As part of a continuing series on health care spending, last week I looked at what share of our health care dollars goes to pay for physician’s fees and clinical services. As the pie chart below shows, 22 percent of the $2.1 trillion that we spent on health care last year went directly to doctors. That’s up from 19.4 percent in 1960.
Most of the jump came in the 1960s and 1970s—though physician incomes continued to grow in the 1980s, rising 30 percent from 1984 to 1989, or about twice as fast as the average increase for other full-time workers.
I promised that this week I would publish a Part II to last week’s post and look at how much doctors are paid in other countries, how hard they work compared to doctors in the U.S., and how patients are faring as physicians’ incomes continue to outstrip both inflation and wages nationwide. Finally, I said I would discuss whether we are spending too much on physicians services—and how we might change the way we pay them.
But first, let me very quickly re-cap the background to this story. In recent years, doctors’ fees have come under pressure. In the 1990s, managed care companies set out to pare costs by questioning virtually every bill that doctors sent them and in recent years Medicare has been trying to keep a lid on spending by refusing to raise most doctors’ fees. Many private insurers have been following Medicare’s lead. Meanwhile, the cost of running a practice has been climbing, making it hard for some doctors (particularly primary care physicians) to stay afloat financially.
Nevertheless, by increasing the number of patients they see and the number of procedures they perform, many doctors have been able to boost their incomes. More entrepreneurial doctors also have been making investments in surgical centers—creating a second income stream. Thus, the overall amount that we spend on physicians’ services continues to rise: up 6.2 percent in 2000, up 8.3 percent in 2003, up 7.3 percent in 2004, up 7.4 percent in 2005, and gaining another 5.9 percent in 2006.
But not all physicians are prospering. The charts I ran last week show pediatricians, family doctors and others who practice what some call “cognitive medicine” (talking to and listening to the patient ) making as little as $115,000 a year while specialists who perform the most aggressive procedures haul home $800,000.
In your comments on the last post, some suggested that I was picking on
well-heeled specialists. “What about plumbers?” one reader asked. It’s
true that plumbers are well-paid. But I’m quite certain that none earn
$800,000. Of course they also didn’t go to school for 8 or 9 years to
learn their trade.
Let me suggest that, rather than comparing U.S. doctors to plumbers or
lawyers, it makes more sense to compare them to physicians in other
countries. On that score, I found some provocative numbers in Robert Stowe England’s 2007 report, “Physician’s Role in Rising Health Care Costs: Perspectives on the High and Rising Cost of Physician Compensation.”
Stowe, a research fellow at Americans for Generational Equity, points
out that primary care doctors and other “generalists in the United
States earn on average $173,000 a year or 4.2 times gross domestic
product (GDP) per capita. In other countries of the Organization for
Economic Cooperation and Development (OECD), generalists earn roughly
half as much – or $94,000 on average –based on purchase power parity
dollars.” Thus, Stowe puts the salaries in the context of what these
earnings can buy in each country.
Meanwhile, he continues, “specialists in the United States earn an
average of $274,000 a year or 6.5 times GDP per capita. In other OECD
countries, specialists earn on average less than half that at $129,000
or 4 times GDP per capita.” So, Stowe concludes, “even adjusted for
higher wealth and earnings in the United States, the gap between what
physicians earn here and elsewhere in the developed world is large, as
is the gap between physician earnings and the average American’s
earnings.” (Stowe recognizes that American doctors pay more for
malpractice insurance than their peers abroad, but in his comparisons,
this is already factored into the numbers.)
American doctors also do more, Stowe reports: “According to a
calculation by McKinsey Global Institute, based on OECD data, even
though the United States has fewer physicians per capita, U.S.
physicians have 8.9 consultations per capita, while in Europe the
number of consultations is lower, ranging from 3.4 in Switzerland to
7.8 in Belgium. Surveys of U.S. physicians confirm that productivity,
usually tied to the fee-for-service structure, is the largest factor in
In other words, the way we pay U.S. doctors motivates them to see more
patients and perform more procedures. And they are doing just that.
Stowe reports that the volume of physician services “rose 5.5 percent
per beneficiary a year in 2004 and 2005. Per capita volume in imaging
is the leader in volume growth, increasing 10.3 percent annually
between 2000 and 2004 and 8.7 percent 2004 and 2005. There was a slower
3.8 percent growth per year for major procedures, including
cardiovascular procedures, knee replacement, hip fracture replacement
and others. Yet, given the cost of these procedures, this steady growth
is costly. The category known as ‘other procedures,’ which includes
minor procedures, such as radiation therapy or colonoscopy, among
others, rose 6.4 percent between 2004 and 2005, and 8.5 percent between
2000 and 2004.” And there is little evidence that this growth in volume
has led to higher-quality care. Indeed, there is much evidence that in
certain areas—particularly cardiac care—we have reached a point of
diminishing returns. We’re doing more, but patient outcomes are no
better. (See this 2006 article in Health Affairs).
