Why paying doctors salaries instead of fees won’t make health care cheaper

February 15, 2014
February 15, 2014

One of the lesser-known consequences of health care reform in the US is a massive consolidation of doctors. Former private practice physicians are getting sucked into hospitals or networks of affiliated practices and hospitals. Beyond hospital recruiting, uncertainty about the health care market, lower insurance and Medicare payments, and malpractice premiums have driven many private practices to consolidate and change the way doctors are paid.

Last year, 64% of doctors’ job offers, placed through firm Merritt Hawkins, involved hospital employment, which is typically salaried, versus just 11% in 2004. Another physician recruitment firm estimates that the number of private practice sales has increased by as much as 40% in recent years. On a larger scale, there were 105 hospital mergers in 2012, up from an average of 50 to 60 a year before the ACA passed.

Economists think that larger networks of doctors operating on the salary model, rather than fee for service, will improve care and reduce costs. But the reality is that the shift from private practices might accomplish neither end in the short run.

Under the old payment model, which has traditionally dominated American health care, private doctors are paid for every procedure. The incentive is to provide lots of care rather than what’s necessary or cost-effective. As a result, medical costs skyrocketed for years without much in the way of health gains to show for it.

Instead of changing incentives, many hospitals tack facility fees on to procedures, offer bonuses to physicians based on the billing they generate, and pressure doctors to suggest physical therapy and follow-on X-rays with even more costly MRI scans. Some of these behaviors existed in private practice, but now happen at a larger scale in networks.

“In many places, the trend will almost certainly lead to more expensive care in the short run,” Brandeis economist Robert Mechanic told the New York Times.

A report Mechanic co-authored (pdf) found that whether salaried or not, many medical groups don’t really link compensation to quality of care.

Consolidation could end up being beneficial if incentives genuinely change.

Some hospital systems are attempting to pay doctors based on their effectiveness, from patient ratings or low level of readmissions. The more data hospitals have, and the more they adopt this model, the cheaper health care will be. But only a few hospital systems do this, and even fewer do it effectively

Until that happens more broadly, consolidation isn’t likely to make the average medical experience any cheaper or better.

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