Does provider variation matter to health plans?

Variance in treatments prescribed by an individual provider may indicate higher quality through better matching of patients to treatments or it may indicate uncertainty about the healthcare production function. It is unknown how health plans respond to provider-level treatment variation. We use a model drawn from the portfolio selection literature, which examines the choice among risky assets, or in this case, providers with heterogeneous treatment variance. We test this model on data from a behavioral healthcare vendor that exercises some control over provider selection. We find little evidence that the plan responds to provider-level variance. (c) 2005 Elsevier B.V. All rights reserved.