How doctors are paid today

As our nation struggles with the mind-boggling algebraic-like task of reigning in on health care expenditures while increasing provider access and high-quality medical care, provider payment structures are in flux between traditional payment methods and relatively new financial structures.

While I am no means an expert of health policy nor medical business and financing, I think it’s important for medical trainees and enthusiasts alike to understand the very general basics of some popular payment structures currently used in our current health care system.

How are doctors paid?

Back in the day, many physicians, nurse practitioners and other various providers were paid directly “out-of-pocket” by patients themselves. Notably, this now only occurs in a relatively small percentage of cases. Most providers today are reimbursed for services through several payers, including federal and state government programs (e.g. Medicare, Medicaid) and insurance programs offered through employment and individual plans.

Reimbursement often involves a payment as a percentage of the total bill received and is usually impacted by standards set by Centers for Medicare & Medicaid Services and on negotiations between an office practice and regional insurance companies that they contract with. A smaller percentage of the bill, known as a co-payment, is often paid directly by the insured patient. Notably, this payment billed to the patient with commercial insurance is often separate from and in addition to a monthly charge to stay covered, commonly known as a premium.

Regardless of who directly foots the bill, it is important to acknowledge that on a national scale, taxpaying and working citizens finance a large portion of both government and private insurance programs. In the end, the majority of us are at least indirectly paying for our own and for each other’s care.

What are a few examples of various payment structures?

There are several ways that providers are paid, so much so that the list is beyond the scope of this piece. Below are a few important examples.

Fee-for-service (FFS), a common payment structure seen in both private and public practices, occurs when office practices bill for individual clinical tasks. Using the workup of a swollen knee as a case example, the provider may bill separately for different services rendered, including the initial consultation and any additional office procedures.

This varies from other payments structures frequently used in medical practices, including the concept of capitation. Capitation involves paying a physician a fixed amount of money per patient over a pre-specified period of time. Under this method of payment (in its purest form), the physician caring for the patient with a swollen knee would be paid the same regardless of the number of services provided.

Potential issues that arise with each of these payment methods relate to the possibility of incentivizing providers to overtreat or undertreat their patient panel. In the case of FFS, it is often a fear that medical systems will order more tests and procedures than needed. In the case of capitation it is just the opposite: Pre-specified bulk payments may incentivize medical systems to underutilize services.

To mitigate these potential issues, many new forms of payment structures are currently being tested on a nationwide scale. Most notably, pay for performance has been a method that ties bonus payments to the quality of care of each patient rather than to how much or how little services are provided. Although this form of payment is currently being studied for its effectiveness and often tied to other traditional forms of payments, it is a promising example of new and innovative ways to pay medical providers.

Take home point 

The brief descriptions of various payment methods mentioned are just a drop in the water when it comes to the complexity of how providers are paid and health services are financed. But it’s important to start somewhere.

Because whether we like it or not, beneficial changes in our health care system will not have any lasting effect without aligning incentives of big health care players involved, including payers, providers and most importantly, the patients.

Brian J. Secemsky is an internal medicine resident who blogs at the Huffington Post.  He can be reached on Twitter @BrianSecemskyMD and his self-titled site, Brian Secemsky MD. This article originally appeared in the American Resident Project.

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  • Dr. Drake Ramoray

    Almost every other country that has single payer allows two things. Fee for service and collective bargaining. We can’t collective bargain in the US and we are losing fee for service.

    Pay for performance is bad for patients and bad for doctors, especially in underserved, rural, inner city, and poor areas. The best thing a doc can do fr themselves in a pay for performance structure is move to an affluent area.

  • Peter Elias

    Let’s unpack this statement: “…pay for performance has been a method that ties bonus payments to the quality of care of each patient …”

    The first issue is that bonus payments are not tied to quality. For one thing, we do not have either an agreed upon and operational definition of quality, or a way to measure it. As a result, we have been forced to find proxies, secondary markers, that are associated with (but importantly, not causative of) some aspects of quality. Then we reward high performance on the secondary markers. Good apple pies are likely to be made with fresh apples. A financial incentive to use fresh apples will not result in good pies if the remaining ingredients are poor, absent, in the wrong quantities, baked at the wrong temperature or for the wrong length of time. P4P for fall-risk screening does not reduce the morbidity or mortality from falls or improve the quality of care if it incentivizes screening but not the more complex and challenging work of assessing those with positive screens and arranging individualized interventions for their specific risks.

    The second issue is that bonus payments are not tied to the care of each individual patient but to the aggregate. The P4P approach currently being tested encourages us to treat all our patients the same, rather than as individuals. The a1c target, systolic BP threshold and target for treatment, and the BMI are data points that need to be interpreted using the context, preferences and values of the individual patient. Many things benefit from being standardized, but not everything. Many aspects of testing and treatment need to be individualized in order to maximize individual quality. Consumer Reports may test and show the ‘best value’ for a microwave, exterior paint, or cordless drill, but that doesn’t mean that everyone will be best served by their selection.

    Though I disagree with your brief description of our current (mis)use of P4P, I heartily endorse your last comment: we do, indeed, need to align the incentives of payors and organizations and clinicians with the incentives of those we all exist to serve: our patients.

    • Dr. Drake Ramoray

      I contend that the metrics are largely irrelevant. The only real motive of pay for performance is to move the financial liability of caring to the doctor from the insurance company. Of course it was first moved to the insurance company from the patient by the government. The doctors were left holding the bag.

      Even metrics of how often A1cs are checked, regardless of whether or not you even take into account how good they are doesn’t demonstrate quality. I have several patent s who always have A1c’s of 10 and many who always have A1cs of 6. I could make the case that even checking it quarterly as required is a waste of money on many patients (high or at goal). As for the 10′s. Sweet tea is just too delicious for some folks.

      • SteveCaley

        And – research on cardiovascular disease in diabetics suggests that it’s the postprandial spike that causes most of the harm. So, if you control the postprandial spike with immediate-acting insulin and ignore HbA1C, you are doing “Worse Better” than using simply a ultra-long-acting agent and tuning numbers. Hmmm. Do we save the patient, or the number?

    • Michael Wasserman

      Excellent points! There are little to know evidence based outcomes in the people who cost the Medicare system the most, the frail elderly. Sometimes death is actually the best outcome. Other times, just the ability to walk to the bathroom is more important than targeting a number on a lab test. Those who talk about implementing such performance based systems are only serving to prolong one of the underlying causes of the existing expensive system, lack of adequate education in caring for the frail elderly. The number of geriatricians is dropping annually. I agree, we need more good apples!

    • DeceasedMD1

      Look at only as far as the VA is concerned and you are right about P4P. Look how well it worked there, in that case to get admin bonuses.

  • JR

    “Back in the day, many physicians, nurse practitioners and other various providers were paid directly “out-of-pocket” by patients themselves.”…

    This kinda makes it sound like this whole insurance thing is new.

    During WWII, there were wage controls in place. Fringe benefits were not considered “wages” so they could be raised, so more companies started offering health insurance. By 1958, 75% of Americans had some form of Health Coverage.

    Medicaid and Medicare rolled out in 1966.

    That means that physicians who are now retiring started practicing at a time when having health insurance was the norm…

    • Peter Elias

      “That means that physicians who are now retiring started practicing at a time when having health insurance was the norm…”

      True, but when I started (the late 70s), my insured patients had coverage that rarely covered what a family physician did in the office and NEVER covered preventive services. Overwhelmingly, we billed patients directly and some of them were able to get re-imbursed by their insurer. Medicaid was the exception.

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