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Breaking the rules of health care: Paying your doctor

health care payments
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Pearl is a clinical professor of plastic surgery at the Stanford University School of Medicine and is on the faculty of the Stanford Graduate School of Business. He is a former CEO of The Permanente Medical Group.

Most Americans — Democrats, Republicans and independents — agree that the cost of medical care has gotten out of control in our country.

U.S. health care spending grew 9.7 percent in 2020, reaching $4.1 trillion (or $12,530 per person) and accounting for 19.7 percent of the nation's gross domestic product. The federal government spent nearly $1.2 trillion on health care in fiscal year 2019. Of that, Medicare claimed roughly $644 billion.

The numbers are mind boggling.

If our nation is going to make coverage affordable and improve clinical outcomes we must start breaking the unwritten rules of health care.


One unwritten rule we follow is that the best way to pay doctors is transactionally. Transactional payments are the basis for nearly all financial interactions. A seller provides a good or service in exchange for payment. This is how we hire piano teachers, rent apartments and procure Girl Scout cookies. It’s also how we pay for 95 percent of physician visits today.

Paying transactionally for health care made sense in simpler times when doctors could deliver only a fraction of the “products” and “services” they provide today — and when patients trusted they’d always receive the best care available at reasonable prices.

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These days, researchers and policy experts point out that 25 percent of the $4 trillion spent on American health care each year is wasted (much of it on unnecessary or ineffective treatments). That’s an inevitable and well-documented consequence of quid pro quo payments in health care. But the harm done isn’t just limited to America’s economy. Often overlooked are the ways that transactional payments cause harm to patients, doctors and the doctor-patient relationship.

The simple fact is that transactional payments compromise patient health. With transactional reimbursements, doctors get paid to fix specific and identifiable problems. When someone has a heart attack, the cardiologist gets paid to perform angioplasty. When a kidney or lung fails, the surgeon gets paid to transplant an organ.

These are remarkable and life-saving procedures, but doctors of the 21st century can do something even more remarkable: with preventive screenings, frequent check-ins and the right medications, they can help prevent hearts, kidneys and lungs from failing in the first place.

Herein lies the transactional payment problem: How do you pay someone for something that didn’t happen (like a heart attack or a stroke)? As it stands, a primary care doctor has to file an insurance claim for each step in the process. To help just one patient effectively manage or prevent even one chronic disease, a physician has to file dozens of claims. When you consider that 133 million Americans suffer from at least one chronic illness, it’s clear that paying doctors transactionally is a costly error.

Transactional payments also harm doctors. In the 21st century, insurers have sought to reduce health care costs by lowering payments to doctors and implementing strict prior-authorization requirements. In a transactional payment model, these are the most powerful tools a payer has to curb medical spending and dial back unnecessary services.

In turn, doctors have been forced to see more patients per day to maintain their incomes, and they spend up to half of each day on insurance-related tasks — chasing down authorizations and filing paperwork.

Under these circumstances, it’s no wonder physicians have grown dissatisfied, frustrated and fatigued (the classic symptoms of “burnout”).

And perhaps most importantly, transactional payments erode the doctor-patient relationship. In a 2019 survey, physicians said that gratitude from, and relationships with, patients were the most rewarding aspects of medical practice. And yet, 87 percent of doctors say patients trust them less now than a decade ago.

Breaking the rule: A better way to pay physicians

Both the federal government and private insurance companies have tried to fix the problems of physician reimbursement with “pay for value” and “pay for performance” incentives. These programs have failed to make much difference because they simply replace one form of transactional payment with another.

Instead of paying doctors per visit or per procedure, so-called value-based models reward doctors for meeting dozens of preventive screening targets and other “high value” benchmarks. Few of these programs have moved the needle on clinical quality.

Instead of a quid pro quo payment methodology, American medicine needs a relationship-based reimbursement model.

It is time to move from transactional to transformational payments

Here’s how a transformational, relationship-based Medicare reimbursement system might work:

  • Medicare enrollees select a primary care doctor as their accountable physician.
  • The Centers for Medicare and Medicaid would then pay that physician a single, upfront sum to provide a year’s worth of medical care to these patients (instead of a single payment after each medical service).
  • The doctor’s base compensation would depend on (a) the number of Medicare enrollees they care for and (b) the complexity of each patient’s current medical problems, which helps to forecast the amount of care they’ll need.
  • Each primary care physician would be eligible for added payments each year, depending on the patient’s experience. At the end of the year, enrollees would answer a series of questions about the impact their physician had over the previous 12 months: Did the doctor help you live a healthier life? Did he/she help you make good medical decisions? Do you value your relationship? Do you trust your doctor’s recommendations?

The benefits of this transformational payment model would include:

  • Greater satisfaction. Because doctors would no longer be paid for each service, they’d be able to spend much less time on paperwork. In place of these dissatisfying bureaucratic tasks, physicians could spend that time doing what matters: helping their patients prevent and manage their diseases.
  • A meaningful difference. Transformational payments shift the incentives from what a doctor does to the impact a doctor has on the patient. Rather than evaluating physicians on a litany of individual actions and clinical metrics, the transformational model rewards physicians for the positive impact they have on the lives of their patients. That is, after all, the reason people choose to become doctors in the first place.

Even with an incentive payment equal to 10 percent of a physician’s salary, the added cost of the program would be relatively low. That’s because the income of primary care doctors is a tiny fraction of total health care expenditures. And the potential return on the investment would be massive. By moving from transactional to transformational payments, patients could better manage their chronic diseases, live a more productive life, and reduce their risk of experiencing a heart attack, cancer or stroke.

Undoubtedly, debate would center on the program’s written rules and implementation. But it is time for Congress to put partisanship aside

Otherwise, we can expect our nation’s health care problems to get worse with each passing year.

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