How Doctors are Trapped

Every lawyer, every accountant, every architect, every engineer — indeed, every professional in every other field — is able to do something doctors cannot do. They can repackage and reprice their services. If demand changes or if they discover a way of meeting their clients’ needs more efficiently, they are free to offer a different bundle of services for a different price. Doctors, by contrast, are trapped.

To see how trapped, let’s look at another profession: the practice of law. Suppose you are accused of a crime and suppose your lawyer is paid the way doctors are paid. That is, suppose some third-party payer bureaucracy pays your lawyer a different fee for each separate task she performs in your defense. Just to make up some numbers that reflect the full degree of arbitrariness we find in medicine, let’s suppose your lawyer is paid $50 per hour for jury selection and $500 per hour for making your final case to the jury.

What would happen? At the end of your trial, your lawyer’s summation would be stirring, compelling, logical and persuasive. In fact, it might well get you off scot free if only it were delivered to the right jury. But you don’t have the right jury. Because of the fee schedule, your lawyer skimped on jury selection way back at the beginning of your trial.

This is why you don’t want to pay a lawyer, or any other professional, by task. You want your lawyer to be able to reallocate her time — in this case, from the summation speech to the voir dire proceeding. If each hour of her time is compensated at the same rate, she will feel free to allocate the last hour spent on your case to its highest valued use rather than to the activity that is paid the highest fee.

Clowns to left of me, jokers to the right
Here I am, stuck in the middle with you

In a previous Health Alert, I noted that Medicare has a list of some 7,500 separate tasks it pays physicians to perform. For each task there is a price that varies according to location and other factors. Of the 800,000 practicing physicians in this country, not all are in Medicare and no doctor is going to perform every task on Medicare’s list.

Yet Medicare is potentially setting about 6 billion prices across the country at any one time.

Is there any chance that Medicare can get all those prices right? Not likely.

What happens when Medicare gets them wrong? One result: doctors will face perverse incentives to provide care that is costlier and less appropriate than the care they should be providing. Another result: the skill set of our nation’s doctors will become misallocated, as medical students and practicing doctors respond to the fact that Medicare is overpaying for some skills and underpaying for others.

The problem in medicine is not merely that all the prices are wrong. A lot of very important things doctors can do for patients are not even on the list of tasks that Medicare pays for. Some readers will remember our Health Alert on Dr. Jeffrey Brennan in Camden, New Jersey. He is saving millions of dollars for Medicare and Medicaid by essentially performing social work services to reduce spending on the most costly patients. Because “social work” is not on Medicare’s list of 7,500 tasks, Brennan gets nothing in return for all the money he is saving the taxpayers.

We have also seen that there are other omissions — including telephone and e-mail consultations and teaching patients how to manage their own care.

In addition, Medicare has strict rules about how tasks can be combined. For example, “special needs” patients typically have five or more comorbidities — a fancy way of saying that a lot of things are going wrong at once. These patients are costing Medicare about $60,000 a year and they consume a large share of Medicare’s entire budget. Ideally, when one of these patients sees a doctor, the doctor will deal with all five problems sequentially. That would economize on the patient’s time and ensure that the treatment regime for each malady is integrated and consistent with all the others.

Under Medicare’s payment system, however, a specialist can only bill Medicare the full fee for treating one of the five conditions during a single visit. If she treats the other four, she can only bill half price for those services. It’s even worse for primary care physicians. They cannot bill anything for treating the additional four conditions.

Since doctors don’t like to work for free or see their income cut in half, most have a one-visit-one-morbidity-treatment policy. Patients with five morbidities are asked to schedule additional visits for the remaining four problems with the same doctor or with other doctors. The type of medicine that would be best for the patient and that would probably save the taxpayers money in the long run is the type of medicine that is penalized under Medicare’s payment system.

Take Dr. Richard Young, a Fort Worth family physician who is an adviser for the federal government’s new medical Innovation Center. As explained by Jim Landers in the Dallas Morning News:

 [When Young] sees Medicare or Medicaid patients at Tarrant County’s JPS Physicians Group, he can only deal with one ailment at a time. Even if a patient has several chronic diseases — diabetes, congestive heart failure, high blood pressure — the government’s payment rules allow him to only charge for one.

