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POLITI CS AS USUAL AND CUSTOMARY? PHYSICIAN PAYMENT IN TRANSITION Lawrence D. Brown People knocking them up at all hours. For God's sake doctor. Wife in the throes. Then keep them waiting months for their fee. To attendance on your wife. No gratitude in people. Humane doctors, most of them. James Joyce, Ulysses1 Like Leopold Bloom, American policymakers tend to think well of physicians and their services. Increasingly, however, both policymakers and public opinion believe that physicians are paid too much for what they deliver. A recent poll found that 88 percent of Americans are satisfied with the quality of the care they get from doctors, but 70 percent thinks that care costs too much, and 81 percent believes that doctors are doing little or nothing to reduce rising costs. 2 As a component of total health care spending, the share of physician services has actually declined over the century. In 1935, the United States spent $744 million on physician services, $731 million on hospitals. By 1950, however, hospitals had pulled well ahead--$3,698 million for them, $2,689 million for physicians--and the gap has widened steadily, indeed annually, since then.3 Of the $322 billion the nation spent on health services in 1982, hospitals consumed 42 percent ($136 billion), physicians less than half as much, 19 percent ~ $62 bi [lion) .4 It is estimated that in 1990 the nation will spend $334. 6 billion on hospital care ~ 44.1 percent of total health spending) and $128.8 billion on physicians' services (17.0 percent).5 Nonetheless, physician services stand second only to hospitals as objects of spending and the rate of growth of the former has kept close pace with the latter: between 1981 and 1982 spending on hospitals rose by 14.9 percent, on physicians by 12.8 percent.6 Moreover, physicians are widely regarded as the captain of the medical team. Even though only 20 percent of health care expend itures are for physicians' services and less than 10 percent of all health care workers are physicians, it is the physician who determines most of 11

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what happens in the health care process.~7 And ~most. may mean seventy percent of all personal health care expenditures.8 The Perplexing Target Of Policy The central policy issue is how to influence, by remuneration measures or otherwise, the lines of causation, sometimes clear and distinct, sometimes tortuous and obscure, between physicians' decisions and the nation's health care bill. For the most part policymakers in the 1970s (and so far too in the 1980s) have viewed the hospital as the appropriate unit of influence. One program after another--Professional Standards Review Organizations (a program of physician review, but one aimed almost entirely at hospital use), certificate-of-need programs, health planning, state rate-setting, and most recently, the Medicare system of prospective payment based on diagnostic-related groups (DRGS), has been aimed at hospitals. Some have argued that it is futile to regulate institutions that necessarily are capitives of their medical staffs; the reply has been that constraining this major component of the environment of physician practice is the fastest and most feasible means of constraining physician behavior. This hypothesis has not been rigorously tested. For example, it is unclear how far the impressive savings in state hospital rate-setting programs reflect managerial innovation and how far enduring changes in physician behavior. Many physicians do seem to find the hypothesis persuasive, however.9 Critics of hospital regulation as a cost containment strategy are convinced that a better way exists: change physicians' incentives to order excessive diagnostic tests, specialist referrals, treatment procedures, hospital admissions, long stays, and prescriptions. This is easier said than done, however, and although ~scenarios. were abundant in the 1970s, no reliable, generalizable method of changing physic fan incentives (as distinct from regulating their conduct or remuneration) was discovered. Throughout the 1970s, great hopes were pinned on health maintenance organizations (HMOs); the organizational union of group practice and prepayment could not fail to generate economies. Despite their conceptual appeal and despite federal encouragement, however, HMOs have grown slowly; today there are only about 260 HMOs and only about f ive percent of the population receives care f ram them. 10 Moreover, the relationship between organizational variables and physician behavior in HMOs remains poorly understood. Do HMOs achieve savings because their doctors are paid differently or because these doctors bring with them or acquire norms of group cohesion and loyalty or a commitment to the HMO ~cause.?ll The individual practice association is at once the fastest growing type of HMO and the least disturbing to physicians, but its savings tend to be smaller than those found in classic prepaid group practice plans. 12 Other schemes to change incentives by altering the organizational framework of practice--.preferred provider organizations. (PPO), for -12-

