Incentive Bonuses in Prepayment Plans


Robert W. Geist, M.D.
N Engl J Med 1974; 291:1306-1308 December 12, 1974

“…A physician should limit the source of his professional income to medical services actually rendered by him…to his patients.”1 This precept of medical ethics is now under fire from within and without the profession. The attack comes from those who propose that prepaid group insurance plans, combined with financial rewards and punishments for physicians, are a panacea for the problems they perceive in American medicine, and especially the problem of cost.

The proposal to pay incentive bonuses to physicians is taking place during a national debate on two philosophies of financing medical care.2 One philosophy proposes that people have a right to funds for medical care and that the individual should be free to make his own decisions on allocation of these funds; the patient would himself have a motive to monitor and enforce efficiency in medical-care delivery. Consumer preferences would shape the nature and quality of care.3 The other philosophy proposes that people ought to have ready access to care that the government has an obligation to support through one means or another. Both philosophies agree on insuring catastrophic illness. The real argument is over insuring first-dollar care.

Proponents of ready access to medical care, faced with the cost of services for patients having “free care,” readily espouse any plausible scheme for controlling utilization of those services despite the demand. For instance, health-maintenance organization (HMO) promoters find a ready audience for their promises to control utilization through “prevention of disease” while simultaneously negotiating such pragmatic controls on “free access” as paying physicians an incentive bonus if they can limit “irresponsible” use of medical-care services.

Incentive Bonuses

Incentive bonuses are not new in medicine, and familiar names for them are split fees, kickbacks, rebates, bribes, and so forth. Until now, they have been not only unethical but illegal. Why have organized medicine and society through legislative action found incentive-bonus payments to physicians intolerable? Simply because an incentive bonus is intended to influence the physician’s medical decisions for the benefit of the person or agency paying the bribe. No patient should suffer the reality or even the appearance of being sold to the highest bidder. As an example, the honest physician ordering hospitalization or consultation from other providers may not legally or ethically be paid a kickback from either. If physicians could be universally trusted not to be influenced in their medical judgment by a bonus from another provider, there would be no need for laws or medical ethics. Unfortunately, physicians, like any other group of human beings, have no monopoly on virtue. Society has therefore established legal and ethical standards that in this instance require that physicians may be paid only for the medical services that they deliver to their patients.

Incentive bonuses may not be new, but they may be given new names. For instance, the honest HMO physician may not need to order services of hospital or consultant. If this results in accrual of any unused funds, the insurance-company intermediary offers to pay the doctor a “reward” as an “incentive” to continue such exemplary medical and fiscal behavior. But when the honest HMO physician accepts these payments for other than medical services that he has delivered, and in this case from quite properly not ordering the services of other providers, he has accepted a bonus in no way different from his counterpart outside the HMO who has ordered the services of a hospital or surgeon and has received a kickback. In both instances, the split fee or the HMO incentive bonus, the physician is paid for his services to another provider or HMO company, and not for medical services that he has rendered to the patient. We are simply less familiar with incentive bonuses paid by insurance-company intermediaries than we are with incentive bonuses paid by another doctor.

I will not attempt to analyze the problem of the dishonest physician, whether outside or inside an HMO. The switch from one payment system to another will present no problems to a charlatan.

Who Pays the HMO Incentive Bonus?

Confusion over the nature of incentive-bonus payments may prevent many physicians from questioning who pays the bonus and why it is offered him.

In the last two decades government and industry have bought first-dollar medical care insurance mainly for hospital services. It should have been no surprise that patients utilized inpatient services that had become virtually “free” because of the very small deductible co-payments for hospitalization. But it was a surprise to find that the increased cost of medical services utilized outstripped both population growth and the rate of inflation experienced by the rest of the economy.4 Not having the political acumen or fortitude to recommend that consumers be made cost-sensitive by increasing deductible insurance co-payments, government and industry became interested in other means of decreasing costs. New strategies such as increased production of physicians to increase competition, PSRO’s to prove tax dollars were not being squandered, or making civil servants of the entire medical-care industry were of little immediate use, were unpredictable in outcome, were not applicable to large industries doing collective bargaining, and simply did not address the real cost-control problems presented by increased utilization of services.