Still the perverse financial incentives of our fee-for-service system
encourage “doing more.” Indeed, a national study of 6,600 physicians
released in January 2007 by the Center for Studying Health System
Change reveals that 70.4 percent of physicians in group practice say
that “productivity” incentives are a factor in their compensation. By
comparison, just 20.3 percent report quality incentives as a factor in
As I’ve discussed before on this blog, paying physicians for the
quantity of work that they do rather than the quality leads to
overtreatment—which can be hazardous to your health. And Stowe notes
that even while physicians themselves are cranking up volume in order
to make up for the fact that fees-per- service are not rising, “a
growing number of physicians recognize publicly that productivity-based
incentives are working to raise costs, generate overutilization, and
unnecessarily drive up health care costs. They have called for reforms.”
At the same time, Stowe observes, American doctors feel a pressing need
to make more than their OECD counterparts in part because they stagger
out of med school carrying enormous loans. In many other wealthy
countries the cost of medical school is subsidized by the government—a
practice which makes a great deal of sense, especially when you keep in
mind that in the U.S. the government (i.e. taxpayers) lay out roughly
50 percent of the $2.1 trillion that we spend on health care. Taxpayers
wind up paying U.S. doctors more because, when they graduate, they
carry debt of $125,000 or more—just at a time when many are hoping to
marry, buy a home, and begin starting a family. The young man or woman
who began med school as an altruist is now desperate to make as much
money as possible as quickly as possible.
Instead of putting young doctors under that kind of financial pressure,
why not subsidize their education, and then, when they graduate, pay
them salaries that fall somewhere between what we now shell out and
what OECD countries pay their doctors? If the average specialist
emerged from med school debt-free he wouldn’t need to scramble to bring
home 6 percent of GDP. If specialists averaged, say, 5 or 5.5 times GDP
(adjusting for higher incomes in the U.S.) they still could consider
themselves well-paid compared doctors in Europe making 4 times GDP.
And they wouldn’t feel driven to see more patients than they can easily
handle, or do more and more procedures year after year. (This is just a
quick back-of-the-envelope proposal; in reality, we would no doubt want
to cut some specialist’s incomes by more, while hiking others. In an earlier post,
I discussed why the Medicare Payment Advisory Comission suggests we’re
overpaying for some procedures, underpaying for others.)
Meanwhile the nation could save billions—money that could be used
toward the medical school subsidies. For we wouldn’t just be saving the
amount pared from some specialists’ salaries, we would also be saving
the cost of the drugs they wouldn’t be prescribing, the devices they
wouldn’t be using, the tests they wouldn’t be ordering, and the
hospital beds they wouldn’t be filling as they saw fewer patients less
often. As Alan Sager and Deborah Socolar point out in “Health Costs Absorb One-Quarter of Economic Growth, 2000-2005,” U.S. physicians receive or control 87 percent of all spending on personal health.
And I suspect that many doctors would be happy with the trade-off. In
terms of quality of life, many would consider being debt-free when they
graduated in their early 30s more important than making 16 to 20
percent more when they were 57—especially if they didn’t have to rush
through their appointments in order to make their numbers. Again,
doctors themselves are not happy to be laboring in a health care system
where they are rewarded for doing more rather than for taking better
care of their patients. Most physicians are as frustrated as their
patients by the hurried appointments and lack of real communication
between doctor and patient.
But wait a minute: if doctors see fewer patients and perform fewer
procedures, won’t patients suffer? All of the evidence says “no.” More
than two decades of research done by doctors at Dartmouth show that
outcomes are no better in parts of the country where patients see more
specialists and spend more time in hospital beds. In fact often these
outcomes (which are adjusted for differences in race, sex and overall
health of the population in different regions) are better when patients receive less intensive, less aggressive and less expensive care.
Moreover, in countries like Switzerland, where patients see physicians
less often, both outcomes and the over-all health of the population are
high when compared to the U.S. This is in part because, in these
countries, there is less emphasis on aggressive hi-tech care, and more
emphasis on low-cost, sometimes free, preventive care—before the
patient becomes deathly ill.
Yet, while many U.S. doctors are not happy with our profit-driven
fee-for-service system, others feel that in a society where they find
themselves surrounded by billionaires, they should be earning more.
Since the 1980s, levitating CEO salaries have increased the pressure on
doctors to take home a bigger paycheck. Wealth, after all, is always
relative, and as CEOs began to demand millions, doctors earning, say
$500,000 a year, began to feel unappreciated. “It’s a matter of
respect,” one doctor told me. “I’m smarter than he is; I have more
education, and I work harder. Why should he make more money?”
