How a Resort to Reason Could Fix Doctors’ Fees

This year Americans will spend around $100 billion for physicians’ services. Patients will pay about one-fourth directly, insurance companies about 45%, and the balance will be paid by Medicare, Medicaid and other government programs.

Regardless of who pays, the predominant form of payment will be “fee for service.” The question of how these fees should be set takes on new urgency as an expert advisory panel created by Congress searches for recommendations as to how to pay physicians who treat the 31 million elderly and disabled people covered by Medicare. The decisions that Medicare makes will have wide impact, not only for the elderly and their physicians, but for the entire medical marketplace.

Traditionally, fees have been set by individual physicians. Most patients do not choose their physician on the basis of price, or even ask about fees in advance. It is difficult for a patient with a broken hip or a lump in the breast to start such negotiations. Moreover, physicians in the same specialty in the same area usually have similar fees and patients have little incentive to question fees because the bill usually is paid by an insurance company or government agency.

Third-party payers, whether government or private insurers, are in a stronger position to negotiate fees in advance, but their efforts thus far have been timid. Medicare, for example, pays 80% of the “usual, customary reasonable” charge.

For private insurers as well, reimbursement is dictated largely by prevailing fee patterns set by physicians. In some ways these patterns make sense--but in many ways they do not.

Within a given area and specialty, the fees have a logical structure: They usually vary in direct proportion to the time and difficulty of the work. For instance, the California Relative Value scale for operations performed by general surgeons correlates almost perfectly with the average operating room time required.

By contrast, differences in fees across specialties frequently bear little relation to the time required, complexity or other identifiable factors. There also are large geographical differences in fees that cannot be explained by variations in cost of living or differences in supply and demand. Paradoxically, fees often are highest in cities that have large physician/population ratios.

One approach to reimbursing physicians is to abandon the fee-for-service method entirely. In prepaid group practices such as Kaiser Permanente, the purchasers (either employers or individuals) pay an annual premium for services, and physicians are paid a salary. This approach is gaining in popularity, but could not be imposed overnight. The fee-for-service method is likely to prevail for the foreseeable future.

The challenge for third-party payers is to negotiate a reasonable pattern of fees across specialties and geographical areas. To solve the first problem, I propose that representatives from each specialty be asked to specify a reasonable gross income and workload. The incomes should be large enough to cover all practice expenses (including malpractice insurance premiums) and still leave a net income commensurate with the ability, effort and training needed to practice that specialty.

The workload should provide enough time for high quality care for each patient plus adequate time for continuing education and leisure. A reasonable income divided by a reasonable workload would yield a reasonable fee. For example, suppose general surgeons said that a reasonable gross income from operating room procedures (they usually have some income from office practice as well) is $300,000 per year, and that a reasonable workload is 10 hours in the operating room per week for 40 weeks per year.

This would imply a fee of $750 ($300,000 divided by 400) for an operation such as an appendectomy that takes about one hour and proportionately higher (lower) fees for more (less) demanding procedures. The geographical problem could be solved by adjusting the national fee in accordance with a comprehensive wage index across regions and communities of different size.

In many specialties and geographical areas average workloads are low and fees are high, while in others fees are low and physicians overworked. Thus this approach would lower costs, raise quality and improve access. The overall cost of care would fall because the price of most “big ticket” procedures such as cataract surgery would be reduced by half. Fees for well-baby care and other kinds of services offered by lower-paid physicians might rise, but on balance the reduction in expenditures would be substantial.

The quality of care probably would improve because many specialists who now have low workloads would have to turn to primary care or other types of practices that have fuller workloads.

With fewer specialists and more primary care physicians, patients would have better access to the health-care system and there could be more emphasis on disease prevention. Also, a better geographical balance in fees would reduce differences in access.

This is a rare opportunity. Most often in medical care, policy-makers must choose among cost, quality and access. In this case, however, a more rational fee structure would yield benefits on all fronts. It can be done. If Medicare takes the lead, the private insurers will follow, and the public would reap the reward.