Pay Doctors For the Value They Offer Patients

When Medicare first created a fee schedule, critics suggested that it was a Marxist invention. Nevertheless, the schedule, which lists what Medicare is willing to pay for some 7,000 procedures, has become the master list for physician reimbursement in our health care system: Most private insurers peg their payments to the Medicare schedule.

The notion of deciding the precise worth of some 7,000 diagnostic and therapeutic procedures is mind-boggling. How exactly does Medicare do it?

The process began in the late 1980s when officials at the Department of Health and Human Services decided that the way Medicare paid doctors should be overhauled. At the time, Medicare was reimbursing physicians  based on what was considered “customary, prevailing and reasonable” in a particular market — in other words the “market value” of the service in that region.

Instead, reformers urged Congress to begin paying doctors in a way that reflected the real cost, to the doctor, of providing the service. (This is where Marx comes in: rather than letting the local market decide what a service is worth “the system appears to be based on the Marxist ‘labor theory of value,’” sputtered Susan Mandel in a 1990 piece in the National Review.)

But to many in Congress, the notion that physicians should be reimbursed for what it costs them to do what they do — plus a reasonable profit — seemed on the face of it, a sound proposal. The problem, of course, lies in determining what the true “cost” is to the physician.

For help, Medicare turned to William C. Hsiao, an economist at Harvard’s School of Public Health who had devised a system for calculating the “relative value” of various medical services. Hsiao had decided that, to be fair, the value of a doctor’s labor should be based, not just how much time the procedure cost the doctor but also on the mental effort and judgment involved, the technical skill and physical effort required, and the stress entailed. To calibrate the precise amount of mental effort, stress and technical skill involved in everything from cataract surgery to performing a hysterectomy on a woman with cervical cancer, the Harvard team interviewed thousands of doctors. At the time, they determined that cataract surgery involves just slightly less work than a hysterectomy.

Some specialties require extra training, and the new system also factored in the value of those years in terms of the “opportunity cost”— the income the doctor might have made if he had not still been in school. In addition, fees tried to reflect “practice costs” (overhead including equipment and supplies) as well as malpractice costs.

In 1992, Medicare adopted Hsiao’s fee schedule, and private insurers soon followed suit. But the schedule was not carved in stone. As medical technology changes, some procedures become easier, while others become more elaborate. Thus the master schedules will always remain a work-in-progress, rather like a cathedral that outlives its original architects. (In January, I described how fees are updated by a committee that is dominated by specialists, which, as I noted, goes a long way toward explaining why Medicare pays relatively little for primary care.)

On the face of it, Hsiao’s system sounds equitable, with perhaps, one caveat: While it makes sense to compensate a doctor for the income lost while training for an additional two or three years, at what point, over the course of a 35-year-career, do you stop compensating for those extra years?

It seems fair that starting salaries should be higher for specialists who spent more years training, both because they will have taken on more debt and because they are that much older when they finally begin practicing medicine. But after 20 or 25 years, should a specialist with an extra two years of training still be making significantly more than a colleague who didn’t put in those additional years?

But that is a relatively minor problem, I think, compared to a deeper flaw in Hsiao’s methodology. The schedule is physician-centered, focusing solely on the cost to the physician in terms of labor, stress, overhead etc. What it doesn’t take into account is the value of the service to the patient.

Typically, in other areas of our economy, we pay more for that which we prize most: We are willing to spend more on a painting that we find exquisite than for one that is merely competent. We pay more for a fresh loaf than for day-old bread.  Utility also comes into play: We will lay out a larger sum for an extremely comfortable, durable mattress.

This makes me wonder: When it comes to reimbursing doctors, why don’t we reward those who provide care that offers the greatest benefit to the patient? For example, shouldn’t the cardiologist who helps a patient to stop smoking be paid handsomely?  Yet, we pay the physician who performs an angioplasty far more.

