American Journal of Law & Medicine

Capitation, advances in medical technology, and the advent of a new era in medical ethics.(Health Care Capitated Payment Systems)


Health care is being capitated(1) throughout the United States,(2) and much of the spread of capitation is attributable to the efforts of insurers to contain costs.(3) The present lack of comprehensive studies evaluating the impact of capitation on overall health care quality leaves vast room for speculation.(4)

Capitation does, however, carry a very fundamental certainty with broad implications. Whether the arrangement calls for a fixed sum for treating a particular ailment, a set fee for meeting all of an individual patient's health care needs, or a standard charge for supplying all the Medication for a specific condition, capitation sets limits. Because the health care costs for any given patient or condition are in reality zero-sum rather than fixed, capitation is about pooling patients and rationing. It involves denying services to some patients despite a general contractual commitment to coverage, presumably so that more patients can be covered or receive better care. The implications of capitation are even more significant when set fully in the context of the overall health care reform now underway. Simultaneously and comprehensively, health care is being managed,(5) made for-profit,(6) and consolidated.(7)

Ironically, at a time when health care policymakers and providers are recognizing that quality health care must be made available to more people and with fewer financial resources,(8) Medical science is on the verge of being able to do much more for patients. Advances in molecular biology have been exponential during the last five years, driven to a large extent by the Human Genome Project (HGP).(9) Genetic products are reaching the marketplace,(10) there is a vast pipeline of genetic products in various stages of development,(11) and these visible products are only the predecessors of an entire new generation of therapeutics, diagnostics, and other genetic tests.(12) Cost assessment and rationing, objectives fundamental to capitation, will become more important and complex due to these technological advances. The ethical ramifications of physicians acting as health care rationers and cost-risk sharers will be underscored as physicians, succumbing to the financial pressures imposed by capitation, do much more of both.

A central premise of this Article is that the ethical and legal implications of capitation should be fully assessed and explored by legislators and other health care policymakers, and some safeguards introduced. Another is that this should be done now, before capitation becomes more extensive and the forthcoming generation of genetic and other advanced Medical technologies enters the health care market. The introduction of the myriad of genetic products and new capabilities now in advanced stages of development, with health care resources held relatively constant, will only exacerbate the effects of capitation. From a health policy perspective, failing to establish a socially responsible ethic for the allocation of health care resources now is irresponsible.(13)

The systematic, fundamental changes associated with capitation and the broader health reform movement, coupled with the recent accomplishments of health science, necessitate a new era in Medical ethics. As set forth in Part II, after decades of Medical ethic norms promoting no concern for costs, the time for a socially conscious approach to Medicine has arrived. Commercialization of the forthcoming generation of genetic technologies will make the limits of health care resources undeniable and increase the need for such an approach. Part 11 proposes the framework for a new approach to Medical ethics responsive to the realities of contemporary health care.

Part III applies this framework to health care capitation. Beyond addressing many of the concerns and issues raised in Part II in the context of capitated care, Part III proposes suggestions for defining the roles of care managers and providers in capitated systems. The collective objective of these suggestions is to promote the responsible allocation of health care resources, the patient-centered principles of the bioethics era in Medical ethics, and the principles of contract law. The Article suggests, among other things, that health care policymakers impose disclosure requirements on care managers that emphasize the limitations of the coverage purchased and the correlation between the cost of coverage and services offered. Such disclosures should be made directly to potential subscribers (rather than through their employers) and prior to enrollment. Part IV introduces suggestions for utilizing legal and regulatory mechanisms to realize this objective.


Modern Medical ethics has evolved from two distinct eras of development-one of professional domination and another of interdisciplinary bioethics.(14) During the era of professional domination, Medical ethics was delegated to the province of practicing clinicians. Ethical concepts were used to generate codes of professional conduct enforced by the profession itself primarily through boards and institutional proceedings. "Consistent with the ancient Hippocratic tradition of Greek Medicine, the resulting ethical principles were primarily concerned with maintaining order among members of the profession and fostering public respect for professional authority."(15) Patient well-being was defined in a "highly paternalistic and authoritarian fashion"(16) and beneficence-the best interest of the patient as determined by his or her care-giver-served as the guiding principle.

