Kinder and Gentler: Physicians and Managed Care, 1997-2001

Tracking Report No. 5, November 2002 — By Bradley C. Strunk and James D. Reschovsky

The managed care backlash of the late 1990s did not drive physicians out of managed care. According to a study by the Center for Studying Health System Change (HSC), an overwhelming majority of U.S. physicians continued to hold managed care contracts through 2001. In fact, doctors reported a modest increase in both the share of practice revenue coming from managed care and the average number of contracts they maintained. What did change between 1997 and 2001 was the nature of those relationships. Health plans significantly reduced their use of capitation — fixed monthly per-patient payments regardless of services rendered. Physician practices also moved away from tying direct financial incentives to clinical decisions. At the same time, the overall influence of treatment guidelines and other care management practices commonly associated with managed care actually grew.

The Rise and Fall of Managed Care?

Managed care plans had achieved remarkable success in slowing health care cost growth during the mid-1990s. The reversal from the high spending increases of earlier in the decade was driven in part by plans tightly managing access to care — using primary care physicians as gatekeepers to specialty services, requiring preauthorization for hospital admissions, and limiting patients' choice of doctors and hospitals through narrow provider networks. But consumers and physicians pushed back hard against the increased oversight and restrictions on care.

Despite this backlash, and despite scattered reports of physicians dropping managed care contracts entirely, more than nine of 10 physicians in both 1997 and 2001 owned or belonged to a medical practice with at least one managed care contract. Among those physicians, average practice revenue from managed care actually rose to 46 percent in 2001, up from 43 percent in 1997. Primary care physicians continued to draw a larger share of revenue from managed care than did specialists — 49.7 percent versus 43.1 percent in 2001.

The average number of managed care contracts also edged upward, from 12.4 in 1997 to 13.1 in 2001, likely reflecting plans' response to consumer demand for broader physician networks. This modest increase may have understated the actual degree to which plans expanded their networks, since considerable consolidation among insurers during those years would have been expected to reduce the average number of contracts physicians held.

Enrollment in preferred provider organizations (PPOs) grew substantially during this period at the expense of health maintenance organization (HMO) enrollment, likely because PPOs placed fewer restrictions on health care use and gave patients more direct access to specialists. Despite this enrollment shift, primary care physicians in 2001 served as gatekeepers for 44.6 percent of their patients, 3.6 percentage points higher than in 1997. Nearly all of that growth occurred before 1999, however, when HMO enrollment was still expanding. Between 1999 and 2001, the use of primary care gatekeeping held steady.

Risk Contracting Declines

Although managed care maintained a strong role in most physicians' practices, the character of those arrangements shifted between 1997 and 2001. The most notable change was a significant decline in health plans' use of capitation — a payment model in which physicians receive a fixed amount per patient per month, regardless of how much care is provided. Capitation creates strong financial incentives to limit the volume of services delivered.

Among physicians with at least one managed care contract, the share whose practice received any revenue from capitation dropped about 9 percentage points to 48.6 percent in 2001. The decline was evident among both primary care physicians and specialists, though specialists remained considerably less likely to receive capitated payments — 36.4 percent compared with 66.7 percent for primary care doctors in 2001. Among physicians whose practices did receive capitated payments, the proportion of revenue from capitation remained essentially unchanged between 1997 and 2001, after a slight increase in 1999.

Use of Financial Incentives

Both health plans and physician practices sometimes linked specific financial incentives to overall compensation as a way to influence clinical decision-making. These incentives included profiling — comparing an individual physician's patterns of medical resource use against those of peers — as well as results from patient satisfaction surveys and quality measures such as rates of preventive care.

Between 1997 and 2001, fewer than a third of all physicians had compensation tied to such specific financial incentives at the practice level. The use of profiling linked to physician compensation declined from 15.6 percent to 12.2 percent over this period. Primary care physicians experienced a proportionally steeper decline (25 percent) than specialists (19 percent).

