Physician Reimbursement and Incentives

Physician Reimbursement and Incentives

Major types of physician reimbursement: Physician incentives

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Healthcare in America is a business, and when constructing a system of payment incentives, the goal is always the minimization of costs and the maximization of quality in the form of patient health. At present, four major types of physician reimbursement exist: the fee-for-service model, the per case system, salary reimbursement and capitation (Jacobs & Rapoport 2002: 149). Balancing the need to optimize patient health with the demand for cost reduction can be seen even in the most straightforward method of cost reimbursement, the fee-for-service payment system.

The fee-for-service system compensates the physician at a fixed rate per unit of service provided. Under some fees-for-services systems, the rates are calculated based upon considerations such as the difficulty and length of the procedures. Other methods of compensation, such as the UCR (usual, customary, and reasonable) system of charges presume that physicians exercise a certain degree of discretion when selecting what procedures are appropriate for patients, and compare the individual physician’s provision of certain services against the general behavioral patterns of physicians exhibited overall under similar conditions (Jacobs & Rapoport 2002: 149).

One common criticism of paying physicians in such a manner is that there is often incentive for providing more expensive services. For example, if the fees for providing surgery yield greater profits than preventative care or less invasive care, the system as a whole incentivizes more aggressive forms of treatment which may or may not be warranted by the patient’s actual condition (Jacobs & Rapoport 2002: 150). It is alleged that the results of the fee-for-service method of reimbursement are higher healthcare costs and often a lower quality of patient care. Although physicians are professionals and are unlikely to prescribe needless treatment simply to make a profit, there is often a blurry medical line between what constitutes necessary vs. unnecessary medical treatment for many conditions. For example, a physician might be more inclined to prescribe insulin treatment for a diabetic, rather than waiting for diet and lifestyle modifications to curtail the patient’s blood sugar. A cancer patient might be prescribed chemotherapy and radiation along with surgery, rather than less invasive surgery and radiation, given the subliminal financial rewards of the fee-for-services pay incentive system.

Even if physicians do not necessarily go against conventional medical wisdom, they may be more apt to offer certain medical treatments based upon such a pay scale. Patients are inclined to agree to such treatments, rationalizing that if the physician suggests the treatment, it must be good and/or more care is better care. Physicians and patients are operating under tremendous asymmetries of information, given that patients without a medical education are inclined to trust physicians when the physician states that a certain procedure or treatment is necessary (Jacobs & Rapoport 2002: 150).

Fee schedules are often used to influence method and location of treatments. Lowering reimbursements for procedures such as tonsillectomies or mammograms for young women are a good example of this — as is the reimbursement of physicians who emphasize less costly outpatient vs. inpatient care. Studies have repeatedly shown that when physicians are forced to shoulder greater financial responsibility for the health care expenditures of their patients, costs dramatically reduce (Jacobs & Rapoport 2002: 151).

The second main type of physician reimbursement is payment per case treated. This provides a strong incentive for physicians to provide FEWER services, given that the physician receives compensation on per-case basis, and pockets any leftover funds as profits not devoted to patient care. It substantially incentives physicians accepting healthier patients with less expensive medical conditions (Jacobs & Rapoport 2002: 150). However, for this reason and the lack of monitoring afforded by third parties regarding quality of care, the per case model is seldom used.

In the United Kingdom, physicians are paid a salary, rather than upon a per-service basis. They physician is encouraged to be a ‘gatekeeper’ in reducing fees, much as insurance agencies act as gatekeepers within the United States (Jacobs & Rapoport 2002: 150-151). The salary system is designed to incentivize providing patient care in a similar manner to all patients. It encourages physicians to evaluate treatments based upon patient need, rather than the likelihood of personally profiting from more expensive care. Although this system might seem to encourage physicians to provide the absolute minimum of service, in theory physicians cannot allow the quality of care to sink below a certain level. This salary model is designed to lower cost expenditures, which is deemed to be necessary under the UK’s NHS (National Health System) (Gold 2011).

While the U.S. has resisted adopting many features of the NHS system, it has attempted to curtail the abuses of the fee-for-service system through the use of capitation, or a fee paid to a physician for patient participant in a health plan. This system, most frequently manifested in the form of an HMO (health management organization) presumes that the primary deficit of the popular fee-for services system is that there is an incentive to provide care if the cost of the treatment to the physician is lower than the fee (What is an HMO, 2011, Office of the Public Advocate). Health insurers and other third-parties must monitor excessive prescription of certain services under the fee-based system. In capitation, a flat fee is provided for every patient, regardless of his or her costs of service, and higher-cost patients are presumably balanced out by lower-cost patients who seek less frequent and less expensive treatment. The insurer monitors for quality of care rather than excessive costs per patient or overly frequent use (Jacobs & Rapoport 2002: 151). The problems of such an incentive method, however, have been frequently commented upon by individuals who allege that their healthcare providers deny them necessary services based upon a desire to reduce costs. The perfect balance between patient health optimization and cost containment in terms of incentivizing appropriate physician behavior has yet to be achieved, and remains a struggle.


Gold, Steve. (2011, May 11). How European nations run national health systems. The Guardian.

Retrieved June 2, 2011 at

Jacobs, Philip & John Rapoport. (2002). The economics of health and medical care. Aspen.

What is an HMO? (2011). Office of the Public Advocate. State of California.

Retrieved June 2, 2011 at

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