The era of bioethics commenced approximately in 1970.(17) Rather than being provider centered, bioethics moved Medical ethics to a "a patient-centered framework that defined Medical ethics in terms of individual rights and patient autonomy. This approach is best exemplified by the legal innovation of the inforMed consent doctrine"(18) and enactment of the Patient Self-Determination Act.(19) To understand the patient's perspective, Medical ethics were discussed and defined in a more interdisciplinary manner and with deference to social scientists and theologians.(20) In the deontological spirit of Kantian ethics,(21) patient autonomy became the guiding principle. The bioethics approach "professes, in its most extreme form, that a doctor's role is to execute the instructions from a fully inforMed master, the patient."(22)


Despite the difference in guiding principles, both the professional dominance and bioethics approaches have agreed on a "single-minded devotion to patients' Medical interests without concern for costs, even if this frustrates efficient distribution of societal resources."(23) It is no surprise, therefore, that the health care industry represents the largest single sector of the U.S. economy.(24) The United States spends nearly fifteen percent of its gross domestic product on health care-$900 billion in 1993-and that figure continues to rise at a rate of approximately 9.2% per year.(25)

At the same time health care expenditure has ballooned, the distribution of health care has been too uneven and the costs too high.(26) The escalation of costs has augmented inequalities in distribution, to the extent that patients with coverage receive access to the miracles of modern Medicine such as genetic testing, while fewer people, especially the working poor and children, have any coverage.(27) While some patients with advanced cancer receive autologous bone marrow transplantations that offer them very little chance of health improvement,28 new mothers and their babies allegedly are being sent home dangerously soon after birth,29 many women are unable to obtain adequate prenatal care,(30) onequarter of children are without health insurance at some point during their first few years of life,(31) and 40 million U.S. citizens have no health care coverage.(32) Depending on the extent of Medicare and Medicaid cuts, analysts predict that the number of uninsured Americans will rise to between 45.9 million and 53.7 million by 2002 if reforms are not made.(33) Moreover, even though Medicare consumes 11.6% of all federal spending (approximately seventy-seven percent of the national health care expenditure),(34) the part of Medicare that covers hospitalization will begin running a budget deficit in 1996 and will be bankrupt by 2002.(35)

The underlying problem is that the no-concern-for-costs approach followed during the professional domination and bioethics eras of health care has accompanied and fostered the growth of an industry built on skewed commercial incentives.(36) As a result of third-party payment of health care costs, patient consumers have become indifferent and insensitive to the prices of services and the costs of treatments, seldom considering price and cost even when they undergo elective diagnostic tests and surgeries.(37) Rather than informed and cost-conscious consumers, patients lacking access to cost data have become dependent on providers and other intermediaries to make the right treatment choices.(38) The fact that many health care purchases are one-time events, thereby making patients unable to draw on past personal experiences when evaluating the service and value of their care, augments this problem. Large segments of the U.S. population have perceived access to quality health care as an entitlement protected by their physician, not as a luxury or privilege.(39)

Health care providers, in turn, have competed on nonprice factors of service. They have, for example, over-serviced patients under fee-for-service (FFS) arrangements and reaped hefty profits for doing so.(40) "[T]he poor comparative information and lack of meaningful outcome measures in health care create incentives for hospitals and physicians to compete based on what is observed."(41) Similarly, "[s]uppliers of new technologies have had every incentive to develop quality-enhancing technologies but little incentive to develop cost-reducing technologies."(42)

