Financial incentives in medicine

What are the roles of physicians and other clinicians in creating high health care spending?

Physicians receive about 20% of health care dollars. But the decisions of physicians and other clinicians trigger the vast majority of total health care spending. Medical professionalism requires clinicians to put the individual patient’s welfare first. But most physicians are unaware of the impact their clinical decisions have on patient and total health care costs. Unneeded patient costs for unnecessary or ineffective care has been termed “financial toxicity. To reduce the toxicity of waste in health care spending, reform must address the financial incentives that have created this disconnect.

How are clinicians paid?

  • Fee-for-service: the most widespread way to pay clinicians for the past century. Clinicians charge for services they perform with each service paid for by the patient out-of-pocket or by an insurance company.
  • Capitation: the payment model most widely used by managed care organizations. Physicians are paid based on how many patients they have, regardless of the number or type of services each patient receives.
  • Salary: a method used by large hospitals, health care organizations, and government-run programs (e.g. the VA, Indian Health Service). Physicians are employees and receive a set salary, often with a bonus based on “production” or volume of services—essentially fee for service.
  • Value-based health care: a newer model of payment, where physicians are paid based on patient health outcomes. In this model, physicians are rewarded for helping patients improve their health.

How does fee-for-service, the most prevalent payment form, influence care decisions?

Fee-for-service can consciously or unconsciously influence clinician decisions. With a fee-for-service model, there is little emphasis on discouraging unnecessary tests or services, since each test ordered or service performed generates income for the clinician or her institution. When reimbursement is high, physicians do more – for example, physicians who financially benefit from imaging (X-Rays, CT scans, MRIs, etc.) order more than those who do not. Many physicians may argue that they over-order because of malpractice fears, but that alone has been shown to be only a small component of overutilization. Fee-for-service is also problematic because prices for the same procedure vary widely depending on the payer. Research has shown that changing pure fee-for-service models, such as cutting reimbursement rates for inappropriate services, is not a magic bullet, and may lead to both positive and negative changes in care.

What roles do for-profit drug and medical device companies play?

Both pharmaceutical and medical device companies can legally pay doctors, whether it is for educational/promotional talks, research, consulting, or other reasons. In 2016, drug and medical device companies paid $8.19 billion to physicians and teaching hospitals. These payment influence what services doctors use, which drugs they prescribe, and how often. For example, it has been shown that the more money doctors receive from pharmaceutical companies, the more name-brand drugs they prescribe. For more information on how pharmaceutical and medical device companies influence lawmakers, see Facts and Data: The expensive politics of health care.

How can incentives to overtest, overtreat, and overprescribe be addressed?

There are some current laws that partially address this. The Stark Law of 1989 limits self-referral, meaning that physicians are prohibited from sending patients for care to places where they will financially benefit. Because of the Physicians Payment Sunshine Act of 2009, pharmaceutical and medical device companies are now required by law to publicly reveal their payments to doctors and teaching hospitals. But new approaches, such as updating the Stark Law for the 21st century, are needed to encourage doctors and other clinicians to provide care based more on evidence and less on the promotional messages of private companies. Updated 6/1/2018