Payment per Procedure: Fee-for-Service
Roy Singleton, a patient of Dr. Weisman, is seen for recent onset of diabetes. Dr. Weisman spends 20 minutes performing an examination, finger-stick blood glucose test, urinalysis, and ECG. Each service has a fee set by Dr. Weisman: $100 for a complex visit, $10 for a finger-stick glucose test, $10 for a urinalysis, and $80 for an ECG. Because Mr. Singleton is uninsured, Dr. Weisman reduces the total bill from $200 to $100.
In 2001, Dr. Lenz, an ophthalmologist, requested that Dr. Weisman do a medical consultation for Gertrude Rales, who developed congestive heart failure and arrhythmias following cataract surgery. Dr. Weisman took 90 minutes to perform the consultation and was paid $120 by Medicare. Dr. Lenz had spent 90 minutes on the surgery plus pre- and postoperative care and received $900 from Medicare. In 2014, Dr. Weisman did a similar consultation for Dr. Lenz and received $130; Dr. Lenz was sent $804 for the operation.
Melissa High, a Medicaid recipient, makes three visits to Dr. Weisman for hypertension. He bills Medicaid $120 for one complex visit and $60 each for two follow-up visits. He is paid $30 per visit, 38% of his total charges. Under Medicaid, Dr. Weisman may not bill Ms. High for the balance of his fees.
Dr. Weisman contracted with Blue Cross to care for its PPO patients at 70% of his normal fee. Rick Payne, a PPO patient, comes in with a severe headache and is found to have left arm weakness and hyperreflexia. Dr. Weisman is paid $91 for a complex visit. Before a magnetic resonance imaging (MRI) scan can be ordered, the PPO must be asked for authorization.
Traditionally, private physicians have been paid by patients and insurers through the fee-for-service mechanism. Before the passage of Medicare and Medicaid, physicians often discounted fees for elderly or poor patients, and even afterward many physicians have continued to assist uninsured people in this way.
Private insurers, as well as Medicare and Medicaid in the early years, usually paid physicians according to the usual, customary, and reasonable (UCR) system, which allowed physicians a great deal of latitude in setting fees. As cost containment became more of a priority, the UCR approach to fees was largely supplanted by payer-determined fee schedules. An example of this is Melissa High’s three visits, which incurred charges of $240 of which Medicaid paid only $90 ($30 per visit).
In the early 1990s, Medicare moved to a fee schedule determined by a resource-based relative-value scale (RBRVS). With this system, fees (which vary by geographic area) are set for each service by estimating the time, mental effort and judgment, technical skill, physical effort, and stress typically related to that service (Bodenheimer et al., 2007). The RBRVS system made a somewhat feeble attempt to correct the bias of physician payment that has historically paid for surgical and other procedures at a far higher rate than primary care and cognitive services. In 2001, Dr. Weisman was paid nearly 13% of Dr. Lenz’s surgery fee, compared with 16% of that fee in 2014.
PPO managed care plans often pay contracted physicians on a discounted fee-for-service basis and require prior authorization for expensive procedures.
With fee-for-service payments, physicians have an economic incentive to perform more services because more services bring in more payments (see Chapter 10). The fee-for-service incentive to provide more services has contributed to the rapid rise in health care costs in the United States (Relman, 2007).
Payment per Episode of Illness
Dr. Nick Belli removes Tom Stone’s gallbladder and is paid $1,300 by Blue Cross. Besides performing the cholecystectomy, Dr. Belli sees Mr. Stone three times in the hospital and twice in his office for postoperative visits. Because surgery is paid by means of a global fee, Dr. Belli may not bill separately for the visits, which are included in his $1,300 cholecystectomy fee.
Joan Cluster has had type 2 diabetes for 8 years with no complications or other illnesses. Dr. Violet Sweet used to bill diabetes patients a fee for each visit but is now practicing in a bundled payment pilot. She receives one payment for taking care of Ms. Cluster’s diabetes for 1 year.
Surgeons usually receive a single payment for several services (the surgery itself and postoperative care) that have been grouped together, and obstetricians are paid in a similar manner for a delivery plus pre- and postnatal care. This bundling together of payments is often referred to as payment at the unit of the case or episode.
With payment by episode, surgeons have an economic incentive to limit the number of postoperative visits because they do not receive extra payment for extra visits. On the other hand, they continue to have an incentive to perform more surgeries, as with the traditional fee-for-service system. Some pilot projects are testing the use of payment by episode of illness, for example, one lump-sum payment for the treatment of diabetes over the period of 1 year, no matter how many times the patient visits the physician (Catalyst for Payment Reform, 2014a).
