Alternative payment models and physician treatment decisions: Evidence from lower back pain

The capitated payment model has been used to address the high cost of health care. Under capitation, physicians are compensated with a fixed amount per patient, regardless of the services generated. We provide new evidence on how the capitation payment model changes physicians behaviors by studying the treatment of lower back pain, as this type of treatment provides substantial scope for physicians discretion. We use data from 2003 to 2006 from a large database of employer-sponsored health insurance claims and leverage capitation variation within the plan and physician to mitigate selection concerns. The results show that the treatment intensity -primarily derived from therapy and diagnostic testing -of patients under a capitation system is 7-12% lower than that of similar patients in a non-capitated plan. Furthermore, we find no evidence of increased relapse rates for patients in a capitated plan.