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example--are widely advertised but their future is as uncertain as their potential for cost containment. Meanwhile European observers look on the American debates about the theoretical merits of regulation ~versus. incentives with some amusement. Their view, surely not implausible, is that a society that wants to spend less on physician services must simply resolve to pay less for them by means of fee schedules. But fee schedules must be bargained between payers and providers and therefore reflect the relative political strengths of the contenders. Furthermore, fee schedules, like other forms of fee-for-service payment, are vulnerable to multiplication of procedures toward ~ target incomes levels. Indeed the Europeans have enjoyed little more success in curbing the growth of spending on physicians ~ not to mention hospitals) than have the Americans.13 Some observers conclude that capitation payment (fixed lump sums paid to the physician for the complete care of each patient on his list) is the only proven economical method, and the experience of Great Britaints frugal National Health Service seems to bear them out. The only comparable country to follow the British example (at least in part), however, is Italy, which created a National Health Service in 1978 and adopted capitation for general practitioners, in good part because physicians who had been paid by capitation under the previous sickness fund system demonstrated lower costs than those paid by fee-for-service.14 National Health Services and capitation may be the waves of the future, but if so they are weak waves and the future a distant one. For now most systems, including the United States, will continue struggling to introduce cost constraints into fee-for-service systems. The Rise And Decline Of Usual And Customary The American health care system differs fundamentally f ram most European systems not in its adherence to fee-for-service payments but rather in its methods of calculating the fees insurers agree to pay. The European method, as noted above, uses negotiated prospective fee schedules; Americans retrospectively calculate the charges that are Usual and customary. or ~prevailing. and ~ reasonable. in the physician' s individual practice and in his community. Although this approach is itself of ten taken to be usual and customary in the United States it is in fact of fairly recent vintage. Fee schedules (or fee bills) are nearly as old as American medicine. The colony of Virginia adopted a fee schedule in 1736. In 1766, New Jersey's medical society adopted one, the first private society to do so.15 Fee schedules proliferated in the 1800s. Doctors were plagued by competition, rising living costs, and a much-deplored credit system that encouraged patients to postpone or -13-

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forget about paying bills for medical services that had been rendered months earlier. There were Quacks putting themselves forward, and doing what they do for half price,. thus creating community norms that made life cliff icult for the unhappy physicians, who thought themselves Bless adequately rewarded for their services than any other class of educated men, in proportion to their labors and sacrifices. The public was always ready to condemn reasonable charges as ~exorbitant. and might even go to court to contest them.17 A fee schedule could establish uniformity, and thereby bring peer pressure to bear on the ~quacks,. assure the public that it had been treated fairly, and illustrate professional opinion for the courts. As a New York journal explained in 1825: Owe are far from desiring that the physician should demand the same compensation from the rich and the poor; he must of necessity regulate his demand by the ability to pay of his patient; but in doing so, let him keep up the impression that his services are valuable, let him charge a proper fee, and then make such deduction as the pecuniary circumstances of his patient require and not openly profess to practice medicine at half price. By the 1880s there were separate fee schedules for city and rural practice and for the sick poor.l9 Health insurance plans, which grew during and after the Depression, essentially institutionalized this dichotomous approach. The better-off subscribed to Indemnity plans, which paid them scheduled sums for care rendered by physicians; fees might well exceed the reimbursement. Those with lower incomes might enroll in ~service. plans, which gave directly to the physician a sum he was expected to accept as payment in full. As insurance spread and incomes rose in the 1950s, however, doctors complained that both the service plans and the insurers' fee schedules unreasonably curtailed their earnings. Some physicians started developing fee schedules that reflected their professional understanding of the comparative value of medical procedures--the so-called Relative value scales,. of which California's was most prominent.20 Others, however, sought to develop a less arbitrary, more dynamic method that would adjust reimbursement automatically to changing practice costs and norms over time without periodic battling over the revision of fee schedules. First employed by a local Blue Shield plan in Wisconsin in 1954, remuneration according to ~usual,. Customary, or ~reasonable. charges began to spread across the country, although quite unevenly. As enactment of Medicare drew near in the early 1960s, physicians feared new struggles over fee schedules with a new and more prominent payer, the federal government. The new Usual and customary approach held several advantages: because high billing by physicians drives up both the individual's usual charges and the community's customary levels, the system leads to progressively more generous reimbursement levels over time. It also allows rate differences among doctors that reflect variations in the quality and scope of service, and permits rapid adjustment to technological or other changes in the content of -14-

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services. 21 Blue Shield hastened to assure Congress that the method was widely used and acceptable, and urged that it be incorporated in Medicare. Congress agreed, partly because it was in search of political peace with the greatly agitated physician community (which opposed Medicare vehemently and warned that its adoption would substitute Socialized medicine. for the system Americans knew and loved), and partly because it believed that usual and customary charges (the statute used the less familiar terms Customary and prevailing. charges) would mean charges similar to, but not higher than, those for similar services rendered to non-Medicare subscribers by local physicians. The method, in short, promised simultaneously to avoid both second-class care for Medicare beneficiaries and excessive billing. Clinton Anderson (D-N. Mex.), Medicare's Senate sponsor, argued that the system would Significantly and unnecessarily inflate the cost of the program to the tax-payer and to the aged,. but Congress, fearful of driving physicians to boycott the program, avoided discussion of fee schedules.22 Before long, Congress--or at any rate the staff of the Senate Finance Committee--had second thoughts. By 1970 charges for physician services for Medicare beneficiaries were running well ahead of charges for people who received comparable services outside the program.23 The staff blamed the Department of Health, Education, and Welfare, which, ever in search of Supportive consensus,.24 had given the fiscal intermediaries a free hand in defining customary and prevailing charges as they saw fit. Although Blue Shield had left Congress with the impression that usual and customary was a method with a fixed meaning and settled application, it turned out that definitions, data, interpretations, and calculations differed greatly from place to place.25 The staff recalled the virtues of fee schedules, which it referred to as Built-in cost limitations,. or Fixed indemnity allowances.. These, it wrote, were Within the traditional framework of the medical insurance obligation of an insurer (social security) to the insured (beneficiary) whereby specific indemnities are payable to the insured by the insurer when he has incurred a legal obligation to pay a physician who has rendered care covered under the policy.. It urged too that balance billing be allowed: The Government will not tell the nonparticipating doctor how much to bill the medicate beneficiary and it will not interfere with this privilege of collecting his own bills. Congress, however, chose to stick with the existing system, tightening def initions and limiting reimbursement increases in various ways, in particular by linking them to a general economic index. In the mid-1970s Medicare was still paying physicians according to their usual and customary charges, but the method had evolved from a Loosely defined and enforced concept. to an Exacting mechanism. of control over price increases.27 15

