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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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:
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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
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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
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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.
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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~.
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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.
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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.
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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.
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Representative terms from entire chapter:
physician services