“You could spend the extra time and deal with everything, but you are completely giving away your services to do that,” he said. Patients are told to schedule another appointment or see a specialist.

Young calls the payment rules “ridiculously complicated.”

That’s an understatement.


Comments (27)

Trackback URL | Comments RSS Feed

  1. Vicki says:

    Great post. Perfect song pairing.

  2. Tom H. says:

    Agree totally. Good insights.

  3. John Seater says:

    Even if the Medicare ideal were a good concept (which in my opinion it is not), the reality is a travesty. That is quite common, probably even the rule, quite possibly nearly the universal outcome of market interventions by the government. The government bureaucracy has no incentive to get anything right, no incentive to minimize cost, no incentive to care for the patient. Experience suggests that that kind of government failure is the usual outcome of government interventions in the market, at least eventually. Given that no one has yet explained to me a single *market* failure in the health care field, why is it we as a society want to replace the well-performing market system with one that seems guaranteed to deliver *government* failure and which, according to experience, is doing just that? Much has been lost. What has been gained?

  4. Greg says:

    Well done, John. Excellent explanation of what is wrong with the payment system.

  5. Davie says:

    The current pricing system gives the term ‘perverse incentives’ new meaning. When doctors force their patients to delay important care they’re putting them at risk. That risk will only grow as wait times grow longer.

  6. Al says:

    John, it appears you understand why it is so hard for an Internist to function under Medicare’s rules. The result is that an Internist can frequently devolve into a triage nurse sending the patient in multiple directions for things that should have been managed in house. That might be one of the reasons some people look favorably towards nurses taking over for Internists. What we forget that it is often said (accurate or not unknown) that ~90% of general complaints do not require care. Of the remaining 10% half will not significantly benefit from the physicians care. The trick is to find the 5%. That requires the skill and experience of a well trained individual.

  7. Bob Geist says:

    John, excellent post and commentaries. Thanks to all, Bob

  8. Andrew says:

    I agree with the central argument here, that the incentives embedded in current physician compensation schemes are not aligned with best treatment practices. I also agree that a compensation scheme that is not based on individual services, but on the entire treatment of a disease would give physicians more freedom to allocate their time and attention and that this is a good thing.

    But I am confused about the example used to illustrate this point. Every lawyer is able to repackage and reprice their services? We have to “suppose” that some third-party payer bureaucracy pays your lawyer?

    What about our system of public defenders?

    What if we supposed instead that physicians who treated Medicaid patients were required to accept an absurdly low, salaried position?

  9. Buster says:

    Our inefficient health care system is a convoluted artifact of the way we regulation medicine. Doctors are trapped, yet we talk about them like they are just about the only important actors in our health care. Atul Gawande, a physician and writer for the Atlantic, has discussed how doctors act more like cowboys when what our health care system really needs is physicians who work like a pit crew. Whichever metaphor you agree with doesn’t matter because it still misses an important point. If doctors and hospitals were not trapped, the entire health care system might well have evolved very differently. Under an ideal system of regulations, we don’t know if doctors would be empowered to be super-doctors; or if they would be relegated to the supporting cast without a larger, integrated entity within our health care system.

    On the one hand, doctors have been trapped for nearly 100 years. On the other hand, they were trapped in a system that made them the gatekeeper and driver of our health care system — but locked in a bad marriage of third-party payment and bureaucratic regulations.

  10. Brian says:

    Hadn’t thought about this compensation concept before.

  11. frank timmins says:

    John, this is an insightful angle to illustrate once again that the concept of centrally planned collectivism is anathema not only to national economic health but to overall societal advancement.

    This has been proven to be true with so much consistency one wonders how this type of thinking survives (avoids) relegation to comedy writers joke standards like Monty Python’s “Ministry of Silly Walks” routine.

    That we allow government mismanagement of the medical profession is a testament to the fact that we as a culture have not yet advanced far enough to understand that government cannot successfully manage an economy, regardless of how important an aspect of that economy is in question.

