The Doctor Payment Problem

doctor payment issues

Our system for paying medical professionals is broken, and patients foot the bill

American healthcare is an enormous tangled knot made over decades, and one strand that must be untied before quality and affordability improve is how America pays its doctors.

The problem is right in our face and in our wallets. Consider the following.

• From 2001 to 2007, personal bankruptcies from illness and medical bills rose by 50 percent, to about 2/3 of all such bankruptcies.
• 1.7 million (2013) Americans live in households that will declare bankruptcy due to their inability to pay medical bills.
• 10 million Americans ages 19-64 with year-round insurance coverage will face medical bills they cannot pay.

Sources: American Journal of Medicine, Nerdwallet Health

Clearly medical insurance isn’t what it once was. Patients are grasping for solutions in the face of unexpected medical costs, and physicians are struggling to stay afloat as problematic compensation pushes them under.

Here are the worst knots we must untangle when it comes to paying doctors:

1. The way insurance companies and Medicare pay doctors gives incentive for unbalanced, expensive care.

Some doctors report they feel pressure from insurance companies to practice a certain way, because the current systems of payment overvalue some services and undervalue others.

For example, if a habitual smoker comes into a doctor’s office, the doctor doesn’t necessarily get paid for getting the patient to quit smoking. The doctor can charge small fees for asking about smoking habits and consulting about how to quit, but the real money comes from how many billable procedures he performs.

Granted some of these procedures are important for improving the patient’s health, but they can’t fill the place of time spent consulting the patient, which insurance doesn’t cover nearly as handsomely. In general, tests and procedures are highly compensated, and time spent with a patient is not. Paying based on volume of services given takes focus away from what it should be: the patient’s overall well-being. Furthermore, it results in unnecessary procedures and wasted money.

“A phrase I’ve heard people say, that I think sums up the current fee-for-service way of paying for care pretty well, is that it can make doctors can feel like they’re practicing medicine in a professionally undignified way,” says Andrea Ducas, MPH, a program officer with the Robert Wood Johnson Foundation, a health philanthropy and social change organization.

Dr. Andy Peiffer, medical director of the Men’s Health Center in Salt Lake City, moved to a cash-based system of payment in 2005, and doesn’t accept insurance for his services. He says this allowed him to begin practicing medicine like he wanted. Perhaps most importantly, he says, it allows him to spend more time with patients.

“In preventive medicine, the most important thing a doctor can offer is time,” he says.

Peiffer says people still need insurance, and that most of his patients have some form of it. Patients pay him out-of-pocket simply because it is worth the value of his time, he says. Patient satisfaction has gone up since he stopped accepting insurance, he reports.

The problem becomes more complicated when Medicare is inserted into the picture. Medicare doesn’t give doctors as much money for medical services as most insurance companies do, which means that if a doctor is going to see Medicare patients, he must see a larger number of them to make it financially worthwhile. The end result is that our senior population, which needs to most medical attention, is often getting the hastiest doctor visits and the least professional consultation.

2. The way we pay doctors demands an absurd amount of administrative labor on their part, which increases costs.

Medical practices must have an office staff to fight compensation battles with insurance companies. The doctor performs a procedure, and bills the insurance company of the patient, but then the insurance company often denies the claim, claiming faulty paperwork or some other issue. The doctor’s office modifies and resubmits the claim, and the battle continues.

“Offices spend inordinate amounts of time on claims,” Peiffer says. “People are nickel and diming and getting nickel and dimed.”

Peiffer says booting insurance allowed him to get rid of overhead costs. Research suggests that the ratio of administrative (paperwork) versus care delivery (actual doctors and nurses) staff has increased significantly in the last 20 years, wasting billions of dollars.

• Administration (versus people who actually practice medicine) consumes 31 percent of health spending in the United States.
• Cutting that in half could save $400 billion annually.


Proponents of a one-payer system (the payer being the government, federal or state), like Canada has, use the argument of bureaucracy costs as one of their main weapons. Having a single body to submit claims to, versus 10 different insurance companies, each with different policies, would supposedly cut costs dramatically. While arguments abound about the quality of Canadian healthcare, our neighbors to the north spend about 15 percent of health spending on administration, or about half of what the US spends.

David Himmelstein, MD, an associate professor of medicine at CUNY and administrative waste researcher, says that hospitals could save about $120 billion annually if the United States switched to a system like Canada has. Doctors would save $95 billion.

“A single-payer national health insurance would make universal, comprehensive coverage affordable by diverting hundreds of billions of dollars from bureaucracy to patient care,” he told The Hastings Center.

In Canada, citizens pay for healthcare through their income tax, for the most part, and pay nothing at the point of service. Before we go crazy about Canadian health care, however, realize that some polls show that many Canadians aren’t content. A 2011 Gallup poll showed that 17 percent of Canadians are very dissatisfied with the availability of affordable healthcare (in the US that number was at 44 percent). Furthermore, 48 percent aren’t satisfied with the quality of medical care in Canada, the poll showed (50 percent aren’t satisfied in the US).

3. There is no standardization of prices for procedures.

Say you need an MRI. That procedure could cost a few hundred dollars or a few thousand, based on where you have it performed, even though it is the same exact test in both places. Medicare, for example, will pay much less for a medical service if it performed in a freestanding doctor’s office versus a hospital facility.

