Senate Insurance Committee Informational Hearing

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Initially HMOs paid doctors and hospitals, or “providers,” on a reduced fee-for-service basis. But then as HMOs grew, HMOs began paying providers using “capitation.” Under capitation, a doctor was paid a fixed monthly amount to provide his or her professional care for a patient. This capitation for “professional” services meant that a provider got paid the same amount every month whether the patient was seen every day or never. The amount that was paid “per member per month” (PMPM) depended upon age and sex but not upon how sick the patient was. The typical PMPM for a child was about $5 (or $60 per year) and about $10 for an adult. If the doctor had only healthy patients, that doctor did well financially. If the doctor had many sick patients, that doctor did poorly financially. Thus there was pressure to have only a few sick patients in a practice.

The concept was that if you had a lot a capitated patients, you could “spread the risk” like an insurance company. The expensive sick patients would be paid for by the healthy patients. However, when the Knox-Keene Act was passed, the growth of this capitation model was not envisioned. Knox-Keene was created to stabilized the financial risk and financial status of HMOs. Now HMOs were shifting the financial risk of insurance coverage to providers. Although Knox-Keene requires strict government oversight of HMOs, there was no parallel provision for government oversight of IPAs and medical groups.

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