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That the mechanism has become exacting did not mean that it made sense, and by 1977 there was growing agreement that, as Holahan and Spitz put it, The only consistent outcome of UCR has been confusion and a loss of program control.~28 The Carter administration, however, chose to launch a new drive against hospital costs and proposed in April 1977 that Congress impose an annual ceiling.on hospital revenues and capital expenditures. The battle over these caps dominated the health policy agenda until November 1979, when the House of Representatives overwhelmingly rejected a much-revised version. The election of Ronald Reagan in 1980 then promised to transform that agenda radically: ~pro-competitive. legislation would be introduced to replace regulation. Throughout 1981 the health sector waited expectantly as the administration struggled in vain to keep its promise. Meanwhile, five years after the introduction of the Carter plan, hospital costs were rising faster than ever--17.5 percent between 1980 and 198129--and an impatient Congress began discussing a system of prospective reimbursement for Medicare, loosely modeled on the rate-setting programs in half a dozen states. Weary of the conundrums of competition and mindful of the concern on Capitol Hill, Richard Schweiker, Secretary of Health and Human Services, put the Health Care Financing Administration to work designing a prospective payment system. In the Tax Equity and Fiscal Responsibility Act passed late in the summer of 1982, Congress instructed the department to transmit such a plan by year's end. The department complied and the plan, attached to a bill to alleviate the problems of the Social Security System, made its way easily to President Reagan's desk in March 1983. Although it applied only to federal payments to hospitals in Medicare, the law also required HHS to report in 1985 on the feasibility of extending prospective payment based on DRGs to Medicare physicians services in hospitals, thus again returning the issue of physician remuneration to a prominent place on the health policy agenda. Forces For Change Apparently the late seventies' lull in the storm that had begun brewing over physician reimbursement was but temporary. The battle over changes in hospital payment had diverted attention from physicians, but in the longer-term i t strengthened the case against usual and customary payment. After all, most of the criticisms of retrospective cost-based reimbursement for hospitals applied to the physician payment system too. And by making a major modification in the hospital payment system only six years after the Carter cost cap was proposed--very rapid change by the usual standards of the American legislative process--the federal government proved that it meant business. Few now doubt that lightening could soon strike physicians too. Robert Dole (R-Kans.), chairman of the Senate Finance Committee, has stated several times that The year of the physicians is at hand. David Ourenberger (R-Minn.), chairman of the Finance Committee's -16-

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Health subcommittee, recently counseled that hospital and physician payments must ultimately be lumped together. lest the prospective payment system create rewards for finding ways to shift costs from hospital to physician reimbursement. ~ 30 The Reagan administration too has contr ibuted to the sense tea ~ change is necessary and desirable by proposing that Medicare payments to radiologists and pathologists be slashed and by calling for a year-long freeze on Medicare payments to physicians. Apart f ram a general and obvious concern with uncontrollable health care spending, which has increased policymakers' taste for cost containment on all health care f rants, six more particular factors explain the willingness of politicians to pick quarrels with physicians less than twenty years after they meekly wrote Medicare payment provisions aimed at appeasing them. First, there has been a general reappraisal by both academic authorities and public opinion of the relationship between health care spending and health status outcomes. Until recently health was widely viewed as something one tried to buy (or repair) by means of the services of providers. The costs of physician training programs, hospital construction grants and loans, Medicare, Medicaid, and more were cheerfully borne, indeed viewed as blue-chip investments In social progress and justice. Research in the 1960s and 1970s introduced complexities in to this image of the production function. Many ~health. complaints--perhaps well over half--are apparently psychological, not somatic, in origin and therefore raise questions of care, not cure. Some somatic problems, especial ly those af f lict ing the increasing portion of the population of advanced old age, are essentially beyond cure; still others get better by themselves without medical intervention. Indeed, too many pills, diagnostic tests, and days spent in the hospital can imperil health, not improve it. Equally corrosive of confidence in the system was new research emphasizing the importance of variables providers could not control--such ~pre-institutional. factors as diet, smoking, exercise, stress, and genetic inheritance. Great strides in reducing morbidity and mortality continued to be registered and appreciated, to be sure, but policymakers and the public began wondering whether these strides were proportionate to the very rapid growth of health care spending. The public had not lost its desire to have a doctor when it needed one. It had, however, begun wondering whether it (that is, everyone besides oneself and one's loved ones) really needed doctors (and hospitals and drugs and the rest) as badly, as often, and as intensively as it thought it did. These changes in thinking about the cost effectiveness of medical care have coincided abruptly with a second, conf licting trend, a large increase in the nation's supply of physicians. Until the early 1970s, public opinion believed that the nation suffered from a doctor shortage, and Almost every study, and every student of the subject .... supported the belief of the developing shortage of physicians.~31 Federal policy reflected this view by making sizable -17-

