The effects of managed care on medical referrals and the quality of specialty care

This paper analyzes the role of referrals in the provision of surgical services. Primary physicians in managed care control patient access to specialists, while referrals in traditional insurance plans are less constrained. The traditional, fee-for-service insurance market is shown to achieve appropriate incentives for high quality care. In contrast, physicians with bad reputations may not lose HMO's referrals, owing to differences in incentives to cut costs. Empirically, we find that managed care may protect a physician whose reputation has been damaged by providing a source of referrals when shunning occurs in the FFS sector following a malpractice claim.