One of President Obama’s plans for reducing healthcare costs is to mimic the way Cleveland Clinic or Basset Health Care compensates physicians — salaries rather than so-called fee for service. There is no question that the absence of incentives to aggressively hold down costs contributes to healthcare inflation. Superficially, paying physicians with a salary sounds nice but it ignores the way physician care is assessed and the way the dollars flow even in large integrated healthcare organizations. Putting it another way, salaried physicians still get paid for what they do.
The Medicare fee schedule is the Rosetta stone for physician reimbursement. Here is the formula for the Medicare fee schedule:
Budget Neutrality Adjustor Values
Year 2006 & Earlier: N/A
Year 2007: 0.8994
Year 2008: 0.8806
Year 2009: N/ANon-Facility Pricing Amount =
[(Work RVU * Work GPCI) +
(Non-Facility PE RVU * PE GPCI) +
(MP RVU * MP GPCI)] * Conversion FactorFacility Pricing Amount =
[(Work RVU * Work GPCI) +
(Facility PE RVU * PE GPCI) +
(MP RVU * MP GPCI)] * Conversion Factor
Fortunately, Medicare helps by clarifying all this:
The Medicare physician fee schedule amounts are adjusted to reflect the variation in practice costs from area to area. A geographic practice cost index (GPCI) has been established for every Medicare payment locality for each of the three components of a procedure’s relative value unit (i.e., theRVUs for work, practice expense, and malpractice). The GPCIs are applied in the calculation of a fee schedule payment amount by multiplying the RVU for each component times the GPCI for that component.” To achieve cost controls, there is the budget neutrality factor which is supposed to reduce the value of each activity measured by the formulas. It has been rescinded by Congress every year.
Got that? Welcome to our world.
What this all means is that Medicare pays physicians a fee based on the amount of work, the amount of malpractice risk, the amount of facilities costs associated with that activity, and a geographic factor to reflect increased costs, mostly in urban vs. rural settings for each and every patient encounter. Private insurance companies pretty much have adopted the Medicare fee schedule and pay physicians in pretty much the same way as Medicare.
The Cleveland Clinic and any other healthcare facility has to actually earn the dollars it pays physicians and the way it earns the money is to bill Medicare (and all the other insurance plans, public or private) through this fee for service system. Therefore, while physicians can be salaried, the money that pays their salary comes from the amount of work they do and is carefully assessed by each institution by measuring those “relative value units” that Medicare created. Most institutions that employ physicians (and a very large fraction of U.S. physicians are employed), use the number of RVU’s to determine what physicians are paid. Not doing it this way would be crazy for otherwise the individual who cared for 75 patients a day would have the same compensation as someone who sees 10 patients a day even though they were each in the same specialty.
Therefore, even if physicians are salaried, the salaries will be based on activity and the revenue to the institution or practice that hires the docs will be based on how much they do. Salaries are not enough to change the dynamic. Real healthcare reform might pay physicians prospectively to care for a whole population of patients and let them and the patients decide what treatments and approaches make sense. How to accomplish this is not simple. True reform, and not some superficially attractive approach as has been advocated by reformers who really do not understand the healthcare system is the real “end game”. It won’t be created by tinkering with the cost of health insurance.
12 responses so far
1 ottovbvs // Jul 30, 2009 at 7:21 am
……..Goldfarb is somewhat intellectually dishonest to put it mildly. About a week ago he had a diary where he was complaining because doctors were reimbursed on a fee for service basis whereas hospitals were paid a flat fee and this was disadvantaging hospitals. This weeks spin is that we must preserve the fee for service structure because putting doctors on salaries rather than paying them by volume would have no impact on costs. Funny because a lot of healthcare professionals and studies have shown it would have a major effect and that’s why many institutions have already switched to it with consequent savings.
2 barker13 // Jul 30, 2009 at 7:57 am
“One of President Obama’s plans for reducing healthcare costs is to mimic the way Cleveland Clinic or Basset Health Care compensates physicians — salaries rather than so-called fee for service.”
“Salaries” implies working for an employer. Aren’t most doctors either self-employed or “contract employees?”
In any case, unless Obama’s plan is to basically emulate the VA example and “own” the hospital/treatment facility and all it’s equipment with all employees from grounds keepers to surgeons working directly for the government I’m not quite sure how this plan could possibly be expected to work.
