Alumni refresher lecture series
For love or money? Paying doctors to improve the quality of health
The methods through which doctors are paid have been shown to influence the decisions they make, and therefore the quality and costs of health care provided
Listen to lecture - August 2008 (MP3 11.1MB)
A key area of health expenditure is the reimbursement of services provided by doctors. In 2005-6, 1.6 per cent of GDP ($15.5bn) was paid to doctors through Medicare fees, representing around 19 per cent of recurrent health care expenditure. This excludes the cost of doctors employed by public hospitals. The treatment decisions made by doctors – such as prescribing, referrals, admission to hospital and diagnostic tests – indirectly determines the level of most other types of health care expenditure. The decisions doctors make are the key to improving efficiency and equity in health care.
The methods through which doctors are paid have been shown to influence the decisions they make, and therefore the quality and costs of health care provided. The aim of this short paper is to examine the role of fee-for-service (FFS) payment and suggest options for the reform of physician payment in Australia. The paper is concerned with how doctors receive their remuneration rather than higher level funding arrangements. In practice, any type of third party payer, from the Health Insurance Commission to proposed managed care or social insurance models, can adopt different payment schemes for the doctors it contracts with.
Current payment arrangements for doctors in Australia
There are a number of issues with the current FFS payment which deserve further attention. These can be illustrated with the following quotation.
“That any sane nation, having observed that you could provide for the supply of bread by giving bakers a pecuniary interest in baking for you, should go on to give a surgeon a pecuniary interest in cutting off your leg, is enough to make one despair of political humanity.”
George Bernard Shaw, The Doctor’s Dilemma, 1911
The first issue raised is the objectives of the patient when visiting a physician. What do patients want from their physician? Better health is a clear objective, depending on how it is defined, but there are other possible outcomes that can influence a patient’s welfare, such as the provision of information and reassurance, and also the process by which treatment is delivered, such as whether a procedure is invasive or not. To link these objectives to a payment scheme requires that they can be both measured and attributed to the doctors’ actions. A ‘fee-per-health improvement’ would be the ideal payment system. However, the health status of patients is not routinely measured before and after they receive a treatment. The only outcome that is routinely measured is death.
Even if an improvement in health could be measured, it may be difficult to attribute this to the actions of the doctor, given the many other factors that influence health status. Attribution may be easier where good evidence from clinical trials links a health intervention to better health. However, this evidence-based approach is far from complete. And so, the usual metric for FFS systems is the number of services. This is easily measurable, but depends on the volume of services provided, and its relationship with quality and outcomes is uncertain.
The second issue that is raised by the above quotation is the motivation of doctors. If they were purely motivated by self-interest and money, as in the above quotation, and alternative treatments attracted a lower fee, then doctors would undertake many amputations. However, we know that doctors also care about their patients’ health status, and most adopt a more conservative practice style that is more closely aligned with the patients’ best interests – they have intrinsic motivation. Some doctors would therefore trade off a higher income for the benefit of patients. If this is the case, then there is no need for such a complicated fee schedule as we have now. The nature of and variations in doctors’ motivations should, therefore, determine the type of remuneration system used.
A key issue here is the absence of evidence for many health-care interventions. In many disease areas there are a number of alternative treatments that could be pursued (including doing nothing) but there is little or no evidence to guide doctors’ recommendations. In the case where there is discretion as to which treatment to recommend, then in an FFS system the physician is more likely to recommend the most highly remunerated option. Where fee relativities are not based on evidence of relative cost-effectiveness, then inefficiency will prevail and the system will provide the wrong incentives for doctors.
FFS also creates a culture where new technologies require new fees. Because some doctors are extrinsically motivated, they will not provide services unless they are paid, even where there is clear benefit to patients. There is a propensity to add on services and fees as technology advances rather than replace services. This is less likely to happen in other types of remuneration systems.
The ability of doctors to determine the level of their own fees means that costs over and above the Medicare reimbursement are passed on to patients. Although patient charges are not new in Australia, there is much evidence to suggest that those who are deterred from using the health care system are more likely to be relatively poor and in worse health – those most in need of health care. So we see a rise in health care costs while fewer patients are being seen.1 FFS and doctors’ ability to set fees and determine the volume of care provided means that although user charges do reduce demand, they do not reduce doctors’ incomes. This also depends on the responsiveness of demand to changes in patients’ out of pocket payments.
FFS also discourages team working, continuity of care for patients with chronic disease, working in under-served and rural areas, universal access for equal need, and specialty choices that meet the needs of the population.
Alternatives to FFS
The economic theory of incentives argues that in complex jobs and where quality and outcomes are difficult to measure, then FFS payment is likely to be inefficient.2 This is because the costs of contracting and monitoring are too high, and because doctors will only do what they are paid for doing.3 In a complex job, it is therefore difficult to determine an efficient fee schedule.
The largely theoretical literature suggests that a mixed system of payment or a salaried payment option accompanied by subjective performance review, and with incentives for effort provided through the career and promotion structure, may be more efficient.