  12. wally says:

    yes, medicare is a problem. But the biggest problem is our medical school shortage and doctor shortage. We need to let hundreds more medical schools be built, and tens of thousands more doctors graduate each year. Special interests, and their allies in government, don’t want more medical schools and more competition for practicing doctors. The result is inflated costs for care. Most care should be perfectly affordable, and paid for in cash. Insurance is risk management, not a pre-payment plan, and is not something everyone must have – it only inflates costs further. Third party payment schemes usually do.

    Educating doctors is a service. It is a business. Medical schools should act more like businesses, and expand enrollment to meet demand. With more medical schools, there will be greater competition, and tuition will go down. Med schools are currently run by academic minded people who are not profit and growth driven, resulting in ballooning tuition costs and many qualified applicants being turned away.

    Having enough doctors is also important because they are gatekeepers to so many drugs and treatments. The bottleneck in doctors inflates the prices of these as well.

  13. frank timmins says:

    Wally, I have been told that the problem with the medical and nursing schools is the lack of qualified instructors, that they (medical schools) are unable to meet demand because they can’t (or won’t) pay enough to get the teachers. I don’t know if this is true or not, or what the politics are regarding medical schools, but apparently there is something wrong given the dearth of doctors being produced here in the U.S.

  14. Al says:

    Wally says to create greater competition “We need to let hundreds more medical schools be built, and tens of thousands more doctors graduate each year. ”

    I’m not disputing the potential benefit of more physicians but if one were to do what you suggest we would likely see tremendous increases in cost. A better way to accomplish at least part of what you want would be a market approach so that physician time will be spent with the patient instead of on administrative functions. Additionally one would see more targeted care on medical issues also saving additional physician time.

  15. Chris Ewin, MD says:

    Pretty simple…
    Drop Insurance, Medicare etc….

    I just got a very nice raise as a concierge physician and the patients make the decision as to whether the service is of value to them….

  16. wanda j. jones says:

    John and Friends:

    Physician compensation is a perfect illustration of why the government should not oversee healthcare; there is a mind-set of “the last nickle” that is produced by government employees trained in law, accounting, and economics, where few have an extensive view of the activities they are regulating. So what goes on now? There is a very visible drive to produce new payment methods, starting with “bundled prices,” which is a tiny, tiny adjustment to the present system. The government drive to be able to challenge anything that looks the least bit off the averages they like to use keeps them from taking a trusting point of view that the professional being paid an all-inclusive fee is honest and is doing exactly what is expected.

    That this will add to the oversight instead of limiting it is obvious; the responsible departments will want to assure that this new payment method is not costing more than the old one. So essentially, the providers will have to record costs by FFS first, then “bundle them” for a summary payment.

    What we need to look forward to is the next ratchett. What about a tier of payments based on patient acuity? I will be simpler, enable doctors to care for all conditions in a visit, and provide a longitudinal care process for the multi-disease patient. The trick then will be to see which providers should get those payments? In fact, we need to have a better view of who should be the paymaster to whom the government delegates its financial management? A Healthcare System, a hospital, a medical group, a particular clinical program, a particular physician generalist or specialist, or, the patient himself, being given vouchers for procedures or a series of visits; he can then pay the provider who gives the care. Don’t we want doctors to respond to patients?

    We must all use this as an object lesson to beat back the know-nothings who say the healthcare system is broken and has admin costs that are too high, yet permit this form of government control to persist. It is the government that is broken, and that has no real leadership in it to change its modus operandi.

    IMO, doctors will not be free again until payment is liberated by awarding block grants from the Federal level to states, and from there to organized healthcare systems, who can make their own decisions about care, with associated revenue and payments.

    Wanda J. Jones, President
    New Century Healthcare Institute
    San Francisco, California

  17. Paul Nelson, M.D. says:


    I stand to be corrected, but my understanding is that the original physician reibursement schedules were based on surgical gobal fees. I also remember that the original definitions came from the California Medical Society in the early 1960’s, then popularized by the Blues. The addition of isolated fees came later as a means to accomodate the non-surgeons. The tradition that emphasized primarily a global fee concept then became fixed with Medicare in 1965 and the rest is history. The magnified reimbursement of procedures as opposed as opposed to the reimbursement for managing the fabric of healthcare is pushing our country’s economy to the brink of collapse, Paradigm Paralysis at its worst.

