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Health Care Costs and Financing

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Managed care's selective contracting with physicians slowed growth in physician fees during the early 1990s

Between 1980 and 1990, during the fee-for-service (FFS) insurance era, physician fees rose 110 percent. One strategy that managed care organizations (MCOs) use to reduce the rate of growth in physician fees is selective contracting with a network of providers who agree to lower their prices in order to gain access to the potential revenue of people insured by the MCO. In turn, the MCOs provide their beneficiaries with financial incentives, such as decreased copayments, if they use network providers. This competitive pressure prompted physicians to reduce the fees they negotiated with MCOs during the 1990-1992 period, according to a study supported by the Agency for Healthcare Research and Quality (HS07068).

Although managed care was successful in providing some market discipline to physician pricing at the time, today several States require MCOs to include "any willing provider" in their provider network. This is likely to undermine the threat of network exclusion and associated loss of patients raised by selective contracting, notes study author, Jack Zwanziger, Ph.D., of the University of Illinois at Chicago. He analyzed several national data sets, including a survey of MCO fee schedules, to determine the impact of several market factors on negotiated physician fees during the 1990-1992 period.

The surveyed MCOs from diverse geographic areas did not abolish the historical pattern of physician fees, but they did modify relative fees to align them more closely with their relative resource use. The most influential factors in fee negotiations were physician supply and the proportion of the area's population enrolled in managed care plans. The larger the MCO presence in the area, the lower the physician fees were. Also, fees were lower in areas with more physicians per capita. The number of physicians in a plan's local provider network had almost no effect on fees.

More details are in "Physician fees and managed care plans," by Dr. Zwanziger, in the Summer 2002 Inquiry 39, pp. 184-193.

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