Furthermore, assuming Obama and the Dems did “VA” the system nationwide (getting past court challenges all along the way) they’d still be faced with pricing care at high enough levels not to operate at a loss.
Finally… if the goal is for government to employ the vast majority of doctors somewhere down the road… you’re gonna need a heck of a lot more doctors willing to work for the government than I’m guessing exist now (or would ever exist in the future).
BILL
3 sinz54 // Jul 30, 2009 at 9:51 am
barker13 asks: “Aren’t most doctors either self-employed or ‘contract employees?’”
That’s the point–and that’s the problem.
If you really want to bring down health care costs and keep them down, you have to fundamentally change how medicine is delivered in this country. You could totally zero out the insurance companies’ profits, and after that you would find health care costs rising again–because of the way medicine is practiced.
Encouraging doctors to join into medical groups, in which they will be salaried by the group, is one promising avenue. (Virtually all of my own doctors are in groups of three or more doctors. That’s the wave of the future in Massachusetts where I live.) That helps eliminate incentives for unnecessary visits and concomitant tests.
Another is to expand the base of the pyramid. We need more primary care physicians, and lots more Nurse Practitioners (NPs). Doctors don’t like NPs much, because they see them encroaching on their turf. So be it. That’s competition–the American way.
4 liv&win // Jul 30, 2009 at 4:26 pm
Clarity: HMO’s initially primarilily used a “salary” compensation system known specifically as capitation. The HMO paid the primary care physician $x per member per month to compensate the doctor for “all” the primary care the patient required. Lots of moving parts and lots of change over time and doctors joined medical groups. Medical groups are quasi-insurance companies which help the doctor bill (fee-for-service) insurance companies, approve or deny referrals and many other traditional insurance company functions. For this, the medical group gets paid a discounted fee-for-service. Private providers generally accept 80% of their billed amount, subject to some cap. Their reimbursement contracts provide that the billed amount and the cap adjust annually. Capitation worked great at keeping costs steady. Then doctors complained, negotiated more control and more reimbursment and reverted to discounted fee-for-service arrangements…costs increased steadily ever since.
More clarity…Kaiser Permanente is a “non-profit” health care company. they own their brick and morter and equipment. They hire and employee all staff with the exception of the doctor. the doctors all belong the the Permanente Medical Group. this part of the company is very much FOR PROFIT. Last I checked (this morning) Kaiser is not all that much more competitive than other HMO programs. Although they have consistently improved their delivery every year for the last 15 years I have studied them. All their hospitals are retro-fitted and they have electronic medical record technology which is utilized across their business.
Medical groups are not a magic bullet as they are more likely to increase profit, than decrease the cost to the consumer. Also, they are closed circuits, meaning you can’t access care outside of the medical group.
My suggestion has always been to separate primary care from other care, have all primary care doctors on salary based on a per member per month rate with limited membership which statistically can be handled by one doctor. the number happens to be 2000 patients. What if 2000 of your neighbors went to the best doctor in the community and said, we want to pay you $250,000 a year. We won’t sue you, we won’t ask you to bill an insurance company. In fact, we also want to hire two nurses who can be trained to do a lot of the stuff you do. We’ll pay them each $50,000. Doesn’t that sound like a good deal? It would cost the patient $14.58/per month for primary doctor care. Oh, yeah, we’ll pay the rent. that will add another $1.50 per month to our cost.
I actually would build this out quite a bit, adding in all primary care (mental health, chiropractic, vision and oral health ). But an interesting thing happens when you totally exclude these claims from the cost of providing insurance. The cost of the insurance and the cost to administer the insurance drops dramatically. 90% of claims are primary care. that is a dramatically reduced work load.
Layer on top of the primary care coverage private individual medical insurance which is based on fee-for-service Medicare rates. The consumer can pick a plan which reimburses at the medicare rate, or medicare plus 25%, 50%, 75% and 200%. Using quality outcomes, education and length of experience, doctors would be ranked at 1, 1.25, 1.50, 1.75 and 2.0. If you wanted to go to the very best doctor in the country, he would earn his 2.0 (or double pay) and you would choose between paying the insurance premiums of a 1.0-2.0 plan. Either way, you pay for what you want and you have the freedom to do what you want.