    The solution is a renewal of quality Primary Health Care, neighborhood by neighborhood and community by community. To endow a dramatic increase in the efficiency of our nation’s healthcare industry, reimbursement systems to this Primary Heath Care must encourage transparency, trust and collaboration between each person, their Primary Physician and the appropriate Specialists required.

    Having done this for more than ten years in a gatekeeper, risk-sharing HMO, my associates and I never had a negative risk-sharing year. As a result, we enjoyed a mutually respectful relationship with the hospitals, the HMO, the specialists as well as our patients. At the beginning, it made me nervous to be at 100% risk for all drug costs, but it was the one single most precise means to mediate the related costs. None of this will occur when managed from the beltway. So, when will the beltway folk ever figure it out?

    Sir John Osler had it right a century ago, “It is more important to know what sort of patient has a disease, that what sort of disease a patient has.” This is the day-to-day basis for the control of healthcare costs. The future stability of our nation’s role in the world’s marketplace will be determined by whether nor not we can reduce the cost of our nation’s healthcare industry by 25%, soon.


  18. Leon from Redding Ca says:

    Kudos to you John.

  19. frank timmins says:

    Wanda Jones writes,

    “In fact, we need to have a better view of who should be the paymaster to whom the government delegates its financial management? A Healthcare System, a hospital, a medical group, a particular clinical program, a particular physician generalist or specialist, or, the patient himself, being given vouchers for procedures or a series of visits; he can then pay the provider who gives the care. Don’t we want doctors to respond to patients?”

    Good point Ms. Jones, and it seems the answer is clear.

  20. Charlie Bond says:

    Good Morning John:
    Since the early 90’s I have been writing and speaking about the absence of cost-based pricing in all health care, but particularly amongst physicians. In my last comment on this blog, I noted that as a result of the absence of the economic reality in pricing, American health care is the largest bubble in history. When it breaks we will all be in it.
    As for physician pricing, we are suffering from 7 decades of procedure-based billing that has become more and more complex as medicine has grown more sophisticated. In part due to AMA’s ownership of the complex coding system, we have not hit the reset button to re-align costs and complexity in any orderly fashion. As a result there is less and less of a rational relationship between the social value of physicians’ contribution to society and the wages they earn. Virtually all hospital administrators earn multiples of the average income of the physicians on staff. Insurance executives earn exponentially more than physicians. Does this reflect our real values?
    To address the problem of misaligned value and to capture the power of the 1-in-6 dollars of our GDP that is spent on health care , the Patient-Physician Alliance has created a system of recirculating “points” that can be passed from patients to providers and returned by the providers to the community. Functioning like a loyalty program, these points can be used to reset real value in a comparative community setting. The points also establish a loyalty network that binds providers, patients and businesses–something that will become more important as ACO’s and other aggregrating strategies are implemented. As the cash component of the patient’s bill increases (which is inevitable with the combination of the health care reform law and current insurance underwriting trends), points will become more and more relevant as a means of demonstrating patient loyalty and establishing real value.
    Patients, physicians, and hospitals drive health care economics. To the extent they can redefine value, rather than the government or the insurance industry, they can and must be the engine of reform. PPA points thus represent a free market method of addressing the unreality of health care economics. Success depends on building a critical mass, so every reader is invited to participate in this experiment by joining the PPA at
    Charlie Bond

  21. Sock22 says:

    Great post! You guys should check out a blog post by the American Action Forum on how our doctors are going broke.

  22. Charles Bond says:

    Hi John:

    Once again – dead on. The patient-physician relationship and its management are the drivers of nearly 1 in 5 dollars in our economy. This relationship was virtually unregulated 25 years ago now it is strangled with constraints imposed both by governmental regulations and by private payors.