In sum, there has been a dangerous severance among (1) the decision to purchase health care services, (2) consumption of the services purchased, and (3) payment for those services. Although patients are the recipients of health care services, providers often make the decisions to purchase them-from which drug to prescribe to the most efficacious course of treatment-with very little cost information passed along to patients, and with confidence that insurers will pay.(43) It is not uncommon for patients and their families, free of concern for cost consequences, to demand futile treatments at the end of life even when their doctors do say no.44


In contrast with familiar Medical ethic norms, managed Care is about payers seKing limits.(45) Care managers limit physician dominance and patient autonomy, and the eras of Medical ethics void of concern for costs have come to a close. Modern Medicine is entering a third era in Medical ethics-an era which might be called socioethics, meaning Medical ethics which are more utilitarian or society-based.(46) Today, and even more so tomorrow, the deontological rights of each patient must be balanced, at least to some extent, against the utilitarian principle of doing the most good.(47) The advent of widespread managed care; the coupling of economic limitations with enhanced Medical capabilities, which has resulted in unconscionable discrepancies in health care coverage; and advances in Medical technology that exacerbate these discrepancies together drive the shift toward this new approach to Medical ethics.(48)

1. The Changed Role of Physicians under Managed Care

Managed care is fundamentally changing the role of physicians.(49) Care managers are drawing health care providers into the long-established conflict between payer and patient, whereby "[t]he payer becomes the patient's adversary, rather than advocate, denying payment on claims whenever possible."(50) First, care managers are assuming direct control over patient care decisionmaking, thereby shrinking the discretion to which physicians have grown accustomed.(51) Second, and more troubling, care managers are shifting the financial risk of patient care to providers through payment schemes that connect physicians' financial compensation to their patients' health risks. Whether physicians receive bonuses for minimizing costs(52) or a fixed monthly fee per patient for a comprehensive episode or period of care, a major component of managed care is shifting risks to providers and creating incentives to control costs.(53) Physicians are becoming health care gatekeepers who control access to specialists and inpatient services, who in turn determine whether and where the patient will be hospitalized.(54)

This change in physician incentives and influence over health care decisionmaking by care managers necessitates a shift from health care decisionmaking on a patient-by-patient basis to more organizational decisionmaking subject to public accountability.(55) Although legal liability may address some of the more egregious instances of inadequate care and instill incentives for providing quality care, it cannot be relied on to police more subtle and systematic lapses in care. This is especially true when patients lack information necessary to assess their care and place trust in their providers.(56) As observed by Professor Starr, "[t]he very circumstances of sickness promote acceptance of [physicians'] judgment."(57)

There already is some indication that, to ensure minimum standards of patient care, specific patient care issues will have to be addressed in a publicly accountable, community health policy manner--whether that community be the patient base of a managed care organization (MCO), a state, or the nation.(58) The fates of patients cannot simply be entrusted to their physicians under the assumption that doctors have the incentives and discretion to provide satisfactory care. In particular, control over care decisionmaking by care managers will necessitate more regulatory safeguards to ensure minimum care. To protect patients' interests and the discretion of physicians to treat them adequately, clearer ethical standards will have to be established and some regulatory safeguards imposed.

2. The Need to Instill a Social Conscience

Due to the deference shown to the commitment of physicians to their patients, "the dominant position among Medical ethicists and the Medical profession in general is a nearly absolute moral prohibition against physicians ever considering the costs of treatment to any degree."(59) It follows from this position that society should make any necessary rationing decisions, not practitioners.(60) Even at the collective societal level, Medical ethicists generally unite in opposing rationing incentives and cost-effectiveness criteria for health care.(61) In light of the no-concern-for-costs mentality of the professional domination and bioethics eras of Medical ethics, presumably the majority of Medical ethicists share this position. For decades, Medical ethics have been administered on a patient-by-patient basis, and providers within the United States, trained under the traditional scheme, have escaped contemplating the zero-sum reality of health care. Cost-effectiveness simply has not been considered.(62)

