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How Doctors Get Paid

In a recent post I asked for ideas and advice about the difficulty we’ve been having at Skyvision Centers scheduling emergency patients in a way that did not adversely affect the experience enjoyed by scheduled patients. The responses I received demonstrated a deep understanding of consumer service businesses, supply and demand, and classic business theory. Given the superior intellect of the readership of this blog this came as no surprise. That is except for the fact that almost all of the suggestions that I received were unusable because almost all of them assumed a free market for the services offered and received. Nearly everyone suggested that we charge more for ER services, or that as the senior doctor I should personally charge more for services I perform. Essentially none of the people commenting has any understanding of how doctors are paid.

Since I know most of the people who offered their thoughts this surprised me.  It certainly doesn’t help that neither our elected officials nor our esteemed professional leaders seem to be terribly interested in educating the lay public about how money moves around in this $2 Trillion part of our national economy. The fact that our system of “health insurance” actually insulates all of us from the true cost of our care only leads to more confusion. The recent Business Week cover article on the “$618,616 Death” is a good illustration.  Allow me to step into the breech.

Once upon a time doctors came in two varieties: the esteemed physician who visited and cared for the sick in his own town, and the traveling charlatan who rolled into town with promises of health and longevity out of the back of a covered wagon or Model T. The town’s doctor owed his position to a lifetime of selfless service to his neighbors, while the traveling expert made his name through clever marketing.  They had very little in common, these two different types of early doctors. Indeed it was to protect the average citizen from the hucksterism of the traveling “expert” that the original cry came out to license doctors. What they DID have in common, and which neither of them would share with their present day brethren, is that they both were paid directly by their patients. The town doctor might be paid in chickens or eggs (it didn’t matter which came first), and the “doctor on wheels” always insisted on cash, but both were paid face-to-face by their respective patients. A service or product was provided, a fee agreed upon, and payment exchanged.

So what happened? Well, healthcare became free of course! No one pays for their healthcare, at least insofar as they know. Rare is the patient who has any idea about how much their care or their medicine or their hospital stay actually costs. A tiny little throw-away law written in the WWII days of wage-controls that allowed businesses (but not individuals) to provide health insurance as a pre-tax expense (and the willingness of labor unions to negotiate for health benefits instead of wages), followed by the creation of Medicare in the mid-1960’s has combined to insulate most Americans from the cost of their care.

So what does this have to do with how doctors get paid? Well, Medicare started to run out-of-control cost increases in the early 1980’s, starting first with hospital costs. This begat the “alphabetization” of medicine. DRG’s, RBRVS, HMO, PPO–medicine in America got over run by capital letters! In short every insurance “company”, led by Medicare and the federal government, got into the business of paying less for medical care and did so by entering into progressively more exclusive and restrictive contracts with doctors and hospitals. Wanna take care of Aetna patients? Sure. Here are our rates. Take ’em or leave ’em. Take away the ability to charge patients for the amount of money not covered by the insurance contract, demand that doctors either opt fully in or fully out of a plan, and tie all of the fees to a politically driven budget (Medicare) and poof! Away goes not only a doctor’s ability to set her fees but also her ability to pass on mandatory cost increases like rent, payroll taxes, and insurance. In comes the era of irrational pricing and willful price ignorance like that seen in the $618,616 death that actually cost something like $250,000.

It’s not market-based, it isn’t capitalism, and it ain’t healthy.

For some 15 years now every single one of your doctors has experienced a decrease in payment for each service they have provided to you. That’s right, despite the dramatic increase in the quality of care in the United States, the dramatic improvements in the comfort and health of our senior citizens, every hip replacement and cardiac bypass and cataract surgery is now paid at a rate that is a fraction of the rate paid in 1990. Total expenses for medical care have gone up only because more medical care is being consumed, NOT because the cost of that care has increased. The only inflation that has occurred in medicine is in the overhead costs borne by your doctors and hospitals. Wages, rent, insurance, licensing fees, payroll taxes…all of these have kept pace with the overall rate of inflation in our economy. Fees have decreased in real dollars, not just  inflation-adjusted dollars.

To be sure some of these fees were too high to begin with, set at a level that reflected pricing anomalies caused by prior government contracting. A good example of this comes from my world of eye surgery. When I finished my residency a cataract surgery typically cost somewhere in the range of $2200, clearly too high given any reasonable market evaluation. We now do cataract surgery that gets better outcomes with a nearly 0% significant complication rate done more quickly and with a better patient experience. Today’s fee? $649. Pretty good value, that, seeing how it also includes 3 months of postop care. Doesn’t matter if the surgeon is a nationally recognized superstar or the kid who barely scraped by to graduate from his residency, $649. When you take into account the overhead structure of an eye surgeon’s practice, time spent training, risk accepted, and constant seeking of better technique and technology the fair-market trading value is probably closer to $1100 or $1200 per case.