At this point, it is helpful to introduce the important concept of risk. Risk refers to the potential to lose money, earn less money, or spend more time without additional payment on a transaction. With the traditional fee-for-service system, the party paying the bill (insurance company, government agency, or patient) absorbs all the risk; if Dr. Weisman sees Rick Payne ten times rather than five times for his headaches, Blue Cross pays more money and Mr. Payne spends more in copayments. Bundling of services transfers a portion of the risk from the payer to the physician; if Dr. Belli sees Tom Stone ten times rather than five times for follow-up after cholecystectomy, he does not receive any additional money. However, Blue Cross is also partially at risk; if more Blue Cross enrollees require gallbladder surgery, Blue Cross is responsible for more $1,300 payments. As a general rule, the more services aggregated into one payment, the larger the share of financial risk that is shifted from payer to provider.
Payment per Patient: Capitation
Capitation payments (per capita payments or payments “by the head”) are monthly payments made to a physician for each patient signed up to receive care from that physician—generally a primary care physician. The essence of capitation is a shift in financial risk from insurers to providers. Under fee-for-service, patients who require expensive health services cost their health plan more than they pay the plan in insurance premiums; the insurer is at risk and loses money. Physicians and hospitals who provide the care earn more money for treating ill people. In a 180-degree role reversal, capitation frees insurers of risk by transferring risk to providers. An HMO that pays physicians via capitation has little to fear in the short run from patients who become ill. The HMO pays a fixed sum no matter how many services are provided. The providers, in contrast, earn no additional money yet spend a great deal of time and incur large office and hospital expenditures to care for people who are sick. (In the long term, HMOs do want to limit services in order to reduce provider pressure for higher capitation payments.)
Certain methods have been developed to mitigate the financial risk associated with capitation payment. One method involves reintroducing fee-for-service payments for specified services. Such types of services provided but not covered within the capitation payment are called carve-outs; their payment is “carved out” of the capitation payment and paid separately. Pap smears, immunizations, office ECGs, and minor surgical procedures may be carved out and paid on a fee-for-service basis.
A common method of managing risk is called “risk-adjusted capitation.” For physicians paid by capitation, patients with serious illnesses require a great deal more time without any additional payment, creating an incentive to sign up healthy patients and avoid those who are sick. Risk-adjusted capitation provides higher monthly payments for elderly patients and for those with chronic illnesses. However, risk adjustment poses a major challenge. Researchers have investigated measures for risk-adjusting capitation payments by appraising an individual’s state of health or risk of needing health care services (Brown et al., 2010).
Capitation may control costs by providing an alternative to the inflationary tendencies of fee-for-service payment. In addition, capitation has been advocated for its potential beneficial influence on the organization of care. Capitation payments require patients to register with a physician or group of physicians. The clear enumeration of the population of patients in a primary care practice offers advantages for monitoring appropriate use of services and planning for these patients’ needs. Capitation also allows for more flexibility at the practice level in how to most effectively and efficiently organize and deliver services. For example, fee-for-service typically only pays for an in-person visit with a physician; under capitation payment, a physician could substitute “virtual visits” such as e-mail and telephone contacts for in-person visits for following up on blood pressure or diabetes control, or delegate routine preventive care tasks to nurses or medical assistants in the practice, without experiencing a financial disincentive for these alternative ways of delivering care. Capitation also explicitly defines—in advance—the amount of money available to care for an enrolled population of patients, providing a better framework for rational allocation of resources and innovation in developing better modes of delivering services. For a large group of primary care physicians, the sheer size of the aggregated capitation payments provides clout and flexibility over how to best arrange ancillary and specialty services.
Capitation with Two-Tiered Structures
Jennifer is a young woman in England who develops an ear infection; her general practitioner, Dr. Walter Liston, sees her and prescribes antibiotics. Jennifer pays no money at the time of the visit and receives no bill. Dr. Liston is paid the British equivalent of $12 per month to care for Jennifer, no matter how many times she requires care. When Jennifer develops appendicitis and requires an x-ray and surgical consultation, Dr. Liston sends her to the local hospital for these services; payment for these referral services is incorporated into the hospital’s operating budget paid for separately by the National Health Service.
British System—Capitation payments to physicians in the United States are complicated, as will shortly be seen. But in the United Kingdom, they have traditionally been simple (see Chapter 14). Under the traditional British National Health Service, each person enrolls with a general practitioner, who becomes the primary care physician (PCP). For each person on the general practitioner’s list, the physician receives a monthly capitation payment. The more patients on the list, the more money the physician earns. Patients are required to route all nonemergency medical needs through the general practitioner “gatekeeper,” who makes referrals for specialist services or hospital care. Patients can freely change from one general practitioner to another. This simple arrangement, illustrated in Figure 4-1, is referred to as a two-tiered capitation structure. One tier is the health plan (the government in the case of the UK) and the other tier the individual PCP or several physicians in group practice.
United States System—In the United States, capitation payment is associated with HMO plans and not with traditional or PPO insurance. Some HMO plans have two-tiered structures, with HMOs paying capitation fees directly to PCPs (Fig. 4-1). However, capitation payment in US managed care organizations more often involves a three-tiered structure.