Granted, counseling patients or introducing them to nicotine patches doesn’t involve as much technical skill as angioplasty, and is probably not as stressful. (The doctor is much less likely to be sued by the patient who stopped smoking — even if he relapses.) And learning how to help patients kick the habit doesn’t take the same type of training. But it does take time and patience (more time than a single procedure) — and a commitment to the patient over a period of months.

Yet, typically, doctors who specialize in smoking cessation are not well-compensated for their time—even though we know they save lives. By contrast, research suggests that the majority of patients who undergo angioplasty do not live longer or suffer fewer heart attacks than those treated only with drugs.

The symptoms of angina, including chest pain and shortness of breath may disappear, so there is some benefit for the majority of patients, but over time, even that advantage disappears.

Meanwhile, the doctor who helps a patient stop smoking has greatly reduced the patient’s chances of dying a premature and painful death. Shouldn’t this be factored into the equation when deciding his fees?

And it could happen. In its March 2007 report, the Medicare Payment Advisory Commission (MedPac ) reveals  that:

“Some Commissioners have argued that the relative value units of the physician fee schedule should be at least partly based on a service’s value to Medicare. … For example, if analysis of clinical effectiveness for a given condition were to show that one service were superior to an alternative service for a given condition, then Medicare’s process of setting relative values might reflect that. This process would be a departure from the established method of setting relative values based only on the time, mental effort, technical skill and effort, psychological stress, and risk of performing the service.”

As MedPac describes it, “the value of a service to Medicare” is almost synonymous with the value of the procedure to the patient. Whether or not it costs the doctor more physical or mental effort to deliver the service, it seems logical that we should provide financial incentives to doctors who provide the most effective services.

Today many health care providers have expanded cardiac centers to provide extremely lucrative cardiac services; few have set up smoking cessation clinics.  Yet the physician who persuades the patient to stop smoking saves the patient a world of suffering—and saves Medicare the tens of thousands of dollars it might well otherwise have to spend to treat that patient’s tobacco-related disease. Of course, eventually the patient will die of something. But dying of lung cancer or emphysema is an extraordinarily “costly” way to die—in every possible sense of the word.

Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of  “Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much,” an examination of the economic forces driving the health care system. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.

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12 replies »

  1. One more thing Maggie
    Your concern about CEO salaries and your enthusiasm about aggregating care results using hospitals as care centers contradict each other. Protestations from administrators aside, hospitals are run as businesses by businessmen. They are to make money, even (perhaps especially) the “Not-For-Profit” ones. Any patient care costs are chalked up to “risk management”. Having seen the sausage made from deep inside, even one non-complient patient will be too many. The only way risk aggregation works is if a physician is calling the shots. It sounds corny, but we and the nurses take the oaths, no one else does.

