Government intervention to control cost in the healthcare market has a long history. The Health Maintenance Organization Act of 1973 directly promoted the development of HMOs. In the 1980s, the prospective payment system (PPS) for Medicare was introduced in an effort to curtail healthcare costs in hospitals. Hospitals were reimbursed a predetermined amount for each diagnostic-related group (DRG). DRGs were intended to motivate hospitals to increase efficiency and minimize unnecessary spending, as they would only be reimbursed a set amount for each diagnostic category. To provide a way of measuring provider efficiency by DRG category, resource-based relative-value units (RBRVU) were introduced. Each RBRVU corresponded to a DRG. RBRVUs, however, continued to reimburse physician providers on a fee-for-service basis and reflected a highly complex set of calculations.
In the 1990s, private organizations and employers sponsored HMOs, PPOs, and physician hospital organization (PHOs) as part of their managed care efforts to reduce costs by eliminating provider incentives for inappropriate care and excess productivity. Many MCOs entered into capitated arrangements with contracted physicians, wherein such providers would receive a fixed amount per patient month per member (PMPM). Capitation was intended to emphasize primary care as central to improving healthcare and keeping hospital costs under the budgeted amount.
Yet capitation created a perverse financial motive to deny access to care and limit utilization, which was detrimental to patients. Because payment was not tied to outcomes, capitation arguably encouraged providers to cut spending without sufficient concern for patient welfare.
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