    The model of American health policy was really set by a commission appointed by Herbert Hoover and headed by Lyman Wilbur, M.D. (former AMA President and Stanford Dean). Written at the height of industrial age, Wilbur’s report assumed universal access to care and recommended a “factory” model for delivery of care. It posited large medical groups consolidating physicians into a Kaiser-like model. Henry J. Kaiser himself knew both Wilbur and Hoover through the Bohemian Club, so I am sure they discussed the organization of health care delivery before Kaiser started setting up the Permanente medical group. The first General Counsel to Kaiser Permanente was one of my dearest friends was Scott Fleming. He was the man loaned by Kaiser to the Nixon administration for a 1-year period. (Ever wonder why we got so many HMO laws in the 70’s?)

    Now, 70 years after the Wilbur Committee’s report, the same ideas are still driving American Health policy. ACO’s are nothing more than a recycling of “managed care/managed competition” models, from which we have squeezed all the savings we can squeeze. Nonetheless, ACO’s are pursuing a continuation of this longstanding policy of aggregating doctors in the hope that sound planning can be supplemented by a policy that is nothing more than cynical reliance on a doctrine of “let the thieves fight it out amongst themselves.” The problem is that neither doctors nor their patients are thieves.

    The fact is that there is no good way to incentivize doctors: theoretically, fee-for-service incentivizes overtreatment, while capitation incentivizes under-treatment. I emphasize “theoretically,” because doctors are trained as a matter of ethics to consider the good of the patients as being the foremost ethical concern. Interestingly, no other sector of health care imposes that ethical obligation on itself.

    Over the last 70 years, there have been so many strides in medicine – diagnostically, technologically, pharmacologically — that the choices of what is for “the good of the patient” have expanded exponentially. We have become concomitantly blessed with better care, longer lives and overall better health – with cures that could not have been imagined a generation ago.

    With this better care has come the “complexification” of health care – especially the reimbursement system. You are correct in saying that most doctors are trapped in cottage industry model that is predicated on fee-for-service. As trapped as doctors are, however, payors perpetuate the trap. Free from antitrust laws, payors continually bend and bend the formulae. As a result we’ve seen health plan executive salaries rise exponentially, hospital administrator salaries reach record levels, while doctors’ incomes decline and patients pay more and more for their care.

    There is and will be a tipping point at which patients and physicians realize they are the economic drivers of the system and that they have power within the free market to align and create a patient-centric system rather than a profit-centric system.

    The Patient-Physician Alliance was founded to create the infrastructure for that free market movement nationwide. Accordingly you and your readers are encouraged to join and get actively involved.


  23. Porter Jersey says:

    Mark Ingram Jersey Marques Colston Jersey Mike Bell Jersey Morten Andersen Jersey Patrick Robinson Jersey Pierre Thomas Jersey Reggie Bush Jersey Rickey Jackson Jersey Robert Meachem Jersey Roman Harper Jersey Saints Customized Jersey Scott Fujita Jersey Sedrick Ellis Jersey Tracy Porter Jersey

  24. Chris Ewin, MD says:

    Just wait til ICD-10 is implemented Oct 1, 2013.
    ICD-9 has about 14,000 codes.
    ICD-10 has about 68,000 codes.
    Although we are late adopters of ICD-10 for reimbursement and resource allocation (about 25 other countries use it including England, France, Australia Germany, Canada, etc), the cost will be extremely high…estimated in the billions…
    The upgrading of our EMR’s/practice mngt systems etc will come at a high price.
    Docs will get used to it later…but the burden is huge….

    I trained and have worked at JPS. Richard is great teacher and Doc.
    He’s exactly right in the present system….
    The problem is…he has never truly been outside of the academic setting and running a business/practice.
    It’s a lot different paying the light bill when you run your own business than getting a salary from county hospital.
    But what kind of real changes are going to occur in the near future that haven’t been tried in the past…
    It’s the annual beggathon to ask for money and not cut payments tremendously….

    As mentioned many times, in primary care…people will pay directly for care….Docs have to cut the cord….

  25. Oklahoma doctor INTEGRIS says:

    Great post. Keep writing and shower your readers with such useful information. Keep it Up!!!

  26. julieanderson says:

    Good post.Keep updating such kinds of posts!