How Should Doctors Get Paid?

In all of the ferment surrounding the discussion of the healthcare reform bills making their way through the Congress I’ve seen more deconstruction of our healthcare system recently than ever before, much of it focused on compensation. I think this is very constructive.

Typical is this op-ed in the Boston Globe from David Osborne:

If structured correctly, a new public program could help transform the healthcare marketplace. But if it’s Medicare-for-all, with fee-for-service reimbursement, it could intensify the rate of healthcare inflation and make universal coverage unsustainable. The crucial issue is not public or private. It is the incentives and performance standards built into the system. If we don’t change those, we’re sunk.

Put simply, we must change the way we pay for care. The financial incentives in our system are backwards. Under fee-for-service payment, providers make more money by performing more services. If a hospital makes a mistake and the patient has to be treated again, the hospital makes more money. If a provider group figures out economical ways to keep patients healthy, it starves.

He advocates a system under which physicians are paid an annual fee for each patient they treat, a system known as “capitation”:

We need to replace fee-for-service reimbursement with price competition between integrated providers that are paid by the year, not the procedure. They, in turn, should pay their doctors and hospitals lump sums for cycles of treatment for medical conditions – such as a knee replacement or a year’s treatment of diabetes. In Massachusetts, a commission created by the Legislature recommended a shift to such “global payments.’’

The outcomes of that care should be measured and reported to buyers (including health plans, consumers, employers, and public programs like Medicare and Medicaid), so they can make choices based on both price and quality.

further advocating an immediate conversion of Medicare to a capitation scheme.

Our current system, as Mr. Osborne notes, is what is referred to as a “fee for service” system. Under this system physicians are compensated based on the number and types of procedures they perform. More procedures—more pay. More complicated procedures—higher pay.

Under such a system physicians are incentivized to perform more procedures, e.g. tests, examinations, and so on, and to gravitate towards specialties in which the procedures performed are compensated at a higher rate. Note, too, that under such a system physicians are able to respond to changes in compensation for individual procedures by increasing the number of procedures performed. We shouldn’t be surprised if that’s what they do. In comments in one of my previous posts physicians who did that were characterized by the commenter as “shmucks”. The better word would probably be shmegeges.

While it might be true they are shmucks who are responding to the incentives that are presented to them.

The capitation system has already been mentioned, above. Italy, which has based its healthcare system closely on the British model, uses a capitation system. In Italy employers are required to provide healthcare insurance for their employees. Roughly three quarters of healthcare expenses are paid by the government out of premiums and general revenues, the remainder by private insurers and individuals.

In Italy you register with a physician who then is paid an annual fee for treating you. By most accounts healthcare is pretty good in Italy, although possibly not up to Northern European standards. Italy has the highest proportion of primary care providers of any OECD country, a multiple of the number we have here. However, healthcare costs are in increasing in Italy, too, albeit not as quickly as they are here, and Italy is having some difficulty in attracting physicians.

There are several problems with capitation. The first I’ve mentioned several times before: physicians are incentivized to limit their practice to the healthy, i.e. adverse selection is transferred from insurers to physicians. I honestly don’t know how Mr. Osborne’s proposal would work unless physicians were required to take every Medicare patient who presented him- or herself as a patient.

Another problem is that the United States is a larger, much more dynamic society than Italy is. People move, even elderly people. The problems of determining capitation rates would be substantial.

Another approach to compensating physicians is the approach taken in the hospitals in the United Kingdom. Nearly all physicians working in hospitals are employees of British National Health Services (the fifth largest employer in the world) and are paid a salary. Most general practitioners are self-employed and paid by the BNHS on a capitation basis. The criticism most commonly made of the British system is that it’s sort of like having your healthcare provided by the post office, combining the worst features of each. On the other hand the system avoids some of the perverse incentives problems we have here and is able to deal with a problem we have little way of coping with: underserved communities.

Costs are rising for BNHS, too.

For reasons suggested above I’m skeptical that we’ll be able to change from our current system of compensation for physicians to another system and I’m further skeptical that we would see significant benefits if we did.

If anyone knows of other compensation systems that are in place around the world, please leave references in comments.

4 comments… add one
  • Jimbino Link

    I suppose we could get our food from the grocer either by capitation or fee-for-service. Under capitation, the grocer would get a fixed amount per year for keeping me in food. Under fee-for-service, the grocer has every incentive to sell me food I don’t need, probably by putting free samples in the isles.

