria J. Virginia Commonwealth University Kenneth Arrow (1963: 962) discussed two forms of provider compensation that were in existence during the 1960s: fee-for-service and prepayment. Like many others before him, he recognized a problem with the former that has been the subject of much subsequent discussion in health economics. Under traditional indemnity insurance, consumers face incentives to expand their health services utilization because the effective price for their health services is less than the actual price. Fee-for-service compensation provides no financial incentives for health providers to mitigate consumer moral hazard, but prepayment does. However, Arrow noted that physicians were resistant to prepayment for two reasons: (1) their inherent aversion to accepting financial risk, and (2) the potential impediments to physician autonomy through the use of closed panels for referral (957). Since Arrow’s time, the U.S. health system has experienced rapid growth in HMOs, risk contracting, and a plethora of provider intermediary organizations (e.g., medical groups, Independent Practice Associations [IPAs], Physician Hospital Organizations [PHOs], Management Services Organizations [MSOs], physician practice management companies, organized delivery systems). Taken together, these developments This essay was supported in part by the Robert Wood Johnson Foundation’s Investigator Awards in Health Policy Research http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Health Politics, Policy and Law Duke University Press

Medical Service Risk and the Evolution of Provider Compensation Arrangements

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Publisher
Duke University Press
Copyright
Copyright 2001 by Duke University Press
ISSN
0361-6878
eISSN
1527-1927
D.O.I.
10.1215/03616878-26-5-1003
Publisher site
See Article on Publisher Site

Abstract

Page 1003 Gloria J. Virginia Commonwealth University Kenneth Arrow (1963: 962) discussed two forms of provider compensation that were in existence during the 1960s: fee-for-service and prepayment. Like many others before him, he recognized a problem with the former that has been the subject of much subsequent discussion in health economics. Under traditional indemnity insurance, consumers face incentives to expand their health services utilization because the effective price for their health services is less than the actual price. Fee-for-service compensation provides no financial incentives for health providers to mitigate consumer moral hazard, but prepayment does. However, Arrow noted that physicians were resistant to prepayment for two reasons: (1) their inherent aversion to accepting financial risk, and (2) the potential impediments to physician autonomy through the use of closed panels for referral (957). Since Arrow’s time, the U.S. health system has experienced rapid growth in HMOs, risk contracting, and a plethora of provider intermediary organizations (e.g., medical groups, Independent Practice Associations [IPAs], Physician Hospital Organizations [PHOs], Management Services Organizations [MSOs], physician practice management companies, organized delivery systems). Taken together, these developments This essay was supported in part by the Robert Wood Johnson Foundation’s Investigator Awards in Health Policy Research

Journal

Journal of Health Politics, Policy and LawDuke University Press

Published: Oct 1, 2001

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