The HMO promoter at this point offers a panacea — apparent unlimited access to care, which pleases politicians and labor, as well as control of utilization, which pleases government and industrial leaders who buy medical care in large volumes. There is no shortage of testimony that HMO cost-control stratagems will be effective since these stratagems represent an insurance millennium of nearly complete control of the premium dollar by the insurance company. Whereas other casualty companies are limited to conventional actuarial principles to control expenditures, HMO companies have available such controls as limiting the number of beds and physicians available (queuing), determining the kinds of providers available (including doctor substitutes), paying the physician an incentive bonus to join the company in conserving premium dollars, and attempting to acquire power to threaten the patient with loss of insurability if he or she does not comply with medical orders. In fact, “patient-compliance” contracts, if enforceable through statutory or regulatory approval, appear to be the real HMO managerial secret for “health maintenance” since the onus of health maintenance can be shifted to the patient who disobeys orders to take medications, eats too much, fails to attend prenatal classes, and so forth. Thus, the HMO concept packages “free access” with a system of “incentive-bonus rewards” that are proportional to the ability of the insurance company or its agents to control utilization despite the demand.

Who, then, pays the incentive bonus in an HMO and why? The major “buyer” of an HMO package may be either government or industry, but in either event the patients’ money is used not only to purchase medical care but also to “reward” the intermediary agents restricting patient utilization of premium dollars. A physician having a financial interest in decreasing utilization of premium dollars would have the appearance, if not the reality, of being a self-serving denial-of-care agent for the benefit of “buyers” of care seeking “cost control” of the “health-care industry.” This rhetoric of commerce is even used to justify an incentive-bonus “profit” for the physician having a stockholder-like risk of “loss” if too much of the medical-care “product” is “consumed,” and accurately characterizes the substitution of a commercial for a professional doctor–patient relation.

Consequences of HMO Incentive Bonuses


Persons enrolled in an insurance program paying an incentive-bonus reward would be dealing with a physician-insurance complex whose financial interest in not prescribing care and in coercing behavior conflicts with the patient’s desire for more care and freedom from dehumanizing manipulation. It is difficult to imagine any internal peer-review mechanism that would adequately protect the patient from underutilization or manipulation since the reviewing doctor would have an obvious financial interest in all decisions not to prescribe care and to manage patient behavior “for the patient’s own good.”


If physicians have even an appearance of a disreputable financial interest in ordering patient care, peer-review credibility will be lost, and the public will demand not doctor review but implementation of “objective review” of its medical care. The claim that incentive-bonus paying HMO’s would prevent government regulation is therefore false since incentive bonuses, by destroying the physician’s credibility for self-regulation, guarantee the necessity of government regulation.


Even if an “objective review” regulatory agency could avoid being controlled by those regulated, or of having conflicting responsibilities of promotion and regulation, it probably could not avoid the problems of lack of medical expertise and lack of means to do quality-of-care review. Nearly unlimited amounts of computerized data for process or outcome analyses are available, but the whole system is as yet untested. In the hands of an agency with fiscal rather than professional interest and expertise, and with no way to measure consumer preferences accurately, the use of such data would probably be for cost control and not quality of care.

Medical Profession

The work of doctors, like that of other laborers, is not an article of commerce, and the medical profession has never treated the doctor–patient relation as a commercial one. However, if physicians acquire a stockholder-like interest in their patients’ premium dollars by taking an incentive bonus from the HMO insurance-company intermediary, they will pervert the doctor–patient relation into an article of commerce. This transformation will invite antitrust action and necessitate government regulation when countywide foundations or even larger conglomerates are viewed by the public as self-serving monopolies of financial convenience between “buyers,” insurance intermediaries, and providers. Incentive-bonus payments may well be the critical step in taking physicians out of professionalism and into the field of commerce where the twin doctrines of laissez faire and caveat emptor not only will apply but will rule their “business.”


Regardless of the philosophy for financing medical care ultimately adopted in the United States, physicians must protect their patient’s right to a doctor and to a peer-review mechanism untainted with self-serving financial interests, and must guarantee people freedom from the physician having a stockholder-like interest in coercing patient compliance when ordering care. The medical profession should lead in the attempt to amend federal and state laws so that payment of incentive-bonus rewards to physicians would be outlawed in prepayment plans in the same manner as they are now outlawed between providers.