    Stupid! And stupid for health care as well. The way to control costs in health care is to privatize it entirely, so that every cent a person spends at the doctors office is his own, just as in the grocery store.

    Some folks will want high-priced food and high-priced medicine. Fine, as long as I’m not paying for it.

    You mention the healthcare systems of Britain and Italy. Well, if one of them needs healthcare while vacationing or residing in the US or Brazil, say, their much vaunted healthcare systems will provide them zilch! They will have to pay out-of-pocket just like the Amerikan tourist.

    Only the situation for the Amerikan expatriate would be much worse. Neither Britain nor Italy taxes the income of an expatriate, while the Amerikan under Obamacare will have to renounce his citizenship in order to escape Obamacare fees while residing overseas.

  • Brett Link

    Stupid! And stupid for health care as well. The way to control costs in health care is to privatize it entirely, so that every cent a person spends at the doctors office is his own, just as in the grocery store.

    The problems with that are

    1. We have a mandatory emergency care law (the law that prevents turning away patients at the emergency room due to inability to pay), so if the uninsured show up and have huge medical costs, you’re going to pay for it anyways (whether in higher service fees, or otherwise).

    2. The uninsured (and underinsured – let’s not forget them) don’t live in a vacuum – their illnesses and loss cost society.

    Italy has the highest proportion of primary care providers of any OECD country, a multiple of the number we have here.

    That doesn’t surprise me – a primary care providers’ services are usually the cheapest among doctors, so they can still do quite well under a capitation system (even if they have an incentive to only take healthy patients, and to get rid of sick ones). For specialists, on the other hand, the adverse selection risk is huge – you’d basically have to outlaw private insurance or payment for many of the more expensive services, or else create a kind of universal mandatory catastrophic insurance for the really high cost services in addition to the capitation system.

    To be honest, I’d rather just do a combination of universal catastrophic health insurance plus a mandatory contribution to a health savings account in terms of taxation – the Singapore system. You could further the incentives by setting up the rule that as long as someone makes a certain number of check-ups with a general physician per year, the remaining money in the HSA gets transferred to an IRA for your use at the end of the year.

    Another problem is that the United States is a larger, much more dynamic society than Italy is. People move, even elderly people. The problems of determining capitation rates would be substantial.

    Definitely. This is my main complaint with the public plan being proposed as well – it ignores the fact that there is significant variation on a state-by-state basis in costs for medical care. I’d much rather “federalize” the whole program, and have the states set the compensation rates (or capitation rate), with the federal role being mainly to investigate abuses, provide funding, and occasionally overrule a regulation.

    The criticism most commonly made of the British system is that it’s sort of like having your healthcare provided by the post office, combining the worst features of each.

    The NHS has gotten a lot better than it was in the middle-late twentieth century, when funding was always tight. That said, I’m rather not have the government owning the “supply” side of medicine – it’s usually easier to make screw-ups that way.

    For reasons suggested above I’m skeptical that we’ll be able to change from our current system of compensation for physicians to another system and I’m further skeptical that we would see significant benefits if we did.

    There was actually a good article in the New York Times about the Mayo Clinic, and why it might be difficult to emulate. As it pointed out, the capitation system generally works best when you have a bunch of doctors working in teams in a multi-specialty setting. The only problem is, most doctors in America don’t work in that setting, and don’t want to, so it doesn’t work well.

  • Jimbino Link

    Brett,

    Your plan is definitely better than what our COTUS has proposed.

    You err, however, in thinking emergency care would take up the slack in a privatized system, since emergency care only serves ti stabilize the patient, whether he can pay or not. It does not provide cancer treatment, inoculations, or any other care that is not emergent.

    How do you propose dealing with the problem of care for overseas tourists and expatriates?

    What do you think of:

    1. Requiring all healthcare providers to publish their prices, like Sears and Walmart do? No fair saying that it would be too complicated, since it is already being done by IDC-9, DRG and CPT coding for Medicare, Medicaid and Insurance reimbursement.

    2. Requiring all healthcare providers to give all comers MFN status: no price discrimination except, perhaps, for volume and the like, just like Sears and Walmart do.

    3. Tax all healthcare “benefits” as regular income.

    4. Require all healthcare providers to “unbundle” all services so that, for example, they have to charge 3% extra to those who pay with credit card and something like 35% extra to those whose care involves Medicare, Medicaid or Insurance record-keeping, filing and delayed payment.

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