Last week I debunked the claim that the fee-for-service payment system for medical services is responsible for escalation of costs and needs to be replaced by some version of managed care. I laid blame for medical cost inflation on direct third-party payment and the absence of true prices.
Now let us see why the FFS system is best for patients. First, you may have noticed that I avoid using the term “healthcare.” This term allows for the diminution (or dhimmitude) of the medical profession, whose time-honored tradition is in treating the sick. Thus, doctors are lumped in with all “healthcare providers.” Doctors are trained to diagnose and treat illness. Healthy people for the most part do not need doctors, and, given current trends, are probably wise to stay away from them!
Similarly, a system that pays doctors more for doing less (e.g. HMOs, ACOs) will not have an impact on the majority of participants, most of whom are relatively healthy. But if you have a serious condition, wouldn’t you want your doctor to be paid for actually taking care of you, and to be paid more in proportion to the level of care?
Those who advocate against FFS medicine ignore human nature and the facts. Doctors, like most human beings, are more productive and enthusiastic when directly and proportionally rewarded for their efforts. This is obvious from observing how resident physicians in training often try to “turf” a difficult patient to another service, especially around 4AM! These young doctors are paid a meager salary during training, and are conditioned to develop a work avoidance ethic.
This changes abruptly once the physician graduates and enters the “real world” of FFS medicine, where their livelihood and reputation depend on their availability and positive attitude when called to see a challenging patient at 4AM. Unfortunately, fewer graduates each year are choosing to enter this real world.
There is no denying that doctors are more productive in a FFS environment where there is direct compensation for seeing that extra patient. Salaried doctors eventually develop a shift mentality and clock out rather than stay late for another case. This is what leads to queues for medical care. These queues tend to grow from out the door to around the block, to months and years, as we have seen in the U.K., Canada, and in our own VA system.
Costs escalate in a FFS system when third-party payment dominates and removes the constraining effect of price. If the price for the consumer is hidden, services are invariably overused. The response from the payer, let’s say Medicare, is usually to clamp down on payments to the physician. Needless to say, this strategy never works.
First, payments to physicians are perhaps 10-15 percent of total Medicare spending. Even a massive cut in this sector will not achieve significant savings for the program. Second, cuts in payments to doctors actually lead to increased overall spending. How so?
Let’s say you are in private practice and need to generate $600 every hour to cover office expenses and have something left over to take home. Medicare pays $200 per office visit (those days are long gone, by the way). You would need to see three Medicare patients per hour to stay profitable. Medicare then decides to pay only $150 per office visit. No problem, you say. You simply need to see four patients per hour to make your nut. Instead of a 4-month follow up visit, make it a 3-month follow up. Your daily patient volume goes from 24 to 32.
So revenue is maintained by increasing volume. But each additional visit generates additional charges: lab tests, consultations, and hospitalizations. This results in major increases in overall Medicare spending. Also, you are spending less time with each patient. Quality of care suffers.
This effect of price cuts on volume is observable, and is well known. Yet, the central planners persist. It is the basis for the Sustainable Growth Rate formula adopted by Congress to tie Medicare doctor payments to growth in Medicare spending. If this program were allowed to function, it would create a downward spiral of physician payment that would lead to a major exodus of doctors out of Medicare. To prevent this, almost every year, Congress pushes through a “doc fix.” Talk about idiocy!
It’s easy to see how the business model for private medical practice is becoming unsustainable. Without price controls, private practitioners can adjust fees to expenses, maintain comfortable volume and high quality. This is what happens in legal, dental, and veterinary practice. The only way for private doctors to survive, and even thrive, is to opt out of third-party contracts and develop a direct pay or concierge practice.
Since 1990, Dr. Amerling has been on staff at the Beth Israel Medical Center (now Mount Sinai Beth Israel) in New York. He served as director of Outpatient Dialysis from 1995-2012. Amerling is board certified by the American Board of Internal Medicine for Internal Medicine and Nephrology. He also is president of the Association of American Physicians and Surgeons. He has been published in many journals. For more of his reports, Go Here Now.
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