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financial commitments to the training of physicians in 1963 and by expanding it significantly through 1971. By the middle 1970s analytical (and to some extent journalistic and popular) opinion began taking a more skeptical view of the number of physicians the nation needed and looked anxiously on the projections of numbers of doctors and of physician-to-population ratios in the future.32 Between 1965 and 1977, medical school enrollment rose by about 80 percent, from 32,428 students to 58,266. By 1990, there will be an estimated 188.9 U.S. trained physicians per 100,000 population, more than 40 percent above the level in 1970.33 It is estimated that throughout the years 1965-1990, the number of active physicians will have grown at an average annual rate about three times greater than the rate of population growth.34 It appears that the team has many more captains than it needs. Particularly worrisome was the large, growing number of specialists; manpower legislation in 1976 sought to gear federal financial aid to the willingness of medical schools to enlarge the ranks of their students who said they intended to enter general practice. Critics argued that such declarations by entering students were meaningless; the core attraction of specialist practice is the very high remuneration it can bring, and the best way to enhance the appeal of general practice is to pay specialists less.35 The emerging physician surplus is widely viewed as a calamity mainly, of course, because it implies strong, steady upward pressure on charges for physician services, and therefore for other services too, flying in the face of whatever cost containment policies might be implemented. Not everyone is pessimistic. Some believe that more doctors mean more competition, which means greater acceptance of PPOs and discounted fees and faster development of cost-conscious entities such as HMOs, which of fer physicians a refuge from the entrepreneurial perils of fee-for-service practice. The relationship between aggregate physician supply and HMO development is unclear, however. For example, between 1965 and 1979 the number of active physicians grew from 285,000 to 422,00036 without triggering the explosion of HMO-formation the federal government sought, and no one knows how large a surplus would be needed to do so. Others hope that ~surplus. physicians will forsake over-doctored suburbs for underserved rural sites. Perhaps they may, but a new regional equilibrium may increase costs in rural areas without bringing them down in the metropolis. On balance, the most probable prospect is the pessimistic one: more physicians mean more striving to attain Target incomes,. that is, earnings large enough to allow the physician to live in the manner to which he thinks he has a right to become accustomed. This prospect has understandably placed the problem of the number, behavior, and charges of physicians high on the federal health policy agenda for the 1980s and beyond. If society cannot afford to pay them all as much as they seek, how shall it pay then? Third, enthusiasm about the economic advantages of installing ~gatekeepers. among physicians has spurred interest in changing the -18-

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reimbursement system. (As used here, Gatekeeper refers not to the physician as certifier of patients' eligibility for insurance or other benefits, but rather to physicians acting as checks on each others' conduct. ~ While policymakers in the l950s and 1960s were working to overcome the doctor shortage, they also encouraged construction of new hospital beds to overcome a supposed shortage in that sector too. In the 1970s their efforts were handsomely repaid with a doctor surplus and a growing number of communities with underoccupied excess beds. The rising cost of care and the reevaluation of the connection between services and outcomes then subjected hospitals to cross pressures: organizational imperatives told them to keep pace with each other and fill beds, while policy imperatives told them to reduce capacity, admissions, and lengths-of-stay. Meanwhile insurers came under public pressure to slow the growth of premiums by using the payment system as a means of disciplining profligate providers. The hospitals and payers complained, with some justice, that they themselves could meet these demands only by gaining new leverage over physicians, and the more adventuresome began experimenting with arrangements that might strengthen their hands. Although these arrangements assumed different names and forms, their essence was to bring physicians into an organizatonal f ramework in which some might act as ~gatekeepers. for the rest. The Blue Cross plans became the nation's major sponsor of HMOs. Some insurers began contracting on favorable terms with preferred provider organizations composed of physicians who had demonstrated their responsibi lity and economy in utilization. State Medicaid officials began contemplating restrictions on recipients ~ freedom of choice, and California even began awarding contracts by competitive bidding to hospitals who would provide recipients' care. Greater price discrimination among purchasers is raising the cost of poor discipline and inefficiency among providers. Because by then r nature these gatekeeping mechanisms leave, or threaten to leave, uncooperat ive, unattached physicians on the outside looking in, they have met considerable resistance in local medical communities and are as yet far from becoming mainstream. Although practice has yet to catch up with theory, those diverse gatekeeping experiments have colored policymakers' thinking. It has come to be widely believed that health care costs might be d' sciplined economically if doctors could be disciplined organizationally and that changes in reimbursement policy are a powerful tool with which public and private payers can reward the growth of such organizational discipline among physicians. The simple implication of the exercise: ~ In the past, the physician who ordered a lot of services was the hero. . . Tomorrow he's going to be the bum. ~37 Fourth, interest in changing physician reimbursement draws force f ram a crude sense of political equity now lively among policymakers. In times of austerity and budget-cutting, the argument goes, all 19

