Senate Insurance Committee Informational Hearing



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Incentive withholds

However, medical costs continued to rise and employers wanted lower premiums. In order to control costs, HMOs began using “incentive withholds.” The HMO would “withhold” an amount, typically 10%, of the monthly capitation check to a provider. If that provider did not over-spend on other “ancillary” medical services like laboratory tests, x-rays and hospitalizations, then that provider would be given the withhold. Thus providers were provided an incentive to control costs.


Later, a second incentive withhold was added to address the costs of prescriptions. Again, if a provider did not prescribe too many pills, then the provider was given that withhold. It is important to understand that these withholds were not bonuses. These were monies removed from the allotted capitation check. They were also typically not returned to the provider as costs continued to rise.


  • Risk Pools

Because controlling spending by individual providers was proving difficult, the next model was to put doctors into “PODs” which were groupings of providers with similar specialties. This POD then also had an incentive withhold which was placed into a shared “risk pool.” If the POD did not meet the HMO targeted budget for spending, then the whole POD lost that withhold. If the POD meet the goals, then the entire POD shared the risk pool.


The next model for individual doctors to manage risk was the IPA. Providers joined the IPA to negotiate contracts and terms of the incentive withholds. But then the IPA became responsible for doing all of the administrative duties for billing and utilization review and authorizations. Some IPAs did this alone. Others turned to management service organizations (MSOs) and physician practice management companies (PPMs).
The IPAs tried a variety of cost containment strategies. Some tried to take the entire IPA capitation check and pay all primary care and all specialty care using a PMPM schedule. But under this model, providers were rewarded for doing as little as possible. As such, some PCPs referred all cases to specialists and did little preventive care. The IPA then tried to pay PCPs a modified fee-for-service model based on a complicated formula based on “productivity.” When this did not work in controlling costs and since capitation PMPM was rising with inflation, the IPAs tried paying specialists using a “zero-based-budget” method. Under this model all specialists in a given specialty were grouped together and allowed to be paid only a certain total amount. At the end of the month, all services by those specialists were added up and divided into the monthly amount. The specialists were then paid their pro rata share of the monthly amount based on the number of services provided.

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