Effect of Costly Care on Kaiser Physicians' Profits

To understand how the income of Kaiser physicians is effected by the amount of tests and treatment they prescribe, it is necessary to understand "capitation payments." Kaiser physicians work under a capitation-payment system. The physician groups receive a fixed payment per year for each medical plan member, regardless of the amount of care provided.

  • The Kaiser Health Plan pays the Medical Group a certain amount, and the Medical Group pays the doctors. A summary of these steps is provided below.
  • Each year at Kaiser Permanente parent corporation, the Health Plan and the Medical Group in each region enter negotiations to determine the total amount of money that to the physician group, using the cost of the prior year as a guide. This amount includes administrative and other expenses associated with operating the Medical Group.
  • The Medical Group calculates the amount of money (the "capitation") that the Health Plan pays to the Medical Group for each member.
  • If at the end of the year the actual cost of the medical care is less than the initial contractual amount, the Medical Group physicians share in the surplus. It is the total costs resulting from the physician group upon which the capitation bonus is paid at the end of every year, in addition to each physician's salary.
  • The Health Plan reimburses the Medical Group physicians for several medical costs such as organ transplant that are exceptional occurrences.
  • Salary is the primary compensation paid to the physicians in the Medical Groups  (which is augmented by any profit at the end of the year).

The Bright Spot at Kaiser

The Kaiser group places great emphasis on promoting a healthy life style. That in a lower need for expensive treatment, which improves the end-of-year profit received by the Medical Group physicians. For younger and healthy members, that works fine. And often the cost to be a member is less than an admitted for-profit medical plan.

The Reverse, or Deadly Side

For older members of Kaiser, including those developing cancer, including those that have been members for 40 or more years, the captivated payment arrangement results in less end-of-year additional income for the physicians. Their need for periodic CT or PET scans to detect cancer or other medical conditions, and the costly cancer drugs, are an incentive for denying tests, denying surgery to cancer patients, and encouraging cancer or other patients to do nothing until the advancing cancer produces intolerable pain.

Incentive for Denying Costly Tests and Treatment

Obviously, the "capitation payments" that results in increase compensation for the physicians when they withhold costly treatment, to the members, such as the high cost of many cancer drugs, carry an incentive for many physicians to withhold expensive tests such as CT scans and treatment, especially costly cancer treatment. It is the senior member that would be most effected by this self-serving withholding of care.

Sampling of Some Publicized Medical Outrages Involving Kaiser


Since its founding in 1945, Kaiser Permanente has was founded in 1945. It provides health care under partnership among three entities:

Kaiser Foundation Health Plans.  These are nonprofit regional health plans. They contract with physician groups for prepaid (capitated) comprehensive health care services.

Kaiser Foundation Hospitals. These are also nonprofit corporations. They either own, operate, or contract for hospital services to provide care for Kaiser Foundation Health Plan members.

Permanente Medical Groups. These are medical groups composed of physicians in various Kaiser Permanente regions. These physician groups contract with Kaiser Foundation Health Plan and Hospitals to provide medical services to members.


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