Chapter 9.E.3 (3.E.3) --Capitation Payment and Financial Conflicts of Interest

Most states do not regulate physician incentives very aggressively, or at all. Texas is one notable exception.  There, the insurance department entered into a consent order with the Harris Health Plan (an HMO run by Harris Methodist Hospital in Dallas), calling for it to cease using certain aggressive financial incentive plans, to pay a $100,000 fine, and to refund to physicians several million dollars of withheld payments. A press release and copy of the consent order can be found at Contrast this ruling with an article the previous year by a Harris Methodist administrator bragging about "How Capitation Turned Red Ink to Black at Harris Methodist Health Systems," in Managed Care Magazine, at  Another suit, brought by the Texas Attorney General against Aetna, also resulted in a settlement calling for a wide range of restrictions and changes in various managed care practices and policies.  A press release and copy of the agreement can be found at  For a thorough analysis, see Brant S. Mittler and Andre Hampton, The Princess and the Pea: the assurance of voluntary compliance between the Texas Attorney General and Aetna's Texas HMOs and its impact on financial risk shifting by managed care, 83 B.U. L. Rev. 553-590 (2003).

For additional information on the Medicare rules regulation capitation payments, see

For another scholar who opposes the use of physician incentives, see Timothy S. Hall, Bargaining with Hippocrates: Managed Care and the Doctor-Patient Relationship, 54 So. Car. L. Rev. 689 (2003).  Writing in favor of bedside rationing, see Amy L. Wax, Technology Assessment and the Doctor-Patient Relationship, 82 Va. L. Rev. 1641 (1996).

Disclosure of Incentives.  Addressing the issue left unresolved in Pegram v. Herdrich, the 3rd Circuit held that ERISA does not require disclosure of physician incentives unless the patient asks for this information, or unless the HMO knows the patient needed or wanted this information and that it would have avoided harm to the patient.  Horvath v. Keystone Health Plan East, Inc., 333 F.3d 450, 462 (3d Cir. 2003).  It is noteworthy that the plaintiff in this case had not suffered any physical injury, unlike the plaintiff in Pegram.  For analysis, see Comment, 49 St. Louis U. L. J. 245 (2004).
For a thorough analysis of the problem of adverse selection generally in insurance law and public policy, see Peter Siegleman, Adverse Selection in Insurance Markets: An Exaggerated Threat, 113 Yale L. J. 1223 (2004).  Regarding risk adjustment, see David Blumenthal, et al., The Who, What, and Why of Risk Adjustment: A Technology on the Cusp of Adoption, 30 J. Health Politics Pol'y & L. 453 (2005).

The following graph illustrates the problem of risk selection created by the highly skewed distribution of health care costs across the population. It shows, for instance, that 70% of people account for only 10% of health care expenditures, and that the top 10% of people account for 69% of expenditures. (The graph is taken from John V. Jacobi, Consumer-Directed Health Care and the Chronically Ill, 38 U. Mich. J. L. Reform 531 (2005) and based on Marc L. Berk and Alan C. Monheit.  See Marc L. Berk and Alan C. Monheit, "The Concentration of Health Care Expenditures Revisited," Health Affairs, 20 (March/April 2001), 9, 12.) 


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