Tip: HMOs sometimes give physicians financial incentives to be cost conscious in the care they provide. They do this through one of three payment mechanisms: capitation, withholds or incentive payments. A capitation payment is a fixed payment per month that a physician’s practice receives to cover a specified set of services. The practice gets a fixed regular payment from the HMO for each member who is served. Under capitation systems, the physician’s practice receives the payment whether or not patients receive services in that month. In return, the practice is responsible for providing all the specified services covered in the Evidence of Coverage, even if the costs exceed the monthly capitation payment.

While some physicians receive capitation payments, other physicians have different payment arrangements. Some physicians receive a salary for their services. Other physicians are paid on a fee-for-service basis, that is, payment for each service provided. HMOs sometimes combine these payments with other methods to discourage unnecessary care. For example, HMOs may combine capitation, salary or fee-for-service payments with withholds or incentive payments.

Under a typical withholding arrangement, the HMO keeps a certain percentage of the physician’s regular payment to cover excess medical costs. The physician may receive a refund of the "withhold" at the end of a specified time period if health care services and spending are within allowable limits. Thus, the money a physician receives may depend on how often he refers members to specialists, admits members to hospitals or orders expensive tests and procedures.

Another similar system is an incentive payment. Incentive payments are in addition to a physician’s ordinary payment and are often made on the basis of efficiency. A physician who orders fewer tests and procedures and makes fewer referrals or admissions may get an additional incentive payment or bonus. Both withholds and incentive payments encourage physicians to manage treatment efficiently. However, some people are concerned that these payments may also discourage physicians from referring or admitting members or ordering certain diagnostic tests or medical procedures, when they may be needed.

Withhold or incentive systems may also be based on quality of care measures in addition to efficiency. For example, HMOs may take into consideration patient satisfaction scores or the percentage of members who receive preventive services in paying physicians. Each HMO and insurance company has different reimbursement rules and oversight systems. Ask your health plan or physician about the HMO’s payment arrangements if you are concerned that the arrangement may affect the care your physician can provide to you.