5 ottovbvs // Jul 30, 2009 at 6:06 pm
liv&win // Jul 30, 2009 at 4:26 pm
……….You never did fess up you worked in the industry as you obviously do…..go on be a man not a mouse…..it would also make your contributions more credible to those few like myself who follow them …..otherwise a not too slanted description of how the system works in practice……but then you get into pie in the sky land…….many of the European systems use the capitation formula for primary care……it seems to work although as ever there are arguments about reimbursement levels………what you never really address is how we make a $2.4 trillion system into a $1.4trillion system which would still put us at the top of the peer group in expenditures but means $1 trillion of economic activity has to be squeezed out of the system over say a ten year period
6 sdspringy // Jul 30, 2009 at 11:39 pm
Liv&win, thanks for the info, separation of care seems like a win/win. Don’t pay any attention to Otto. For anything to be valid with Otto, it first must be uttered by Pelosi. Who now hates the insurance companies, healthcare professionals, and anyone involved with healthcare. So as you can see, Otto feels the same way.
And very similar to Dem legislators who don’t read what they vote on. Otto likes to comment on what he doesn’t read, or possibly comprehend.
The part where you state that 90% of the claims workload is from primary care and eliminating that would be a major cost savings seems very plausible.
7 SFTor1 // Jul 31, 2009 at 1:59 am
I don’t understand these continued ad hominems on Otto. He seems quite sensible, not to mention that he seeks out a forum where he will meet opposing opinions, thereby demonstrating his interest in dialogue.
Go Otto.
8 barker13 // Jul 31, 2009 at 8:46 am
Re: Liv&win // Jul 30, 2009 at 4:26 pm –
Wow…
Thanks, L&W! Very enlightening. (*NOD*)
Re: Sftor1 // Jul 31, 2009 at 1:59 am –
“I don’t understand these continued ad hominems on Otto.”
Really…???
Hmm… interesting; very interesting…
(*GRIN*)
BILL
9 midcon // Jul 31, 2009 at 1:25 pm
liv&win, Who would the primarcy care staff work for in your scenario – would it be something like a local or regional co-op? Would a local or state government create an HMO for primary care similar to something like Kaiser? Do you perceive this as an open system that covers all residents of the region or would it be restricted by income level? BTW – RNs are in short supply – you’d have to pay a lot more than $50K for them.
I used to have Kaiser when my children were growing up. At the time I felt Kaiser was very good at primary care but their specialty care had a long way to go. Of course 90% of what kids need is primary in nature. Kaiser specialty care has come a long way since then.
10 SFTor1 // Aug 1, 2009 at 3:48 am
Kaiser killed the father of an ex-girlfriend of mine. They thought it was a little cough, but it was really small-cell lung cancer. It was actually a pretty famous case.
That was a while ago. One of the better articles I have read about the cost of health care cost was in the June 1 New Yorker. The Cost Conundrum, by Atul Gawande.
Well worth reading.
11 SFTor1 // Aug 1, 2009 at 3:58 am
Is it just me, or does it seem like a lot of the contortions around getting the health care costs under control have at least partial root in the for-profit nature of the system? You can make more by treating more.
Isn’t that a problem in and of itself? No? Really? How can it not be? Combine it with the threat of litigation and you have a system that actively encourages over-treatment, also known as “defensive medicine,” which reaches the apex of incoherence in the rampant prescription of antibiotics for viral infections. No? This is not incoherent? Really? How can that etc. etc.
12 sinz54 // Aug 1, 2009 at 9:48 am
sftor1: Profit has very little to do with the fact that the cost of health care continues to rise at a race that outpaces GDP growth. (The profits of the providers or the insurance companies aren’t rising at such a fast clip.)
There are other profit-making arrangements besides fee-for-service. If doctors are salaried by a profit-making group, paid a fixed amount, then there is no direct incentive for doctors to schedule lots of visits and lots of tests for patients.
Doctors don’t prescribe antibiotics so they can make a profit. They don’t make any more money when they whip out their prescription pad and give the patient a prescription. Doctors prescribe antibiotics because their patients, sick with a viral infection, are apt to demand something from their doctors.
In any case, prescribing antibiotics for viral infections is only a tiny part of the total health care cost picture. Surveys have repeatedly shown that it’s the BIG chronic illnesses–cancer, Alzheimer’s, arthritis, heart disease, kidney disease, AIDS–that are the big cost drivers. We’re able to keep patients alive–but often their disease cannot be cured, so their disease requires constant management and expensive treatments.
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