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programs, providers, and clients must take their turn at the chopping block. In 1981, for example, Medicaid was cut significantly; ~therefore. in 1982 it was Medicare's turn.38 In 1983, the new prospective payment system begins imposing new constraints on hospitals; ~therefore. 1984 should be the year of the physician. Policymakers resort to these less-than-Rawlesian images of fairness not because they are ignorant of or indifferent to the complexities but because such intuitive balancing aids coalition-building in the fragmented American legislative system, by diffusing the costs of programs widely and thus reducing opposition. The politics of Medicare and Medicaid in 1965 displayed such balancing clearly. Costs were nicely parceled out among beneficiaries (payroll deductions for Medicare Part A, premiums for Part B), employers (contributions to Part A), the federal taxpayer (general revenues for Medicare Part B and for the federal share of Medicaid), the state tax-payer (Medicaid), and providers (who suffered new governmental intrusions and red tape). Fifteen years later, the cuts of the early 1980s were faithful to this political logic: higher deductibles for Medicare beneficiaries, lower reimbursement for specialists, a tighter payment system for hospitals, new copayment provisions in Medicaid, reduced federal matching payments to the states, and onward, each gallantly taking its turn in an unfortunate but unavoidable adjustment to hard times. By 1983, however, there was a sense that physicians had gotten off comparatively lightly and that they should be subjected to ~reform. before others sacrifice more. Even if it should be unwilling to single out physicians for reform in new reimbursement legislation, Congress will have a full opportunity to express its sense of equity when it turns, as it soon must, to legislative remedies for the impending deficit in the Medicare trust fund. Such legislation, like the law that originally established the program and the one that fortif fed the Social Security trust fund in 1983, will probably incorporate an extensive diffusion of the costs of change. Because their ~turn. has come, changes in physician reimbursement may loom large in the policy package. Fifth, the accumulation of data, and the growing technical and analytical capacity to manipulate data, have shown policymakers how great are the differences in medical procedures and costs that exist within and across geographical areas and medical specialties, and have persuaded them that many of these differences have no objective basis in the physical condition of patients. For example, Wennberg and Gittelsohn found striking variation in rates of surgical procedures in New England communities. The application of various controls left no satisfying explanation but that physicians dif fered in practice styles and preferences. 39 The efforts of the Professional Standards Review Organizations to collect information on regional and local diagnostic and admissions patterns, to analyze it, and to discuss and refine into a shape sufficiently normative for peer review purposes likewise -20-

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enhanced the sense that medical practice and medical costs were replete with unjustified diversity. These findings and debates built policymakers' confidence: if rates of treatment and remuneration were in so many respects arbitrary then perhaps government might impose its own more-or-less arbitrary rules and limits on reimbursement with little fear of doing harm. Finally, physicians' spokesmen have come to recognize that the profession itself has some stake in changes in reimbursement. Parallels with the politics of the prospective payment system for hospitals may be instructive here. Threatened with the Carter cost cap bill in the late 1970s, the hospitals fought vigorously and (as it turned out ~ successfully in defense of the status quo. By 1982, rising rates of spending clearly demonstrated the failure of the industry's Voluntary effort. to hold costs down, the prospect that competition would transform the federal health agenda had disappeared, Congress' s interest in prospect ive payment was unmistakable, and the status quo was doomed. Hoping to influence outcomes it could not avert, the industry decided to play a ~constructive. role in designing the new payment system, and in April 1982 the American Hospital Association came forth with its own prospective payment plan. The association's president explained that cost-based reimbursement had been So severely tightened by Government regulations. that many hospitals were willing to be paid prospectively.40 As a consequence of the federal government's gradual transformation of usual and customary charges into an ~exacting. mechanism of control and more recently, the Reagan administration's annual eagerness to endorse extensive cuts in and freezes on reimbursement, physicians too have come to view the prevailing system as a double-edged sword. In politically favorable times the system permits individual physicians steadily to elevate their usual charges and physicians collectively to drive up the customary charges in their community. In politically difficult times federal policymakers may tighten definitions, reduce payment percentiles, disallow cost factors, and then reassure the public that all is well because physicians are being paid on the basis of their usual and customary rates. Complaining precisely of this--that despite a growing disparity between physicians' actual charges and the reasonable charges paid by Medicare, the federal government asserts that sour payment is based on what most physicians charge anyway.--41 the American Medical Association's Council on Medical Service recommended in 1983 that the organization consider abandoning the usual and customary method. In essence, the Council argued in 1983 for what the staff of the Senate Finance Committee had proposed in 1970--.an indemnity system of payment for the majority of services provided by physicians, ~ with the physician left Free to charge the patient what he believes to be a fair and equitable fee for his service..42 -21-