  2. Maggie
    I greatly appreciate your comments. I have practiced 15 years on the front line as an FP, opting to earn far less serving folks within the system than I could make out of it (not that I am that great a guy, I just enjoy most of what I am doing) I must admit with all humility that I do not have “the answer”. Only observations.
    Most people are ignorant of their own health habits and are less likely to have access to care under any iteration of “pay for performance”. For this reason, I consider this system unethical, although it does work very well for primes in the UK
    When folks have to pay for their own services, they are much more appropriate in seeking care and far more receptive to lifestyle counselling, even if they are seeing me for something unrelated.
    Total risk contracts by PCPs through third parties have by far the best results in promoting health and controlling cost but they do put the inexperienced PCP at moral hazard. Truth is, with less barriers to care, I spend more keeping these folks healthy then I do under any other arrangement.
    The amount of time I spend on third party payer issues significantly reduces the quality and quantity of care I provide. I have often wondered why the taxpaying public doesn’t get angry about how much this costs them. After all, they subsidized my education and take 50% of my marginal income. If taxes were truly a “protection racket” I would send Tony “the Fish” from the IRS over to CMS to break some kneecaps.
    Fear of lawsuits and information management derived from it is another enormous drag on my productivity and driver of costs. I have seen a trial lawyer, in front of a judge mind you, threaten to draw out a suit until my partner dies of a heart attack from the stress of it (the judge did nothing, the case was thrown out after 6 years). Since other people don’t seem to care about our Tort system and providing good care does not seem to be much of a defense, I feel free to spend as much of their money as needed to keep myself out of a similar situation. I do try to spare patients unnecessary radiation from serial CT follow ups from overreads though.
    Most of the physicians, specialists and primes alike, I work with have a service ethic that is, well, unbelievable. If I have a sick patient without insurance, they take ’em and write them off on the back end. If I have a sick patient with Medicaid……well,it ain’t worth the hassel and I don’t blame them. Twisted system ours
    I have often wondered if the simple triple play of medical arbitration courts, doing away with third party payment and a free medical education would return some sanity to the system.
    One more thing, I don’t think there is an appreciation out there how dire the PCP situation is. We have quit trying to recruit FPs who are want to be in full time private practice, there are none out there. The combination of reimbursement and low intensity residency training has lead to a generation of shift workers or concierge physicians. Nothing wrong with that, they just do not fit the general need. Our strategic plan is to replace retiring docs with NPs and supervise them remotely through our all knowing, all seeing EMR.

  3. Maggie Mahar writes:
    > [it] isn’t just about how much they earn–it’s
    > working conditions. In order to keep a practice
    > afloat, they have to see too many patients too
    > quickly.
    Ummmmmm. Methinks reimbursement levels and “volume requirements to stay in business” are too intimately related to talk about separately. Don’t you?
    Harvey Frey said:
    > If you MEAN “the value of a service
    > to the patient” say it just that way!
    We can’t know what the value of a service is to a particular Medicare beneficiary or to all the beneficiaries in the aggregate, for that matter. We can only impute a value somehow, probably on a utilitarian basis like QALY. And this is not without its problems.
    I think what Maggie means is that under all sorts of assumptions about rationality, desirability of various outcomes, full information and ability to pay, Medicare’s judgment about which procedures to discourage would match the patient’s judgment. But that’s a mouthful for a blog article and I think she did well with “almost synonymous”.

  4. I would deny that “the value of a service to Medicare” is “almost synonymous with the value of the procedure to the patient.”
    Like an HMO, Medicare reaps the greatest value when an enrollee pays while healthy and is hit by a bus as soon as he develops an expensive disease.
    If you MEAN “the value of a service to the patient” say it just that way!