There have been almost 30 years of international empirical research into physician payment systems, and a number of reviews of this literature have been published.4 Compared to salaried and capitation payment, FFS has consistently been shown to lead to a higher volume and intensity of care being provided. What this literature has yet to show, however, is whether this represents ‘too much’ care or over-servicing. For this, it is necessary to examine the effect of different payment systems on the health outcomes of patients. This is a key area where the literature is lacking. Capitation payment, where doctors are paid according to the number of patients they are responsible for, has been shown to lead to low levels of health care provision and a more conservative approach to treatment by doctors. Salaried payment has again shown lower levels of treatment provided in comparison to FFS, although there has been no empirical research on the role of incentives contained within salary scales and careers.
In order to avoid the more extreme opportunities to provide too much or too little care, blended or mixed systems of remuneration have been advocated as the way forward.5 Such systems might involve a number of elements:
- A proportion of income that is fixed, with an additional element to reflect experience or seniority. This may be paid to all doctors providing a ‘core’ set of agreed services to minimum standards. Alternatively it could form the basis of a salaried system of payment. This fixed element could also be determined by capitation payment, which is perhaps more suitable for GPs rather than specialists.
- The addition of an FFS element is desirable if fees can be linked to health improvements (e.g. immunisation) or to evidence-based guidelines of good practice in certain priority disease
areas (e.g. cost-effective prescribing in coronary heart disease, chronic disease management), where they exist. This is a pay-for-performance element.
- The addition of ‘non-core’ payments for services that doctors can choose to provide, such as after hours care.
A further aspect of alternative payment schemes that has not been researched in health care is the role of the payment scheme in influencing the relative attractiveness of jobs for doctors. Workforce issues are a key area in Australia and other countries, and it is important to examine how the payment system can influence recruitment and retention. The level of expected future income has been shown to influence recruitment into certain specialties in the US. The type of remuneration scheme is also likely to influence recruitment and retention into geographical areas, as it will influence other non-pecuniary job characteristics. It may, therefore, be necessary to have a plurality of payment schemes, such that doctors can choose to be salaried employees, for example.
This may be beneficial in rural areas and is already happening in Australia to a small extent. It may also be beneficial for those doctors who desire more flexible working hours, or who do not want to run a small business or bear the costs of the red tape associated with FFS payment.
Evidence from Australia
The Practice Incentive Program (PIP) for GPs in Australia was introduced in 1999. In addition to the usual FFS payments, the PIP provided capitation payments to improve practice infrastructure, and incentive payments to improve quality of care for patients with diabetes, asthma, mental health problems, and to improve coverage in cervical screening. This pay-for-performance scheme was recently evaluated in relation to diabetes treatment, and found that the HbA1c test (blood glucose test) was between 15 per cent and 20 per cent more likely to be ordered by GPs in the PIP scheme compared to GPs not in the PIP scheme. The study controlled for a wide variety of patient and GP characteristics, and also controlled for the self-selection of GPs into the PIP scheme. The results suggest that modifications to the FFS scheme can have marked effects on quality of care.
Fee-for-service payment is widely regarded as being potentially inefficient and inflationary. Any proposed alternative payment system for doctors should follow a number of principles. Where possible, remuneration should be linked to performance in terms of patients’ health outcomes. This requires the linkage of evidence-based clinical guidelines and standards to the payment system, which will not be achievable for many disease areas. A blended or mixed system of remuneration should be used to avoid the extreme incentives of under- or over-servicing, and it should also be tailored to reflect the different motivations of doctors. A plurality of payment schemes should, therefore, be available for all doctors. This would have a positive effect on recruitment and retention. Finally, there should be experimentation and rigorous evaluation of any new payment schemes.
2 Prendergast C. (1999) ‘The provision of incentives in firms.’ Journal of Economic Literature, 37, 7–63. Burgess S., Metcalfe P. (1999). ‘Incentives in organisations: a selective overview of the literature with application to the public sector.’ Centre for Market and Public Organisation, University of Bristol, Working Paper no. 99/016.
4 Gosden T., Pedersen L., Torgerson D. (1999) ‘How should we pay doctors? A systematic review of salary payments and their effect on doctor behaviour.’ Quarterly Journal of Medicine, 92(1), 47-55; Gosden T., Forland F., Kristiansen I. S., Sutton M., Leese B., Guiffrida A., Sergison M., Pedersen L. (2001) ‘Impact of payment method on the behaviour of primary care doctors: a systematic review.’ Journal of Health Services Research and Policy, 6, 44-5; Robinson J. C. (2001) ‘Theory and practice in the design of physician payment incentives.’ Milbank Quarterly, 79:149-177.
5Scott A., Schurer S., Jensen PH., Sivey P. (2008) The Effects of Financial Incentives on Quality of Care: The Case of Diabetes. Working Paper No. 12/08. Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, 2008.