The marked variation among metropolitan areas in payments to physicians underscores the lack of consensus among physicians about which services are required. Moreover, the practice style in a given community appears to be influenced not by the aggregate supply of physicians but rather by the mixture of primary care physicians and specialists.

In an effort to encourage further debate, we have described one method of physician profiling. Profiling data help identify and characterize differences in practice style to which individual physicians or hospital staffs can respond. Because profiling is not based on rigid rules, it is a cost-containment strategy that can easily accommodate legitimate exceptions; it is therefore preferable to methods in which the appropriateness of each clinical decision is judged separately.

Payers are increasingly using diagnostic data from outpatient encounter records to adjust the payment to health plans. Although much has been written about the ability of such data to predict health care costs, little has been written about the data itself--its quality and availability. Fee-for-service (FFS) data face several threats to their validity, including the possibility that they may seriously underreport diagnoses. Because the systems and incentives that yield FFS and managed care diagnosis data are quite different, they may not be comparable, depending on circumstances such as audit rules. The next generation of risk adjustment models should be designed around the capabilities and potentialities of plans' information systems.

Proposals that reduce inpatient physician expenditures also would reduce facility expenditures in the long-run.