Payment Arrangements and Financial Incentives for Physicians

New physician payment structures -- including capitation and performance-based compensation -- became central to broader efforts by health plans, medical groups, and other organizations to give doctors financial reasons to control health care spending while maintaining quality. According to a survey by the Center for Studying Health System Change (HSC), 54 percent of physicians reported that their practices received capitation payments -- a fixed monthly amount per enrolled patient -- for at least a portion of their patient panel.

The Center's findings revealed considerable variation in capitation participation by physician type and geography. Primary care physicians were far more likely than specialists to be in capitated practices: 71 percent of primary care doctors received capitation, compared with 43 percent of specialists. Geographic differences were also pronounced. In Seattle, 73 percent of physicians were in capitated practices, and in Orange County, California, 72 percent were. On the other end of the spectrum, only 41 percent of physicians in Syracuse and 43 percent in Greenville, South Carolina, participated in capitation arrangements.

Capitation Rates by Community

The Community Tracking Study documented physician participation in capitation across 12 metropolitan areas, as well as nationwide averages. The share of physicians in practices receiving capitation for at least some patients varied substantially by location:

Boston, Massachusetts: 61 percent. Cleveland, Ohio: 63 percent (significantly different from the metropolitan average). Greenville, South Carolina: 43 percent (significantly different). Indianapolis, Indiana: 67 percent (significantly different). Lansing, Michigan: 59 percent. Little Rock, Arkansas: 44 percent (significantly different). Miami, Florida: 60 percent. Newark, New Jersey: 51 percent. Orange County, California: 72 percent (significantly different). Phoenix, Arizona: 59 percent. Seattle, Washington: 73 percent (significantly different). Syracuse, New York: 41 percent (significantly different). The average for metropolitan areas with populations exceeding 200,000 was 56 percent, while the national average stood at 54 percent.

Understanding the Variation

The wide differences in capitation rates across communities reflected the uneven penetration of managed care in different parts of the country during the late 1990s. Markets like Seattle and Orange County, where HMO enrollment was already high, naturally had larger shares of physicians operating under capitated payment models. Conversely, communities such as Syracuse and Greenville, where managed care had made fewer inroads, showed correspondingly lower rates of capitation.

The gap between primary care physicians and specialists in capitation participation underscored the fundamental role that primary care doctors played in managed care cost-containment strategies. Capitation was designed to encourage primary care physicians to coordinate care efficiently and avoid unnecessary utilization. Specialists, who typically treated patients on a referral basis, were less frequently placed under capitated arrangements, though a significant minority -- 43 percent -- still received some capitated payments.

Implications for Health Care Delivery

The prevalence of capitation raised important questions about how financial incentives shaped clinical decision-making. Proponents argued that capitation encouraged physicians to focus on prevention, coordinate care more effectively, and eliminate unnecessary procedures. Critics worried that capping physician payments per patient could create incentives to undertreat, potentially compromising quality, particularly for patients with complex or chronic conditions.

The data from the Community Tracking Study provided a baseline for monitoring how these payment arrangements evolved as the health care market continued to shift. With managed care facing increasing public scrutiny and a political backlash in the late 1990s, understanding the financial structures underlying physician practice was essential for evaluating the real-world effects of market-driven health care reform.

Sources and Further Reading

Data presented in this bulletin are drawn from the Community Tracking Study Physician Survey, conducted by the Center for Studying Health System Change. The survey collected information from physicians across 12 randomly selected metropolitan areas and a nationally representative sample. Statistical significance is noted where site values differ from the mean for metropolitan areas with populations over 200,000.