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February 26, 1996

Changing Paradigms in Medical Payment

Author Affiliations

From the Anderson Graduate School of Management, University of California at Los Angeles (Dr Tabbush); and University of Arizona, Tucson (Dr Swanson).

Arch Intern Med. 1996;156(4):357-360. doi:10.1001/archinte.1996.00440040015002

The enormous level and rate of increase in health care expenditures in the United States during the past several years has been well documented. A combination of increased health insurance coverage and advances in medical technology, coupled with perverse economic incentives resulting in supplier-induced demand and cost-unconscious demand from patients, has created this explosion in health care spending. This explosive increase has given rise to a variety of private and public sector initiatives to reform the system. With a greater concentration of purchasing power among managed care payors and increased competition among providers, a trend toward dramatically reduced payment for providers continues. Under capitation, the most rapidly growing form of managed care, providers have contracts from insurance companies that call for them to provide care for a fixed per patient annual payment, regardless of what this provision actually costs. This form of per capita payment typically offers drastically reduced payment to providers, forcing them to adopt a cost-reduction strategy. Providers must contain costs while enhancing quality or else perish in this new cost-conscious environment. This new payment paradigm means that price, which is often dictated by the payors, including government, determines the providers' cost rather than cost determining price as it was under the traditional indemnity insurance schemes. It is this new imperative to contain costs while maintaining or else improving the quality of health outcomes that is behind many of the recent mergers and other collaborative activities that we are witnessing nationwide among hospitals and other health care organizations.

(Arch Intern Med. 1996;156:357-360)