The Theory and Practice of Disclosing HMO Physician Incentives

Abstract:     
In a recent commentary, health economist Jaime Robinson observed that "the fundamental flaw of managed care, in retrospect, was that it sought to navigate the tensions between limited resources and unlimited expectations without explaining exactly how it was so doing". One such failure is the absence, prior to the late 1990s, of any disclosure by HMOs that they use financial incentives to encourage physicians to contain costs, and of any explanation of how and why this is done. Other features of managed care are visible to all members, such as a limited network of providers, primary care gatekeeping, or prior authorization requirements. Physician incentives, however, are entirely behind the scenes. Disclosure of financial incentives to subscribers has occurred only in the past three years, in response to several legal pressures.

These developments call for an assessment of the theory and practice of disclosing physician incentives. To what extent does HMOs' earlier silence about physician incentives account for the public's backlash against managed care and the failure to appreciate the need for making cost/benefit trade-offs in medicine? Now that disclosure is becoming more commonplace, will this help put managed care back on a better track? Or, is disclosure being done in an excessively legalistic environment that defeats its fundamental purposes?

To gain better understanding of these issues, this article begins by summarizing the theoretical case for mandating disclosure of incentives, in terms of various types of information market failures. The article then analyzes the components of liability and regulatory law that require disclosure, observing how well each source of law responds to different aspects of the justification for disclosure. Following this, empirical literature is explored on the content, source, and timing of disclosures now being made, and on the impact of incentive disclosures. The article concludes by sketching a model approach to disclosure, one that provides information in layers, at different points and in varying levels of detail, as best suits people's desire and need for this information.

Number of Pages in PDF File: 27

Keywords: Health Care, Health Economics, Health Law, Physicians

JEL Classification: K32, K00, K23

Accepted Paper Series