Cost Control in Health Maintenance Organizations

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An HMO is an organized health care delivery system, which provides health care to its members through networks of doctors and hospitals. Rather than traditional health plans, HMO’s cost less. Two ways HMO’s control costs are: controlling hospital admission and length of stay, and by providing incentives to physicians. These two cost control methods are further examined by an article published by The National Bureau of Economic Research (2002). The article examines the incentives to physician strategy for reducing utilization cost. The Physician Guide to Managed Care (1994) describes HMOs the case management procedures used to control cost through hospital length of stay and admissions.
Much of the focus regarding HMO controlling cost is based around physician incentives. According to The National Bureau of Economic Research (2002), physicians in a HMO network would receive a sizable bonus in exchange for keeping patient cost below target levels. Physicians would achieve lowering utilization cost by: teaching patients to better manage their chronic diseases to avoid hospital visits, by not encouraging unnecessary testing or specialty referrals, and by offering extended office hours and answering services to reduce emergency room visits. HMO’s have provisions when it comes to physician incentives. They limit the effect of its cost control bonus by providing placing a “stop-loss” provision for seriously ill patients. If a very sick patient acquired more than 100,000 worth of expenses in a year, this amount would be included in for a maximum of the 15,000 of a physical annual utilization cost.
Physician incentives are also link to quality of care. According to a report by the Natural Health Purchasing Institute (2002), Providers a...

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Tracy Certo. (2002 February). Incentive Effects of HMO Contracts. Retrieved from The Natural

Bureau of Economic Research website:

National Health Purchasing Institute: Provider Incentive Models for Improving Quality of Care
An Initiative of The Robert Wood Johnson Foundation. Bailit Health Purchasing, LLC .
March 2002.

National Research Council. Crossing the Quality Chasm: A New Health System for the 21st
Century. Washington, DC: The National Academies Press, 2001.

S D Pearson, T H Lee, E Lindsey, T Hawkins, E F Cook, and L Goldman. (1994). The impact of membership in a health maintenance organization on hospital admission rates for acute chest pain. Journal of Health Service Research, 29, 59-74

Nash, D. B. (1994). The Physician's guide to managed care. Gaithersburg, Md.: Aspen

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