Managing the Unmanageable: The Nature and Impact of Drug Risk in Physician Groups

Abstract

As drug costs rose in the 1990s, health maintenance organizations (HMOs) began transferring risk for prescription drug expenditures to physician groups. With principal-agent theory as a framework for understanding drug-risk transfer, we used a multiple case-study design to examine the relationship between the level of drug risk that a physician group accepts and the physician group's adoption of drug-use management strategies. The data demonstrated that adoption of drug-use management innovations was not related to level of risk for pharmacy costs and that factors other than drug-risk level (e.g., contracting and data issues, financial and market factors, and physician group assessments of the fairness and incentives of risk contracts) can influence the principal-agent relationship. The data also revealed a novel form of information asymmetry between physicians and HMOs and unexpected failures of HMOs to fully enable their physician-agents. We believe these observations reflect the complexity of relationships in the health care system and have implications for the use of incentives. Based on principal-agent theory and our findings, we offer an alternative approach to drug-risk contracting that reduces physicians responsibility for aspects of drug use that are beyond their control while maintaining the incentives to manage drug costs and use that were the original intent of drug-risk contracting.