Two-tiered capitated payment structures. The health plan pays the primary care physician by capitation and pays for referral services (e.g., x-rays and specialist consultations) through a different payment stream.
Capitation with Three-Tiered Structures
In three-tiered structures, pioneered in California, HMOs do not pay capitation fees directly to individual physicians or small group practices, but instead rely on an intermediary administrative structure for processing these payments (Robinson & Casalino, 1995). In one variety of such three-tiered structures (Fig. 4-2), physicians remain in their own private offices but join together into physician groups called independent practice associations (IPAs).
Three-tiered capitated payment structures. Primary care physicians receive a capitation payment plus a bonus from the IPA if there is an end-of-the-year surplus in the pool for paying for referral services.
George is enrolled through his employer in SmartCare, an HMO run by Smart Insurance Company. SmartCare has contracted with DoctorFriendly IPA, which provides physician services for its enrollees in the area where George lives. George has chosen to receive his care from Dr. Bunch, a PCP affiliated with DoctorFriendly IPA. SmartCare pays the IPA a $70 monthly capitation fee on George’s behalf for all physician and related outpatient services. DoctorFriendly in turn pays Dr. Bunch an $18 monthly capitation fee to serve as George’s primary care physician.
George develops symptoms of urinary obstruction consistent with benign prostatic hyperplasia. Dr. Bunch orders some laboratory tests and refers George to a urologist for cystoscopy. The laboratory and the urologist bill the IPA on a fee-for-service basis and are paid by the IPA from a pool of money (called a risk pool) that the IPA has set aside for this purpose from the capitation payments received from SmartCare. At the end of the year, the IPA has money left over in this diagnostic and specialist services risk pool and distributes this surplus revenue to its PCPs as a bonus.
Sorting out the flow of payments and nature of risk sharing becomes difficult in this type of three-tiered capitation structure. In most three-tiered HMOs, the financial risk for diagnostic and specialist services is borne by the overall IPA organization and spread among all the participating PCPs in the IPA. In the 1980s and 1990s, IPAs often provided financial incentives to PCPs to limit the use of diagnostic and specialist services by returning to these physicians any surplus funds that remain at the end of the year. This method of compensation was known as capitation-plus-bonus payment. The less frequent the use of diagnostic and specialist services, the higher the year-end bonus for IPA physician gatekeepers. This arrangement came under criticism as representing a conflict of interest for PCPs because their personal income was increased by denying diagnostic and specialty services to their patients (Rodwin, 1993). More recently some managed care organizations have begun to tie bonus payments to quality measures—“pay for performance”—rather than to cost control (see Chapter 10).
Dr. Joyce Parto is employed as an obstetrician-gynecologist by a large staff model HMO. She considers the financial security and lack of business worries in her current work setting an improvement over the stresses she faced as a solo fee-for-service practitioner before joining the HMO. However, she has some concerns that the other obstetricians are allowing the hospital’s obstetric residents to manage most of the deliveries during the night, and wonders if the lack of financial incentives to attend deliveries may be partly to blame. She is also annoyed by the bureaucratic hoops she has to jump through to cancel an afternoon clinic to attend her son’s school play.
In contrast with traditional private physicians, physicians in the public sector (municipal, Veterans Health Administration and military hospitals, state mental hospitals), and in community clinics are usually paid by salary. Salaried practice aggregates payment for all services delivered during a month or year into one lump sum. Managed care has brought salaried practice to the private sector, sometimes with a salary-plus-bonus arrangement, particularly in integrated medical groups and group and staff model HMOs (see Chapter 6). Group and staff model HMOs bring physicians and hospitals under one organizational roof.
The distinction between staff and group model HMOs is analogous to the difference between the two- and three-tiered IPA model HMOs discussed previously. The staff model HMO is a two-tiered payment structure, with an HMO insurance plan directly employing physicians on a salaried basis (Fig. 4-3A). In the group model HMO, the HMO insurance plan contracts on a capitated basis with an intermediary physician group, which in turn pays its individual physicians a salary (Fig. 4-3B).
Salaried payment. (A) In the staff model HMO, the plan directly employs physicians. (B) In the group model HMO, a “prepaid group practice” receives capitation payments from the plan and then pays its physicians by salary.
HMO physicians paid purely by salary bear little if any individual financial risk; the HMO or physician group is at risk if expenses are too great. To manage risk, administrators at group and staff model HMOs may place constraints on their physician employees, such as scheduling them for a high volume of patient visits or limiting the number of available specialists. Salaried physicians are at risk of not getting extra pay for extra work hours. For a physician paid an annual salary without allowances for overtime pay, a high volume of complex patient visits may turn an 8-hour day into a 12-hour day with no increase in income. HMOs and medical groups may offer bonuses to salaried physicians if overall expenses are less than the amounts budgeted for these expenses or if the physician performs high-quality care (pay for performance).