For understanding as to how health plans pay physicians, there are a few basic terms that need to be understood. Out of these, four terms – fee-for-service, discounted fee-for-service, capitation, salary – refer to payment methods; and three – withholds, bonuses, retrospective utilization targets – refer to payment adjustments.

These terms are the primary basis of all contracts that physicians have with the health insurance providers. Also these (payment methods and payment adjustments) play an important role as physicians act as a buffer or gatekeepers when they manage patient’s access to the hospital care and specialist referrals. While the payment methods affect the treatment patterns, the payment adjustments affect both, the treatment as well as the referral patterns. It should be noted that since majority of physicians practice in groups or clinics, the financial responsibility of the patient is shared by all the physicians in the group.
The Four Payment Methods

• Fee-For-Service: In a fee-for-service (FFS) plan, the physicians are reimbursed for their service on a fee for service basis, meaning that they get paid for each visit or medical care that they provide. So, the health insurance company pays for every test, procedure medicine, etc. Physicians under this mode of payment have the incentive on increasing not only the services they provide for every visit but the number of patients they see as well. In this type, the physicians can treat the patients without any consideration of the cost.
• Discounted Fee-For-Service: It works on a similar basis as the FFS with the only difference being that physicians are paid a specific amount or percentage of the total charge of their service. In this mode of payment, although the possibilities that physicians receive payments consistently lower than their cost is low, the risk in not completely null. In this plan, the physician does get some incentive for balancing the effectiveness and cost of the treatment. However, they do not get any incentive for changing the specialist referral patterns unless they have any payment adjustments.
• Capitation: Under capitation, the physician receives monthly payments for a specified number of enrollees (patients) that are allocated to them, regardless whether those enrollees make visits or not. Hence, they get incentives for containing the costs but at the same time can be open to financial risks. For example, if none of the allocated enrollees visit the doctor’s clinic, the doctor still gets the whole decided payment. On the other side, if all the allocated enrollees make visits (and at times numerous visits) the doctor does not get any payment above the decided value and is hence prone to financial risk. In real scenarios, fact remains that, during the specified time, some enrollees may never seek treatment, some may seek only basic attention and some may need extensive care. So the results vary widely.
• Salary: Salaried physicians have neither financials risks nor any incentives to alter their treatment patterns and are hence not concerned with the treatment or producers per visit or number of visits. There is no financial risk for salaried physicians unless their contracts include any of the payment adjustment methods.

The Three Payment Adjustments

• Withhold: Primary care physicians who are paid through fee-for-service, capitation or discounted fee-for-service usually receive some financial risk from health plans via withholds. These ‘withholds’ are the amount or percentage (usually 20%) that health plans withhold from the payment to be made to the physician in order to cover the deficits that the health plan bears when the premiums paid by the insured (enrollees) are lower than the cost of treatment. This deficit may later be released to the physician as bonus if the physicians restrain costs, referrals to specialists and hospitalization when the premiums are not lower than the total expenditure. However, the physicians may not receive any bonuses if the specialist and hospital expenditure exceed the withheld funds.
• Retrospective Utilization Targets: The bonuses that physicians receive are determined by the retrospective utilization targets which are the financial benchmarks set by the health plan provider. A bonus is awarded to a physician when he/she achieves the pre-determined target of medical service. The targets are essentially set so that the physicians are cost effective in patient care management.
• Bonuses – As discussed earlier, bonuses are disbursed to physicians from the unspent amount from the ‘withhold’ funds in case the premiums of the health plan are not lower than the total expenditure of the care. The bonus can also be based on other factors such as the outcome of care, access to service and patient satisfaction. Other factors that affect the bonus amount comprise of doing fewer procedures and tests and providing more preventive care to the enrollees. The physicians may also get bonuses for managing the access to specialists or hospitals. There is however, other constraint as well where if the physicians exceed the utilization targets, they may have to contribute to the health plan at the end of the year.

Depending on what suits them more, the physicians contract the payment method with the health insurance provider.