Hospitals and Doctors - Doing Away with Fee-For-Service and Putting Doctors on Salaries

Doctors in the United States are usually paid fees for each service they provide. The more procedures and tests they order, the more money they pocket. There is widespread agreement among health policy analysts that many of these procedures are unnecessary, raising costs in ways that often do nothing to improve patient health.

By contrast, Bassett — like the Cleveland Clinic and a small number of other health systems in this country — pays salaries to all of its doctors. No matter how many tests or procedures are performed, they take home the same amount of money. Medical costs at Bassett are lower than those at 90 percent of the hospitals in New York, while the quality of care ranks among the top 10 percent in the nation, surveys show.

“Everyone knows that the Bassett model is the right model,” said Senator Charles E. Schumer, a New York Democrat involved in negotiations over health care legislation. “The question is, How do you get from here to there?”

Gardiner Harris, “Salaries for Doctors, Not Fees, New York Times, July 24, 2009

Not everyone, Senator Schumer, including me and payers and patients who pay fees to hospitals who hire doctors on salary.

These days you hear a lot of rumbles – from CMS, Massachusetts health authorities, and analysts and pundits – about ending free-for-service (FFS) for doctors. The presumption is that FFS is negative economic incentive that doctors cannot resist.

Therefore, critics say, it logically follows that practitioners do more, i.e., over treat for financial gain but no gain in outcomes. In reformist jargon, FFS is a “structural problem” – a problem that can be corrected by various means capitation; bundling of fees for episodes of care, chronic disease, or procedures; paying only for what works based on comparative research; health algorithms that eliminate fee variations and place everyone on the same payment playing field, and placing doctors on salaries.

This line of thinking insults doctors by questioning their integrity, as President Obama did the other night when he said greedy doctors would remove tonsils to treat a sore throat.

It ignores the fact that at least 40% and maybe even 50% of doctors are already employed by hospitals, clinics, medical schools, and other institutions without noticeable impact on costs.

And oblivious to the reality that the world at large, particularly small businessmen and independent entrepreneurs, work on the basis of fee-for-service. In other words, FFS is the way the world, and independent professionals – lawyers, accountants, consultants, and others – works.

On Jlu 24, the New York Times carried an article, cited above, on Bassett Hospital, The piece heralded the fact that the doctor-run hospital had placed its medical staff on salaries and that salaries practices removed incentives to do more, and instead focused on how to treat patients without thinking about money. This may be, and it is certainly the message that integrated systems like Mayo, the Cleveland Clinic, Geisinger, and Kaiser like to convey to the world.

And as I write, hospitals are on a hiring binge to hire more doctors on salary. This has its cost downside. The greatest profit margins and the driving force for many hospital marketing programs lie in procedures related to heart, orthopedic, surgery, and cancer care. Hospitals expect their hired doctors to refer patients to these programs rather to independent ambulatory facilities, which often charge much lower fees. In addition, one of the dirty little secrets of the cost equation is that hospitals can legally charge “facility fees, “ which may be higher than doctor fees or other hospital procedure fees. Finally, hired physicians are instructed to send patients to hospital laboratories, x-ray and imaging units, and other hospital services, which cost much more than independent facilities.

The net result of these various factors is that hospital-based employment may significantly raise rather than lower costs, due ironically, to hospital-based FFS rather than doctor-related FFS.