Robert W. Geist, M.D.
228 Lowry Medical Arts Building St. Paul, MN 55104


  1. Principles of Medical Ethics. Chicago, American Medical Association, 1969, Section 7, p 39
  2. Newhouse JP, Phelps CE, Schwartz WB: Policy options and the impact of national health insurance . N Engl J Med 290:1345–1359, 1974 Full Text | Web of Science | Medline
  3. Feldstein MS: The medical economy . Sci Am 229(3): 151–159, 1973 CrossRef | Web of Science | Medline
  4. United States Department of Health, Education, and Welfare. Chart Book: The size and shape of the medical care dollar (DHEW Publication No [SSA] 73–11910). Washington, DC, Government Printing Office, 1972, p 6

Citing Articles

Geist, Robert W., . (1978) Advertising in Medicine — A Physician’s Perspective. New England Journal of Medicine 299:9, 483-486 Full Text

© N Eng J Med. 1975;292:653.

                                          [Reformatted after scanning original on 3-14-02]        


To the editor: Sounding Board article, “Incentives in Prepayment Plans”, in the December 12, 1974, issue of the Journal begins with erroneous conclusions and then proceeds to amplify these and of course the final invective is based on these biases.

The precept of medical ethics quoted is true as far as it goes, but it does not take into account the changing socioeconomic scene. The author should be aware that many state and local medical societies have under consideration review of medical ethical principles regarding prepayment plans not only in financing, but also in their marketing.

Prepayment plans operate by allocating funds for medical services on a projective (budget) basis. The bonus aspect does not apply for a number of reasons. Physicians in prepayment plans are credited with the amount of the premium that covers medical and hospital benefits. Since they are at risk to deliver practically unlimited medical services without further allocation of funds, it follows that any funds unspent in a particular space of time for pa­tient care should then be available for additional medical use as experience dictates. Because prepayment plans exist mostly in the responsible organizational setting of group practice, there is at least a minimum of peer review that takes place naturally in group practice. The likelihood of dishonesty is thus minimized.

At present our “self-serving” financial interests are to over- utilize inpatient services inappropriately. The funding mecha­nism of prepayment to physicians in a responsible organizational setting places the dollars where they belong: in the hands of the physicians—those who spend these funds. This mechanism gives us a positive posture for accountability both professionally and financially.

The use of unexpended risk funds in no way resembles (or is) bonus payments. The opportunity to have available these shared-risk funds allows for a positive and more appropriate utilization medical-care resources.

Chicago, IL
Marvin Shalowitz, M.D

The above letter was referred to the author of the Sounding Board in question, who offers the following reply:

To the Editor: I wish Dr. Shalowitz could share my concern over the consequences that would follow a change in medical ethics. But his choice instead to justify rebates gives one an opportunity to examine the justifications themselves.

     An appeal to vague situational imperatives (“the changing socioeconomic scene”) probably refers to the pressure that gov­ernment and industry are applying to make physicians cost-sensi­tive rationing agents rather than to return cost sensitivity to the public by raising insurance deductibles. Political pressure is hard­ly a good argument for changing ethics.

     It is a strange argument that some number of physicians greater than one (“group practice”) confers integrity on the phy­sician adequate to protect the patient’s weal even when the group has a self-serving interest in a kickback from money unspent on patient care (“…shared-risk funds allows for positive and more appropriate utilization of medical resources”).

     Dr. Shalowitz projects onto physicians practicing outside pre­paid groups a kickback for ordering care (“our ‘self-serving’ fi­nancial interests are to over utilize inpatient services inappropri­ately”) where such rebates simply do not exist unless one splits fees or has some cozy relation with the hospital ownership. This ad hominem argument obviates any necessity of analyzing the real causes of medical price inflation, and attempts to convert avarice into a social good if utilization is reduced.

     Finally, physicians are the servants of their patients. If physi­cians accept incentive payments for being masters of the patient’s pocketbook (“dollars where they belong”) they will instead find themselves servants of what Goodwin has called a faceless bureaucracy. (Goodwin RN: Reflections: the American conditioning—p. 111. The New Yorker, February 4,1974, pp48-9l).

St. Paul, MN
Robert W. Geist, M.D

About the author

Minnesota Physician-Patient Alliance

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