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Prospects for Change Certainly, important forces for change in physician payment methods are at work among federal policymakers. Probably, signif icant changes of some type will be adopted before the end of the decade. The content of such changes is, however, difficult to predict in detail. Certainly, the outcome will depend partly on endogenous forces (the characteristics of the political system and its players) and partly on exogenous ones (events and trends in the larger society). Considering the usual pattern of shifts and swings in electoral sensibilities, partisan support, and ideological enthusiasm, probably it is a safe guess that over the next few years the federal Executive and Congress will be no more conservative and ~pro- physician. than those in office today and that the very considerable interest in changes in physician payment among today's cast of charters is unlikely to be weaker among tomor row' se-at least insofar as electoral, partisan, and ideological variables are at work. Thus it may be useful to leave aside the endogenous factors here, focusing on the exogenous as the key predictive variables. Two exogenous variables may be expected to play a fundamental role in political outcomes--the rate of increase of spending for physician services relet ive to the rate of increase of spending on hospitals and in the consumer price index (CPI ~ generally, and the degree to which the DRG-based prospect ive payment plan for hospitals in Medicare is thought to be working or faltering. The two variables together define four cells and a political ~scenario. may briefly be sketched for each of the four. If spending on physicians rises rapidly while hospital spending and the CPI slow down, and if the DRG-based system for hospitals is thought to be working well (that is, slowing the growth of hospital costs without major adverse side effects), a DRG-based system will probably be applied to inpatient physician services too in short order and with comparatively little political pain. In this situation policymakers would enjoy both a call to arms and a workable model; the coincidence of the two is the major precondition of change. Apparently the intellectual basis for applying DRG categories to physician services is intact, or nearly so, (one designer of the DOG approach recently said that such an extension was conceptually--though not politically--.a snaps )43 and there would seem to be no reason to delay extending them. If spending on physicians continues to rise rapidly but the DRG-based system is thought to be in trouble--because it fails to contain hospital costs, triggers many hospital closures, generates large uncontained cost shifts, is beset by ~gaming,. or for other reasons--policymakers may well impose on physician services fee schedules that lack the elaborate methodological f ounda t i ons and validation of DRGs. Doing so would trigger much political conf lict: 22

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the American belief that regulatory standards should be based not merely on practicality and public interest but also on fancy scientific reasoning will inspire charges that fee schedules are ~arbitrary,..inequitable,. and ~perverse.--the unholy trinity of anti-regulatory rhetoric and the health sector. Nonetheless, rising costs in the face of the general factors working for change will convince policymakers that they must ado something. ~ In this situation, however, they will seek their model not at Yale but in Europe or Canada. 44 If increases in physician spending slow down near or below the (lower) rates for hospitals and the CPI, and the DRG-based system is thought to be working well, a lively and inconclusive legislative battle over extending the system to physicians is likelye Organized medicine and its political supporters will argue that the profession should be permitted to continue putting its own house in order without radical change imposed from outside. The reform-minded will contend that equity and consistency demand an extension of the new system to physicians and will assert that any temporary decline in the growth of spending can be no more than a blip on a generally ascending curve. In this situation, incrementalism will be in full flower, and a compromise outcome might be further tightening of the usual and customary approach, particularly for specialists. Last, spending for physicians might level off while the DRG-based system is judged to be doing poorly. Policymakers then might be expected to shelve the issue of payment reform, at least until soaring spending sounds a new call to arms, a newly-attractive model comes on the scene, or both. Challenges Of Change It would be surprising if physician spending declined so sharply or the prospective payment system malfunctioned so dramatically as to neutralize the forces for change now gaining strength. Extension of the DRG-based system to physician services or adoption of a European-style fee schedule will not end debate, however, but rather will shift it to another equally troublesome set of concerns, of which three deserve special attention. First, fee schedules (DRG-based or other) for physicians in Medicare, like the new hospital payment system, will shift costs to non-medicare payers. Because about 90 percent of hospital charges are paid by third parties, cost shifting in the new system may be expected to meet with organized resistance and to generate pressure on state governments for redress. Only about two-thirds of physician charges are paid by third parties, however; shifted costs would be spread over a less cohesive constituency, which might well dif fuse political pressure for an all-payers system. On the other hand, about half the -23-