Medical ethics should bring health care and patients together, not drive them apart by making insurance unaffordable and health care unobtainable.(63) As expressly recognized at the state level by Oregon,(64) implicitly recognized through the spread of managed care, and evidenced by the fact that 40 million U.S. citizens have no health care coverage despite the exorbitant resources allocated,(65) rationing health care resources is necessary.(66) The challenge of contemporary Medical ethics is to maintain, if not enhance, quality care and patient trust in providers while instilling in both providers and patients a social conscience, meaning an appreciation for the limits of health care resources. The ultimate goal should be to internalize cost-conscious calculations on the part of physicians, as in Great Britain where, "despite the severity of financial constraints--the British system spends only one-third per capita of what ours does--physicians seldom consciously engage in explicit cost-benefit calculations."(67) Moreover, "British doctors still profess just as strong an ethic of absolute quality."(68)

It is possible to ration health care resources without making health care substandard. For example, simply becoming aware of the existence of and prescribing less expensive drugs, avoiding referrals to specialists when there is high confidence in a diagnosis and prognosis, and denying marginally beneficial treatments (especially expensive ones) would have a profound impact on health care resources and make insurance coverage significantly more affordable.(69) A presumption against trying expensive treatments highly unlikely to work unless the patient has supplemental insurance or the personal means to pay for them must replace the presumption in favor of trying any treatment that might work.(70) Fully informing patients of the option of purchasing such services outside the scope of their primary insurance should fulfill fiduciary responsibilities and help to maintain patient trust. The effectiveness of such an approach could be maximized if (1) patients understand the limits of their coverage when they purchase it, (2) patients understand that rationing is making their insurance affordable, and (3) health care ethical norms are expanded to more comfortably address cases in which high costs are not justified by minor expected benefits.(71)

It is time to lessen the ethical taboo against physician rationing in order to do the most good with our health care resources.(72) With almost 10,000 diagnostic entries in the World Health Organization's International Classification of Diseases and almost 10,000 medical interventions listed in the American Medical Association's (AMA) Current Procedural Terminology, "[a] complete and scientifically valid set of rationing rules would entail the impossible task of developing rigorous empirical information ...."73 Accordingly, the only way to ration effectively and with sensitivity to each patient's condition is through the medical profession, meaning through professional ethical norms that are socially conscious. No grand transformation in health care expenditure accompanied by quality care is possible without instilling a medical ethic sensitive to the injustice of wholly unaffordable insurance and unobtainable health care. Providers must fulfill the third fundamental obligation embodied in Hippocratic tradition-"to refuse to treat those who are overmastered by their diseases, realizing in such cases that medicine is powerless."74

3. Exacerbation of the Need for New Ethical Norms

Modern medicine has made the need to ration undeniable. During this century, medical technology has impacted human health profoundly. Life expectancy from birth has climbed from fifty-four years in 1920 to seventy-five years in the early 1990s, and the death rate from disease has fallen from 1212 per 100,000 in 1920 to 800 per 100,000 in the early 1990s.(75)

The paradox of medical technology is that, though it is responsible for alleviating human suffering and disease, it also is responsible for raising health care costs.(76) The reasons are multifold. First, longevity is the equivalent of susceptibility to new, more complex diseases that are more difficult to treat and require specialized,(77) technology-intensive care.(78) In other words, "[i]nnovation has . . . Ied to longer life, but in so doing has created an even bigger challenge, represented by chronic, progressively debilitating diseases."79 Accordingly, effective medical technology increases the need for more advances and scientific research and development (R&D), and also increases consumption of technology-intensive, specialized, and expensive treatments.(80) "Thus, paradoxically, even if another `penicillin' was discovered that inexpensively cured the prevalent diseases of today, the population would eventually age to the point where some new set of diseases would be killing (much older) people at essentially the same rate."(81)

Second, by prolonging life, medical technology has greatly increased the ranks of the elderly, the nation's biggest health care consumers. …

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