How Doctors Are Paid Matters

03 May

Imagine if you will that I have a job for you to complete. I need you to paint the interior of my house. I tell you that I will pay you in one of three ways: You can be paid a flat fee to paint every wall in the house, you can be paid by the hour, or you can be paid based on how much paint you actually apply to the walls. If I’m smart, I’ll pay you a flat fee and the reason why should be obvious: It limits my expenditure and guarantees my satisfaction with the final product. In the other two scenarios, you as painter are likely to drag your feet (if paid by the hour) or apply additional unneeded coats of paint (if paid by volume of paint applied) in order to increase your earnings. It’s basic economics.

Now for the shocker: Physicians respond to economic incentives just like any other human being does. Ezra Klein reports on the conflict of interest that arises when physicians refer patients to outpatient facilities in which the physicians have a vested financial interest. Such double-dipping conflicts are easy to spot, but what about more subtle motivations?

As Jason Shafrin finds in a recent study appearing in Health Economics, physicians respond to financial incentives. In fact, if a surgeon paid on a capitation (i.e., fixed amount per patient per month) basis is switched to a fee-for-service payment system, they are likely to perform 78% more surgery. That’s a pretty sizable effect. The question that isn’t answered is this: Do fee-for-service surgeons provide unnecessary surgeries because it is profitable for them or do surgeons paid on a capitated basis fail to perform surgery in cases where it is clinically indicated? My hunch is that a little of both goes on, but that’s just a guess.

1 Comment

Posted by on May 3, 2010 in Uncategorized


One response to “How Doctors Are Paid Matters

  1. Jan Baer

    May 3, 2010 at 1:01 pm

    Discussions about the actual cost of medical services seemed largely avoided during the noisy health reform debate, although there was ample intelligence out there which might have shed light on the core issue. No doubt there were political reasons for pointing at health insurance as the main villain without pointing out hospitals' or health care providers' share in responsibility.These costs are at the heart of the problem, so I have hoped to see more work targeting the issue. If health reform is to be effective, these costs must be addressed rationally.


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