Principal-agent, risk, and market structure effects on health maintenance organization choice of payment method for primary care physicians

This research analyzes determinants of HMO compensation (salary, fee-for-service, and capitation) for primary care physicians. First, a theoretical model is constructed to analyze physician preferences for fee-for-service versus capitation based on payment risk characteristics. The analysis shows that capitation can be less risky than fee-for-service. A physician's ranking of payment methods may depend on her utility function, the health distribution of HMO members, and the relationship between payment schedules and the health distribution of HMO members. In some circumstances, an HMO can pay less under capitation and still make a physician as well off as under fee-for-service.