  5. Docanon, Lawrence,rbar, Tom, Vjay, Health Social
    Thanks for your comments.
    Docanon–There is no question but what some physicians would fight this. But at this point in time, most view what the spine surgeons did with embarassment.
    I expect to see reform in physicians fees as Medicare takes a close look at its own payment schedule. The Medicare Payment Advisory Commission has made it clear that some fees (particularly for primary care) need to be raised, while others (particularly, as you say, for treatments of marginal value) need to be lowered. The effect will have to be “budget neutral” because Medicare is running out of money. In eleven years, its Hopsital Trust Fund won’t be able to meet its obligations.
    The alternative it to take an axe to physicians’ fees across the board, slashing them by 10% , then by 5% then by another 10% as current law requires. Last month Congress made it clear it is not prepared to do that. It realizes this is a crude solutoin. Medicare needs to adjust its fee schedule with a scalpel, not an axe.
    Private insurers will follow Medicare’s lead
    And since a fairly large and popular group of doctors would be the winners (family docs, primary care docs, geriatricians, palliative care specialists, and pediatricians) they (and their patients) will push back against the specialists who will find fees for some services reduced.
    Lawrence– health care reserachers have figured out that it is just not possible the measure the quality of care provided by individual physicians.
    This isn’t to say that Doctor A may not be better than doctor B. All physicians–like everyone in every profession–life on a bell curve, with some much better than others. (Google Dr. ATul Gawande’s New Yorker article titled “The Bell Curve.”
    But when you try to measure how good individual doctors or even small group practices are you run into a problem: just a handful of non-compliant patients can skew results. And we don’t want good doctors avoiding non-compliant patients –who are usually poor and in need of good care.
    Difficult cases also skew results, and in a small pool of patients, researchers have found that risk adjustment is impossible.
    But Medicare is considering measuring outcomes in much larger pools, by paying a hospital and all of the doctors who refer patients to that hospital or work in that hospital a lump sum, per medical episode, with a bonus for outcomes that are better than benchmark and penalties for outcomes that are below benchmark.
    Now you are looking at enormous pools of tens of thousands of patients and non-complicance or difficult cases become a wash.
    Moreover, rather than simply rewarding the especially talented doctor, you are rewarding all of the doctors–and the hospital–for collaborating, with the particularly talented doctor taking a closer look at who he is referring his patients to, whether they are following up, and whether the hopsital where he has priviledges really is on top of reducing infection rates.
    It does a patient no good to have one very good doctor (say his surgeon, or his referring doctor) if the others fall down on the job. And these days, few patients are treated by just one doctor. Many hands are involved.
    rbar–First I agree. Outrageous CEO pay has set outrageous standards for fair compensation. Virtually anyone can live very comfortably on $500,000 a year, and if CEO pay hadn’t gotten out of hand, few physicians would be feeling underpaid if they make “only”
    $750,000. . .
    But we do pay for utility. Tolls are usually higher on heavily traveled highways that are kept in (relatively) good repair, while there are no tolls on country roads.
    You ask: “How can you reimburse oncologists in fair manner who have the often frustrating work of helping patients who can barely fight metastatic disease, and still do relapse? A neurologist who diagnoses an untreatable condition like Huntington’s or ALS?”
    This question assumes that we measure outcomes in terms of whether or not the patient died. A “good”outcome is one where the patient doesn’t die. But we all die.
    Beating death is not possible–and that is not what medical care should be about.
    Medical care should be about “care” not just “cure.”
    The Dartmouth Research which has been looking at outcomes and spending for nearly three decades looks at
    Medicare records of patients who have already died and compares what happened to them during the final two years of life. (see http://www.dartmouthatlas.org)
    How many days did they stay in the hoppital? Did they develop an infection and have to stay longer? Did they have to be readmmited within 60 days? Were they able to die at home (which is what most patients want.) Did they receive hospice or palliative care so that they did not die in pain? How many procedures did they undergo during the finaly weeks and months of live? Did they receive two more rounds of chemo during the last two weeks (this would suggest futile care.)
    Dartmouth also asks about “patient satisfaction” and “physician satisfaction.
    Rather than asking “did the patient live or die” we need to ask: if he died, was it a good death? If he lived, did he go home to play with his grand-children, or did that final hositalization and surgeries leave him so enfeebled that he spent the remaining year of his life warehoused in a nursing home where he recognized no one?
    Tom– please see my responses to Lawrence and rbar.
    Yes, it is very clear that we are not paying primary care docs enough–and we’re not paying others who specialize in “cognitive medicine” enough.
    I’d add that the shortage of primary care physicians isn’t just about how much they earn–it’s working conditions. In order to keep a practice afloat, they have to see too many patients too quickly.
    In other countries, the government looks at the question of access and asks: are patients having a hard time finding an eye doctor, a primary care specialist, a
    pediatrician? Are we doing too many by-passes (without notable reduction in mortalities from heart disease)?
    The government then sets limits on how many med students can go into cardiology, and sets targets for how many are needed in pediatrics, etc,. This determines the number of residencies that are open in each area. It’s not a perfect system, but it works better than our laissez faire chaos.
    Vijay– Thank you. I agree we need to appreciate the art as well as the science of medicine. Right now we pay more for the science, relatively little for the art. And yes, we need to move away from the retail mentality.
    Health Social Networks– I hope you’re right. But patients will also have to go out of their communities to centers of excellence when seriously ill. (I’m not talking about going to another state, but I am talking about going to the city that is 1 hour and 25 minutes away rather than going to a suburban hospital that does too few procedures. We have too many small hospitals with overlappping resources (MRI equipment, etc.) and this is wasteful.
    rbar — First, on assessing quality of care, see what I wrote above, first to Lawrence and then to you. Dartmouth has been doing a good job of assessing outcomes for quite a while. You can’t assess the quality of care provided by one doctor. And outcomes are rarely the result of what one doctor does or doesn’t do. They are the result of what all of the doctors, nurses and others who touch that patient do.
    On smoking cessation. Yes, a patient has to want to stop. But given the cost of cigarettes these days, plus the hassles–a cough, clothes smelling like stale smoke, others objecting when you try to smoke almost anywhere. . .Most patients would like to quit. And with the tools we have today, most patients can be successful..
    Btw, I’d be wary of blaming smokers for a “victim mentality.” Did you know that half of the people in the U.S. who smoke are mentally ill? (This is from Dr. Steven Schroeder, who runs the smoking cessation clinic at UCSF). This isn’t a excuse as to why they should smoke; but it does explain why they have difficulty getting it together to stop. Many are simply very, very depressed. Today, most smokers are low-income poor have relatively little education.
    Part of a good smoking clinic’s job is to address those psychological problems by giving the patient support, a feeling that whether or not he succeeds matters . . .
    I agree about steering patients toward treatments with long-term benefits by having no co-pay and no deductible for things that we know work. And it makes sense to have high-copays for procedures, drugs and device if we have little or no medical evidence that they are more effective than less expensive treatments. .