There was no statistically significant change between 1997 and 2001 in the degree to which physician compensation was tied to patient satisfaction surveys or quality metrics. Nearly one-quarter of physicians (23.6 percent) reported that patient satisfaction survey results factored into their compensation in 2001, while about 17 percent said specific quality of care measures played a role. Primary care physicians were more likely to be subject to both types of incentives — 29.4 percent for patient satisfaction and 23.8 percent for quality measures, compared with 19.8 percent and 13.1 percent for specialists, respectively.

Impact of Care Management Tools Grows

Although relatively few physicians had compensation directly tied to financial incentives, tools such as profiling, patient satisfaction surveys, and treatment guidelines had broader applications for care management. Over time, their influence on how physicians practiced medicine appeared to be expanding, whether or not these tools were linked to pay.

Between 1997 and 2001, the share of physicians reporting that feedback from patient satisfaction surveys had a "very large," "large," or "moderate" effect on their practice grew by nearly 4 percentage points to 61.6 percent. The effect of profiling also increased, but only among primary care physicians — 40.1 percent reported being affected in 2001, up from just over 37 percent in 1997. Specialists remained less likely to be affected by profiling, with 30.4 percent reporting an impact in 2001.

Treatment guidelines, promoted by government and professional medical organizations as part of a broader push toward evidence-based medicine, showed the most dramatic growth. Managed care plans frequently encouraged physicians to follow these guidelines. Between 1997 and 2001, the number of conditions covered by treatment guidelines expanded, and the percentage of physicians reporting that guidelines had a "very large," "large," or "moderate" effect on their practice rose more than 10 percentage points to 56.2 percent. Primary care physicians saw a 15-point increase, reaching 60.7 percent in 2001, while specialists increased over 7 points to 53.2 percent.

Loosening the Grip

The managed care backlash had reshaped the relationship between health plans and physicians — not by reducing managed care's presence, but by producing a softer, less confrontational version of it. Managed care's loosened grip on physicians was likely a contributing factor in the return to double-digit health care spending increases in 2001. Where health plans were introducing new ways to influence clinical decisions, the emphasis appeared to be shifting toward quality — rewarding physicians who met certain care standards. A prime example was the Pay for Performance initiative launched by six California insurers, in which physicians received additional payments for meeting quality benchmarks.

Unlike the 1990s, when health plans' cost-containment efforts had focused largely on lower provider payments and managing physician behavior, the emphasis by the early 2000s had shifted to influencing patient behavior through greater cost sharing — higher deductibles, coinsurance, and copayments. Whether this patient-focused approach could sustain itself remained uncertain. Continued cost pressures, the inherent limitations of relying on patient cost sharing alone, and the possibility of a consumer backlash could eventually bring attention back to strategies aimed at influencing how physicians make clinical decisions.

Data Sources

This Tracking Report presented findings from the HSC Community Tracking Study Physician Survey, a nationally representative telephone survey of physicians involved in direct patient care in the continental United States, conducted in three rounds: 1996-97, 1998-99, and 2000-01. The sample was drawn from the American Medical Association and the American Osteopathic Association master files and included active, nonfederal, office- and hospital-based physicians spending at least 20 hours per week in direct patient care. Residents and fellows were excluded. Each round included approximately 12,000 physicians, with response rates between 60 percent and 65 percent.

Sources and Further Reading

Gabel, Jon, et al., "Job-Based Health Benefits in 2002: Some Important Trends," Health Affairs, Vol. 21, No. 5 (September/October 2002).
Strunk, Bradley C., Paul B. Ginsburg, and Jon R. Gabel, "Tracking Health Care Costs: Growth Accelerates Again in 2001," Health Affairs, Web-exclusive publication (September 25, 2002).
HSC Community Tracking Study Physician Survey, 1996-97, 1998-99, 2000-01.
HSC Community Tracking Study Household Survey (corroborating trends in gatekeeper use).