Saturday, July 25, 2009

How Should Physicians be Paid?

Most physicians currently are paid a fee for the services they perform, which in most economic contexts makes a great deal of economic sense. Some physicians are paid a salary, meaning they earn a set income over a given time period. Many people in today's economy are salaried, including yours truly. The question is, should physicians be compensated using a fee for service or salary model?

As I mentioned above, usually a fee for service makes a great deal of sense, especially when the services that are being provided are being paid by the person providing them. In health care this is not exactly the case, as third-party payers pay the bulk of health care services for those with health care, and for those without health care, the prices they would have to pay leads many to go without health care services or under-ultilize the amount of services they need.

Additionally, many physicians are compensated using a reimbursement schedule called a resource based relative value scale (RBRVS) set up by Medicare. This RBRVS then is calculated based on relative value units (RVU's) which are the cost of an average service, and is based on three areas. The first is the amount of physician work - which is the part of the compensation based on the physicians labor - and no adjustment is made based on the physician is board certified or of higher or lower quality than others, just on the average amount of effort that each different health care service on average requires. The second is based on medical practice expenses - typically family practice and none family practice, and the third is based on malpractice expenses. Each of these three components are then adjusted by a conversion factor which basically accounts for different levels of prices in differing geographic regions.

As I mention in some of my economics classes, the big problem with this, is that physicians are compensated on their implicit and explicit costs, and not on the added value of the services they provide.

In today's New York Times, an interesting article looks at the incentives that exist for physicians compensation based on the pre-dominant fee for service versus a salaried model. The AMA and many physicians oppose a salary compensation model, since they fear that their incomes will be declining. This may be because by ordering extra services, the physician can increase their compensation, and if that is true, some point to this as an example of why health care costs are increasing.

Personally, I am in favor of a physician salary model. Market forces will work, just like they do in an economically similar market (firms directly sell the individuals labor) of academics. Not all academics (even in the same field, same department and same university) have the same salary. Rather salaries are determined by the relative productivity for those individuals and the value that the university places on those individuals. Thus all physicians would not make the same salary, just like not all physician make the same amount of compensation in the fee for service arena.

What do you think?

1 comment:

Jeff said...

This is almost too obvious, you gotta wonder why it isn't the standard. It seems to me that its because a hospital that would switch to this model would not be able to increase its bottom line very much. First, you might lose top doctors because of their desire to be highly compensated. Second, they wouldn't be able to increase their market share very much. If patients were aware of the high costs of unnecessary tests, they might take their business to the hospital with the reputation for economy. But because most patients are not the ones that fronting the costs for the unnecessary tests, they want the doctor to do every possible test, no matter how likely, because, "You never know".