  6. I am really surprised how popular this idea seems to be with most commenters. Let me first state that I do think that the reimbursement system is fundamentally wrong and that PC is undervalued, and that I do appreciate MM’s writing who usually is, in my opinion, right on the mark.
    In addition to what I wrote above, I see 2 more problems, one of them is major.
    (1) The smaller one: I think that it is mainly the patient’s motivation that makes lifestyle changes happen. Paying the doctor extra for smoking cessation (successful only, or does just the attempt count?) takes the responsibility away from the patient and reinforces the victim attitude that is so prevalent among the Americans with unhealthy lifestyles.
    (2) The major one: we already face great difficulty assessing quality of care, even though a standard does exist (per research/peer review). How will we ever establish the value of a medical service to the patient? Some examples:
    -A patient receives a chemotherapeutic drug that has a 20% chance of remission. How about the quality of the other 80% who will just die?
    -A patient does not feel any different with his new blood pressure regimen, in fact has a little less energy and is annoyed by taking pills. His risk of heart disease and stroke is minimized.
    -A patient is extremely happy about a benign growth removed from the cheek.
    Now, if we take the subjective component out (not clear by MM’s posting how the value would be measured) and calculate cost savings only (e.g. to medicare), we will be soon in very difficult territory, a system where patients and doctors feel that it is “all about the money”, but this time not about money in a free market system (so good, for most Americans), but of a government bureaucracy (devil incarnate) (side note: as we know, private insurance companies care little about long term savings due to the movement/fluctuations of the insured and would be an nulikely candidate for value based pricing). That will not go well in the US.
    I am in favor of doing steering with prices, although that has to be done quite carefully. Slightly undervalue what is done in excess (maybe angioplasty, tonsillectomy, hysterectomy), and bring up primary care and counselling, and the inherent value of services will make sure that patients receive them when needed (like relatively underpaid surgery in Japan, as I learned from MM’s book).