The most enraging part of this is when doctors abandon their private practice and join a large medical organization. These doctors will often stay in their own building, but work under the larger organizations salary versus billing patients themselves. The result of this is that the price for a procedure will jump from $300 to $2000, even though it is the same procedure in the same office done by the same doctor.

Certain organizations help set the values for medical services: The Relative Value Scale
Update Committee (RUC) and The Centers for Medicare and Medicaid Services (CMS). The National Commission on Physician Payment Reform recently called on these bodies to be more accurate and accountable in finding the real values of medical services.

Due in part to the variation of prices, consumers are rarely aware of the true costs of the procedures they’re getting. The cost a patient sees is often just the remaining balance of a bill. The insulation of insurance and Medicare coverage often leads people to seek elective medical services without realizing the burden it will place on themselves and the medical providers.

Research suggests that when patients receive all the information about costs, benefits, risks and tradeoffs of elective procedures, they choose about a third less treatment than if they weren’t given all the information transparently, according to Obviously a 30 percent decrease in services represents a tremendous weight removed from America’s back.

What Needs to Happen

Changes must occur with insurers, providers and patients.

• Insurers must start providing incentive for preventive medicine, and must stop rewarding doctors for performing high numbers of procedures. Fixed payments for healthcare and outcome-based reimbursement need to replace the fee-for-service model.
• Providers need to become better coordinated. When a patient requires consultation and services from multiple medical professionals, care and the billing for that care is often disjointed, which wastes money and decreases quality of care. New models put patients under a team of doctors, and billing occurs in a lump sum, decreasing overhead costs and paperwork. This requires cooperation with insurance companies. Providers and value-setting bodies also need to standardize costs for specific treatments across different settings.
• Patients need to start asking about different health plans, and choosing better ways to pay doctors.

There are actually already a large number of medical organizations and physicians that have adopted new payment models, and insurance companies are offering more and more contracts based on fixed payment.

Check out these success stories.

Bundled Payments

Bundled payments, or episode-based payments, are a way to reimburse patients needing multiple services for a specific medical condition. Hip surgery, for example, includes pre and post-operative appointments, along with the surgery. A bundled payment plan would cover anything associated with the surgery, including complications. The efficiency of covering costs of multiple services under one payment saves money and decreases paperwork. The Baptist Health System in Texas instituted bundled options for dozens of cardiac and orthopedic procedures, and saved $4.3 million in two years.

Population-Based Payment

This system tries to align the interests of patients with incentives for doctors. With this kind of payment, which is also called “global payment,” a provider takes responsibility for a certain amount of people, for a set amount of money from an insurance company. The doctor receives more money when care for these patients is deemed effective, making it a value-based system.

In one such case, Blue Shield agreed to pay a healthcare system a predetermined amount for the care of more than 40,000 people of the California Public Employees’ Retirement System (CalPERS). About $30 million was saved in 3 years, which prevented rate hikes for patients. This system is effective because instead of paying doctors per procedure, they were paid a set amount, which offers no incentive for doctors to perform more procedures. In the case above, since the new plan went into action, the number of surgeries dropped 13 percent, and inpatient days dropped by 15 percent.

Patient-Centered Medical Homes

Under this system, insurance companies pay primary care practices to provide team-based medical care to patients, and pay per month, per patient. This system encourages continuity of care and clear communication between providers, which is important for prevention and symptom control, keeping patients out of emergency rooms and hospitals. One doctor will generally lead the team, coordinating care for the patient across medical specialties, allowing each physician to emphasize his or her field.

Hill Air Force Base in Utah implemented this model, and saw improved control of blood sugar and diabetes symptoms. Additionally, their costs went down, and patient satisfaction sits at 95 percent.

 New Systems in Place

There are:
• 7,000 medical practices that are certified patient-centered medical homes.
• 600 Accountable Care Organizations (ACOs), serving 18 million people. An ACO is an organization that ties reimbursement to quality metrics.
• 500 hospitals, health systems or providers using Medicare’s Bundled Payments for Care Initiative (BPCI).

Which is Best?

This is a hard question to answer, because it depends on the market context, according to Andrea Ducas, MPH. Some communities will benefit from one model, while others won’t benefit from the same model. Choosing the right change is difficult, but Ducas says changes are already occurring, and the future looks bright.

“There are a lot of really smart, dedicated people trying to innovate,” she says.

Both insurers and doctors seem to feel a sense of urgency about the current state of affairs. Employers and individuals can help the progression continue by seeking out better health plans.

Are Insurance Companies the Bad Guys?

Medical insurance isn’t what it was ten years ago, when a patient could expect most everything to be covered. Insurance companies used to even cover annual exams, even if a patient hadn’t met a deductible.

But the current state of insurance compensation can’t be blamed entirely on insurance companies, says Dr. Steve Schroeder, Distinguished Professor of Health and Health Care at the University of California, San Francisco. Doctors, especially in some fields, have pushed price-setting bodies to up the level of accepted compensation for many procedures, which insurance companies must deal with.

“There is a circularity to the issue,” Dr. Schroeder says.

Furthermore, insurance companies are putting big money into plans that move away from the older problematic fee-for-service models. Blue Cross Blue Shield, for example, recently announced that they are spending $65 billion annually on “value-based” care, meaning they are rewarding doctors for outcome-based medicine using plans like the ones described above.

“I don’t think there are any real bad guys,” Ducas says.

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