So what’s coming? Well, as I type this the U.S. House of Representatives and the Senate are getting ready to usher in a new era of politically driven price controls. Will these so-called “reforms” lead to lower costs to the system? That surely seems to be the intent. Will this new system of healthcare produce the same degree and scope of breakthrough treatments that we’ve seen over the last 40 years? Will we still see so many of our best and brightest entering the field of medicine, and will our best doctors stay in the game? A tiny article buried in the middle of the Cleveland Plain Dealer might be the sentinel. It seems that between 1997 and 2007 the number of hours worked per week by American doctors decreased by 7.2%, a figure propped up by older doctors who have continued to work 60+ hours each week. Overall doctor fees have decreased 25% between 1995 and 2006, and the authors of the JAMA article quoted note that doctors today “may have less incentive to work.”

Gramp was right. There ain’t no such thing as a free lunch. In the end, as always, we’ll get what we pay for.

8 Responses to “How Doctors Get Paid”

  1. March 22nd, 2010 at 10:03 pm

    Anthony Vlastaris says:

    A drastic reduction in physician compensation is not enough for a private physician to overcome the drastic payment cuts from medicare. Our practice has had to reduce patient services staff and nurses due to medicare cuts already in effect. We have not even seen the new cuts that will occur with the new bill.

    Unfortunately the cost of delays in receiving appointments, delays on phone call returns to patients with questions, worsening communication, and ultimately delays in delivering patient care will occur.

    My fear is that more service demanded in a physician workforce that is not adequately compensated will lead to unwillingness to work more hours and a decrease in the quality of new doctors. This all may lead to worse patient outcomes. Poor patient outcomes is not a dollar value that will be easy to calculate, but should certainly be considered when we look at the true cost of our new health care plan.

  2. March 27th, 2010 at 2:59 pm

    darrellwhite says:

    Anthony, we’ve just begun a race to the mediocre. A sprint to the median. We will see reduced services from 95% of doctors, and reduced levels of patient experience in the office as more doctors attempt to ratchet up volume and flow, increase speed and decrease any value added services that do not pay. It’s a shame. Think of it as the “cattle drive transformation” of American medicine. Sure to be exacerbated if the 21.2% cuts hold and the 35% or so of docs who have said they would stop seeing Medicare patients are true to their word.

  3. March 27th, 2010 at 7:52 am

    Paul says:


    A great analysis of the problems with our health care system today. If it can be summed up in just a couple of words, it boils down to lack of personal responsibility. When people do not see the bill (because it goes to an insurance company), they don’t care about it because “it’s not their money”. Unfortunately, with this further government intrusion into healthcare, we will see even more of this lack of responsibility. The shift to reliance on the government to take care of yet another one of our problems is going to be expensive of course, and will limit quality care. Furthermore, our liberty is even further at risk.

  4. March 27th, 2010 at 3:12 pm

    darrellwhite says:

    Here’s the rub, Paul. By continuing to put a 3rd party between the seller and consumer, insulating the consumer from the cost, we continue to fail to put any brakes on consumption. If it’s “free” who wouldn’t want to have everything possible? Likewise, if we don’t protect the doctors from the risk of malpractice tort (subject of my next post, BTW), we also do nothing to decrease the “order demand”; if the next thing ordered might be the thing that prevents the lawsuit what’s to EVER keep a doctor from ordering it?

    We will now see two things. First, we will continue to see politicians playing games with physician payment in medicare. There is a 21.2% cut in play as of April 1st. The AMA and the American College of Surgeons polled their members and more than 40% of both said they would either stop seeing Medicare patients (every American over the age of 65), or would refuse to contract with Medicare and contract privately with patients (essentially saying they would do no business with patients over 65). Easy math there–gonna be hard to find a doc if you are 65, and only the large “not-for-profit” institutions that can run a loss by floating tax-free bonds will survive by seeing all of the dropped patients now at a loss, and later as the only game in town with a return to an uncut fee structure.

    The second, more dangerous thing we will see is the politicization of disease care. Those diseases with the most effective lobbies will be funded. Each year will bring horsetrading in Congress as medical decisions are made by politicians and their aids. It will bring a whole new meaning to “earmark” when funding for ear tubes is debated, eh?

  5. April 18th, 2010 at 10:43 pm

    medical says:

    Hopefully with the health reform bill passing, we will all have access to better health care.

  6. April 19th, 2010 at 1:55 pm

    darrellwhite says:

    Interesting viewpoint, Jeremy. Most Americans feel that they have no access problem whatsoever right now. The only folks who think there is an access problem are those who are covered by government programs like Medicaid and Medicare that underpay doctors.

    That would argue against hope after the health care bill passed, I’m afraid.

  7. August 20th, 2010 at 10:40 am

    Miami dentists says:

    I was looking at my pay slip the other day and I was surprised at the huge amount I’ve been paying every year for my life insurance. Although it’s a burden to keep on paying for such an amount, it’s better to be prepared because you’ll by no means know what will occur in the future because life in general always takes us unaware .

  8. November 5th, 2010 at 3:27 am

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