  7. I believe that the growth in social networks related to health will eventually lead most people to choose their doctors and clinics based on aggregated stats from the communities.
    the basic law of economy says that the payment will be in accordance

  8. Terrific piece, Maggie.
    Its interesting that a lot of this thinking is derived from the insurance platform, where actuarial thinking (around units of care to be delivered at a specific cost) has overruled retail principles (where the same good may be delivered in different channels to command vastly different prices and experiences).
    Until our existing structure is recentered on primary care, we’re going to continue to see skyrocketing health expenditures with minimal gains. It’ll be interesting to see if we can use the technology to focus us back on the art of medicine– by going too far after the science, medicine has lost its soul.

  9. Lawrence Liebscher writes:
    > The current system operates with the unspoken
    > assumption that physician services are a commodity,
    > Dr. A is the same as Dr. B is the same as Dr. C…
    This was more or less the promise society received when half (or more) of medical schools were closed after the Flexner Report. And to be fair, while there is still variation, there is far, far les than there was. However, the influence of the medical societies over their members seems to be waning now, and this should be restored, avoiding of course the worst excesses of the past. The only other choice is to let attorneys and juries provide the discipline.
    (Dr?) rbar writes:
    > Reimbursement should be based upon the labor
    > specifications
    But your two lane road could be a road to nowhere, and time was when rural two lane roads were mostly gravel and had one-lane bridges. There’s got to be some tie between value and price, even when prices are simply reflective of resources employed.
    I don’t quite know what “fair” means. We might decide we’re paying Oncologists “fairly enough” when we have enough Oncologists to do what ought to be done. That’s pretty much the way every other wage is determined. But in this case, it’s the “ought” that’s the problem.
    There are three questions in this:
    1) Whether to build a road at all
    2) What kind of road shall we build, and
    3) How much does it cost to get someone to build it?
    The first two questions there is no consensus about, and some people don’t think they should even be asked. The third question is the easiest to answer. It’s clear now that we’re not paying primary care enough to get anyone to do it. The proceduralists have managed so far to avoid having the experiment run on them.

  10. I am not sure whether this interesting idea stands up to scrutiny. Reimbursement should be based upon the labor specifications (hours, qualification, stress) involved, as it is the case almost everywhere else. A 2 lane road costs the same, whether it is used a little (because it is county road) or a lot (because it is a busy suburban connection). How can you reimburse oncologists in fair manner who have the often frustrating work of helping patients who can barely fight metastatic disease, and still do relapse? A neurologist who diagnoses an untreatable condition like Huntington’s or ALS?
    The problem with the current reimbursement system is that it completely overvalues (some) procedures. At the end, no doctor should be paid >500 K, in my opinion (similar considerations questions the no limit way of CEO compensation, I might add).

  11. This line of reasoning begs the following question.
    If payment should reflect value to the patient, why are all physicians paid the same for the same service? If cardiac surgeon A has better success rates with lower complications, while providing greater comfort and convenience than cardiac surgeon B, wouldn’t you as a patient be willing to pay more for his/her service? You would if he/she were a lawyer, accountant, financial advisor, or home builder. And in those instances the differences paid to lawyer A versus lawyer B could be quite substantial.
    The current system operates with the unspoken assumption that physician services are a commodity, Dr. A is the same as Dr. B is the same as Dr. C…

  12. Very interesting and relevant post. Incorporating the value of services to patients is probably the most important change to Medicare’s physician payment schedule that could possibly be made. The New York Times has recently run a few great articles about various expensive procedures of low, if not non-existent, value (or even harm) to patients…coronary CT is a great example. If Medicare incorporates value in price-setting, the reimbursement for such procedures should be quite low.
    Of course, doing this will create some big winners (those providing high-value cognitive services) and big losers (those doing tough, but low-value procedures)…so there will be a huge political fight. Remember what the spinal surgeons did to the AHCPR when it announced the low value of most back surgeries? The surgeons nearly had the whole agency de-funded, and now the AHRQ (its successor) won’t go anywhere near these kinds of questions.
    The potential losers have a lot of money right now, and they will do anything to fight this meaningful reform.