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states now use fee schedules in Medicaid and their extension to the entire system should present few conceptual obstacles if the political will were present. Second, European experience teaches that fee schedules usually generate intense battling between generalists and specialists and among categories of specialists. It would not be surprising if these issues were ignored or downplayed in legislation authorizing fee schedules for physician services, for there is now much indignation at the high fees specialists command and much sentiment in favor of trimming them down, both as a matter of equity and in order to reduce incentives for overspecialization. They play, so to speak, the political role of the hospital that charges $3,000 for a cataract removal or $8,000 for a hip replacement, in the growth of support for the prospective payment system, the egregious high-rollers in need of being brought down to earth. Over time, however, specialists may be expected to recover their political standing and to hone their political skills, and disputes over payment will probably come to resemble those in Europe--persis~cent, angry, technically complex, and time-consuming.45 Third, and probably of highest and most immediate importance, is the problem of balance billing. The central governments of nations with national health insurance systems can mandate that physicians accept Assignment, that is, that they take sickness fund payments in full for services as a condition of participation. Physicians who refuse to do so must usually be content to become exclusive purveyors to the small, affluent private sector, and in the nature of the case the number of physicians who can sustain themselves comfortably in this way is limited. In the United States, by contrast, the major government health programs extend only to the elderly and to some of the poor. If participating physicians were required to accept assignment, a large number, perhaps enough seriously to impair access for the programs' clients, might withdraw their services. Recognition that political indignation suff iciently strong to lead to the extension of prospective payments to physicians would probably a lso car ry enough power to enact mandatory assignment has sent to the AMA into what one congressional staffer called a ~frenzy.. When the AMA talks about indemnity payments plus balance billing, policymakers will listen. They may reject much of what they hear, however, for although they worry about rates of participation and assignment, they are also troubled by the erosion of the value of the Medicare entitlement and by the burdens that higher out-of-pocket costs impose on the elderly. As Senator John Heinz (R-Pa.) recently pointed out, on the nearly half of Medicare claims that are unassigned beneficiaries must pay not only 20 percent copayments on reasonable charges but also the difference between reasonable charges and actual cost, which (says Heinz) has risen from 14.4 percent of the total amount of a claim in 1974 to 22 percent in 1980. Therefore, if -24-

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reasonable charges were 72.4 percent of total costs (the estimate for 1982), Medicare's payment would come only to 58 percent of the physician's total bill. Largely for this reason costs of services not reimbursed by Medicare have risen from 1.9 percent of an elderly person' s average income in 1970 to 2.65 percent in 1980. 46 Few legislators will want to accentuate this trend, but few will want to drive down the rate of participation in the program. A compromise might be to allow balance billing within limits, up to a f iced dollar f igure, say, or up to a set percentage of charges. Such improvisations will settle little. Mainly they will highlight the enormous difficulties the central government faces in trying to rationalize public health care programs in a system that retains and cherishes very large elements of pluralism and privatism. -25-

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Ref erences 1. The quotas ion at the head of the page is f ram the Modern Library edition of 1961, p. 162. 2. Yankelovich, Skelly and White, Inc. poll summarized in Medical World News, March 14, 1983, p. 50. Asked who was doing Ha great deal or something. to curb costs, 38 percent named the Blues and commercial insurance companies, 27 percent the federal government, 20 percent state and local government, 19 percent hospitals, and 18 percent physicians. Nancy L. Worthington, National Health Expenditures, 1929-74,~ Social Security Bulletin, Vol. 38 (February 1975), p. 13. Robert M. Gibson and others, National Health Expenditures, 1982., Health Care Financing Review, Vol. 5 (Fall 1983), p. 1. 5. Mark Freeland and others, Projections of National Health Expenditures, 1980, 1985, and 1990., Health Care Financing Review, Vol. 1 (Winter 1980), p. 11. 6. Gibson and others, National Health Expenditures~, 1982, p. 1. Victor R. Fuchs, Who Shall Live? Health, Economics, and Social Choice, (New York: Basic Books, 1974), p. 145. In a similar vein, Jay Winsten ~ Bailing Out Medicare,. New York Times, May 5, 1983) observes that the doctor, Ma private entrepreneur who mobilizes hospital resources yet bears no financial responsibility for the ensuing costs,. is The key decisionmaker,. and contends that fin no other industry are senior decisionmakers so unaccountable for the economic consequences of their actions.. One solution, says Winsten, is to extend the diagnostic-group- based prospective payment system now applied to hospitals in Medicare to physicians too. 8. Mark S. Blumberg, Rational Provider Prices: Provider Price Changes for Improved Health Care Use,. in George K. Chacko, ea., Health Handbook (Amsterdam: North Holland Publishing, 1979~; cited in Alain C. Enthoven, Health Plan (Reading, Mass.: Addison-Wesley, 1980), p. 23. 9. For a recent inventory of predictions by physicians and others see Karen Hunt, ~DRG--What It Is, How It Works, and Why It Will Hurt,. Medical Economics, September 5, 1983, pp. 265-67. . 10. For a discussion of the HMO strategy see Lawrence D e Brown t Politics and Health Care Organization: HMOs as Federal Policy (Washington, D.C.: Brookings Institution, 1983~. 26

