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financial incentives

Financial Incentives and the Practice of Medicine: AMA Recommendations  Council on Ethical and Judicial Affairs of the American Medical Association, December 1997

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In 1997, the AMA Council on Ethical and Judicial Affairs issued a report the role of financial incentives in medicine and the possible conflicts of interest that may arise under some payment systems. What follows is a summary of the report and the Council's concluding recommendations. The full text of the report is available from the AMA in PDF format.

This Council report outlines the potential risks and benefits of financial incentives for physicians under both fee-for-service and capitated systems. While both methods of payment are intended to reduce wasted resources and reward specific patterns of care, potential conflicts of interest may arise when decisions about care directly impact physicians' financial interests, especially in cases where many viable treatment options exist.

Potential benefits of the use of incentives are:

1. Reduction of waste in the use of medical resources;

2. Encouragement of preventative and ambulatory care;

3. Increased attention to patient satisfaction (in systems tying bonuses to responses on patient surveys).

Potential risks include:

1. It may be difficult for physicians to remain objective about treatment decisions if a monetary reward or penalty is associated with a particular course of action.

2. "Bed side rationing." In situations requiring them to balance the interests of a particular patient with those of other patients, physicians are prevented from carrying out their fundamental obligation of individual patient advocacy.

3. If the patient thinks that the doctor is making treatment decisions based on his or her own financial interest, the relationship of trust between patient and doctor is eroded.

4. Doctors may become resentful of patients who require the most care and resources.

In light of these potential risks, the Council issued the following recommendations, intended to provide "general guidance on the ethical implications of introducing the financial interest of the physician into the relationship:"


1) Although physicians have an obligation to consider the needs of broader patient populations within the context of the physician-patient relationship, their first duty must be to the individual patient. This obligation must override considerations of the reimbursement mechanism or specific financial incentives applied to a physician's clinical practice.

2) Physicians, individually or through their representatives, should evaluate the financial incentives associated with participation in a health plan before contracting with that plan. purpose of the evaluation is to ensure that quality of patient care is not compromised by unrealistic expectations for utilization or by placing that physician's payments for care at excessive risk. In the process of making judgments about the ethical propriety of such reimbursement systems, physicians should refer to the following general guidelines:

a) Monetary incentives may be judged in part on the basis of their size. Large incentives may create conflicts of interest that can in turn compromise clinical objectivity. While an obligation has been established to resolve financial conflicts of interest to the benefit of patients, it is important to recognize that sufficiently large incentives can create a untenable position for physicians.

b) The proximity of large financial incentives to individual treatment decisions should be limited in order to prevent physicians' personal financial concerns from creating a conflict with their role as individual patient advocates. When the proximity of incentives cannot be mitigated, as in the case of fee-for-service payments, physicians must behave in accordance with prior Council recommendations limiting the potential for abuse. This includes the Council's prohibitions on fee-splitting arrangements, the provision of unnecessary services, unreasonable fees, and self-referral. For incentives that can be distanced from clinical decisions, the following factors should be considered in order to evaluate the correlation between individual act and monetary reward or penalty.

i) In general, incentives should be applied across broad physician groups. This dilutes the effect any one physician can have on his or her financial situation through clinical recommendations, thus allowing physicians to provide those services they feel are necessary in each case. Simultaneously, however, physicians are encouraged by the incentive to practice efficiently.

ii) The size of the patient pool considered in calculations of incentive payments will affect the proximity of financial motivations to individual treatment decisions. The laws of probability dictate that in large populations of patients, the overall level of utilization remains relatively stable and predictable. Physicians practicing in plans with large numbers of patients in a risk pool therefore have greater freedom to provide the care they feel is necessary based on the likelihood that the needs of other plan patients will balance out decisions to provide extensive care.

iii) The time period over which incentives are determined should be long enough to accommodate fluctuations in utilization resulting from the random distribution of patients and illnesses. For example, basing incentive payments on an annual analysis of resource utilization is preferable to basing them on monthly review.

iv) Financial rewards or penalties that are triggered by specific points of utilization may create enormous incentives as a physician's practice approaches the established level. Incentives should therefore be calculated on a continuum of utilization rather than a bracketed system with tiers of widely varied bonuses or penalties.

v) A stop-loss plan should be in place to prevent the costs of treating a single patient from significantly impacting the reward or penalty offered to a physician.

3) Incentives should be designed to promote efficient practice, but should not be designed to realize cost savings beyond those attainable through efficiency. As a counterbalance to the focus on utilization reduction, incentives should also be based upon measures of quality of care and patient satisfaction.

4) Patients must be informed of financial incentive that could impact the level or type of care they receive. This responsibility should be assumed by the health plan to ensure that patients are aware of such incentives prior to enrollment. Physicians, individually or through their representatives, must be prepared to discuss with patients any financial arrangements that could impact patient care. Physicians should avoid reimbursement systems that cannot be disclosed to patients without negatively affecting the physician-patient relationship.

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