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11. For an analysis emphasizing the latter purposive factors, see George B. Strumpf and others, Health Maintenance Organizations, 1971-1977: Issues and Answers,. Journal of Community Health (Fall 1978), especially pp. 42-47. For a thorough review of the HMO literature, see Harold S. Luft, Health Maintenance Organizations: Dimensions of Performance, (New York: Wiley, 1981~. 12. Luft, Health Maintenance Organizations, p. 74. 13. For various useful measures comparing the United States with Canada and Europe around 1975 see Robert J. Maxwell, Health and Wealth, (Lexington, Mass.: Lexington Books, 1981), Chapter 4. 14. Antonio Brenna, Alternative Methods of Physician Remuneration and Thei r Ef feats on Physician Activity,. unpublished paper, pp. 110, 121-22. 15. George Rosen, Fees and Fee Bills: Some Economic Aspects of Medical Practice in Nineteenth Century America, Supplement to the Bulletin of the History of Medicine, (Baltimore: Johns Hopkins, 1946), p. 2. 16. Quotations from ibid., pp. 55-6, 36. 17. Ibid., pp. 44, 89. 18. Ibid., p. 2. Deference to ability to pay seems to have been accepted in America from the start. In Rome, the church of Saints Cosma and Damiano memorializes two ancient Eastern physicians who Treated the poor gratis,. and were Consequently suspect and slated for martyrdom.. [Kate Simon, Rome: Places and Pleasures (New York: Knopf, 1972), p. 1281. If American physicians felt similarly about their colleagues they held their tongue. 19. Rosen, Fees and Fee Bills, pp. 66-71. 20. For background see Herman M. Somers and Anne R. Somers, Doctors, Patients, and Health Insurance, (Washington, D. C.: Brookings Institution, 1961), pp. 51-56. ^1. John Holahan and Bruce Spitz, physician Reimbursements in John Holahan and others, Altering Medicaid Provider Reimbursement Methods, (Washington, D.C.: Urban Institute, 1977 ), p. 3. 22. Theodore R. Marmor, The Politics of Medicare (Chicago: Aldine, 1973), pp. 71-2. 27

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23. U.S. Senate, Committee of Finance, Report of the Staff on Medicare and Medicaid: Problems, Issues, and Alternatives, 91 Cong., 1 sess. (Washington, D.C.: U.S. Government Printing Office, 1970), pp. 60-65, Chart 1. 24. Judith M. Feder, Medicare: The Politics of Federal Hospital Insurance (Lexington, Mass.; Lexington Books, 1977), p. 146. 25. Medicare and Medicaid, Appendix E, pp. 255-57. 26. Ibid., pp. 67-9. 27. Judith S. Warner, Trends in the Federal Regulation of Physicians' Fees, Inquiry, Vol. 13 (December 1976), p. 369. 28. Altering Medicaid Provider Reimbursement Methods, p. 6. According to Carolyne Davis, head of the Health Care Financing Administration, awe get something like 9 million letters a year on reimbursement, most simply wanting to know how the payment was arrived at. Karen Hunt, What HCFA Wants To Do With Your Mediplan Money, ~ Medical Economics, February 21, 1983, p. 138. 29. Daniel R. Waldo and Robert M. Gibson, National Health Expenditures, 1981,. Health Care Financing Review, Vol. 4 {September 1982), p. 1. 30. Hunt, ~DRG,. p. 272. 31. Stephen P. Strickland, Politics, Science, and Dread Disease (Cambridge, Mass., Harvard, 1972), p. 56. 32. Alvin R. Tarlov, Shattuck Lecture: The Increasing Supply of Physicians, the Changing Structure of the Health-Services System, and the Future Practice of Medicine,. New England Journal of Medicine, Vol. 308 (May 19, 1983), pp. 1235-44. 33. Jack Hadley, physician Supply and Distribution. in Judith Feder and others, eds., National Health Insurance (Washington, D.C.: Urban Institute, 1980), pp. 188-89. 34. Freeland and others, ~Projections,. p. 9. 35. For a pertinent study see Steven A. Schroeder and Jonathan A. Showstack, Financial Incentives to Perform Medical Procedures and Laboratory Tests: Illustrative Models of Office Practice,. Medical Care, Vol. 16 (April 1978), pp. 289-298, especially p. 297. 36. Robert Gibson, National Health Expenditures, 1979,~ Health Care Financing Review, Vol. 2 (Summer 1980), p. 4. -28-

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37. William A. Guy, head of California's Selective Provider Contracting Program, quoted in Robert Cassidy, Will the PPO Movement Freeze You Out?, Medical Economics, April 18, 1983, - p. 262. 38. Lawrence D. Brown, Washington Report: Election-Year Equity, Journal of Health Politics, Policy and Law, Vol. 7 (Summer 1982), pp. 567-71. 39. John Wennberg and Alan Gittelsohn, Small Area Variations in Health Care Delivery, ~ Science, Vol. 182 (December 14, 1973), pp. 1102-08; Wennberg and Gittelsohn, Variations in Medical Care Among Small Areas,. Scientific American, Vol. 246 (April 1982), pp. 120-126. 40. New York Times, April 20, 1982. 41. American Medical Association, Report of the Council on Medical Service: Payment for Physicians' Services,. Report: D (A-83), p. 19. 42e Ibid e ~ ppe 14 - 15. 43. John Thompson of Yale University, talk at University of Michigan, School of Public Health, October 19, 1983. Nonetheless, one Knowledgeable government officials recently contended that owe don't know yet how to do it,. arguing that there are not sufficient data with which to build a fair fixed-fee system. Spencer Rich, Putting the Screws to the Doctors to Rein in Costs,. Washington Post, January 8, 1984. 44. See William A. Glaser, Health Insurance Bargaining: Foreign Lessons for Americans, (New York: Gardner Press, 1978.) 45. See ibid., for cases in point. 46. Exclusive Interview: Senator John Heinz Reviews Health Care Efforts of Congress in 1982,~ Physicians' Washington Report, Vol. 6 (January 1983), pp. 3-4. -29-