This helps explain why, in recent years, physicians have become more
entrepreneurial, investing in outpatient clinics and surgical centers.
Here, once again, what Stowe describes as “the perverse incentives of a
productivity-based fee-for-service business model” come into play as
doctors pad their income by referring patients to clinics and
free-standing surgical centers where they have an ownership stake. A
breakdown of physician earnings shows what a powerful earning stream
this can be.
“The McKinsey Global Institute calculates U.S. physicians earned $160
billion a year in 2003, segmented as follows: $45 billion in
fee-for-service income from hospitals with an additional $90 billion in
fee-for-service income from outpatient facilities. In addition,
physicians earned $25 billion from profits in physician-owned
Sometimes when doctors send patients to facilities where they have a 50
percent stake, they are sending patients for services that they don’t
entirely need. A study published in the Journal of the American Medical Association
in March takes a look at the rate of coronary by-pass operations in
local populations after a physician-owned cardiac hospital is built. It
turns out that once physicians opened the doors of their new facility,
the number of coronary artery bypass grafts (CABG) as well as
angioplasties suddenly shot up by 19.2 percent. Was the population
suddenly sicker? We know that, in health care markets, supply creates
demand. (“Build the beds and they will come.”) But the research
suggests that it wasn’t just the presence of a new facility; when
physicians become owners of a surgical center, they are motivated to
send many more of their patients for surgery. By contrast, in markets
when new cardiac programs open at general hospitals the number of new
procedures increased by only 6.5 percent.
Moreover, Stowe reports, “the Medicare Payment Commission has found
that physician-owned hospitals cherry-pick the most profitable patients
(usually younger and in better health) and focus on areas of medical
practice that offer higher profits.” As one doctor confided when I was
writing Money- Driven Medicine, “ I sit on the board of a surgical
center where the physicians regularly talk about sending some patients
to the community hospital, and other, better-paying patients to our
“This often leaves community hospitals with less profitable patients
and reduced opportunities to earn higher fees,” Stowe adds, and “in
turn, adds to the overall cost of the health care system, as community
hospitals scramble to offset lost business by charging higher fees in
What can be done? In “Unhealthy Trends: The Future Of Physician Services,” a piece published in Health Affairs
just last month, the authors recommend “reexamining regulatory and
administrative rules within Medicare. In particular, expansions and
more-stringent enforcement of laws against physician self-referral, and
higher standards for the credentialing of providers, could help curb
services with the highest volume growth, such as diagnostic testing.”
Secondly, they argue, Medicare needs to restructure physician payment.
Congress is threatening to slice the average fee that Medicare pays
physicians by 10 percent this summer. But, the study notes “continued
use of such a blunt tool (whether applied as a single cap on all
physician services or as separate caps on individual categories of
services) would do little to discourage unnecessary services…”
Instead, the authors suggest, Medicare might consider paying primary
care physicians for services that they don’t reimburse for now—“such as
care co-ordination . . . while revising fees to remove the inadvertent
incentives for specialists to favor certain high -priced
services”—something we talked about earlier this month.
But ultimately, the authors join the consensus that Medicare needs to
move away from a fee-for-service structure to a greater reliance on per
episode or capitated payments, while rewarding physicians for
efficiency and good outcomes. As we have discussed on this blog before,
high quality and lower cost go hand in hand. Health care providers that
achieve the best results also tend to use fewer resources.
Here, the study’s authors agree with other researchers that it is all
but impossible to pay either a solo practitioner or even a medium-sized
group of physicians for quality. Their patient pool is too small—which
means that a relatively small number of poorer, sicker patients can
skew their results. And we do not want to encourage physicians to shun
poor or difficult patients. Secondly, physicians usually have little
control over what happens to their patients when they are in the
hospital and outcomes can be undermined by poor hospital care.
As a result, the authors suggest that Medicare “offer premium payments
to doctors who work in, or are willing organize into, large
multidisciplinary groups that have stable relationships with a narrow
referral network of other providers (such as hospitals) whom the
doctors have selected on the basis of quality and cost performance.”
They point out that “these doctors/hospital groups would need to be
integrated in culture and by care processes and health IT, with the
expertise and ability to measure, report, and be held accountable for
the quality and cost of care…If physicians continue to exhibit the
rational responses to financial incentives evident in recent trends,
then under such circumstances, less well-organized physicians would
have a strong motivation to change their practice organization. “
Here I would add that by bundling payments to doctors together with the
hospital reimbursements, Medicare would be encouraging doctors and
hospitals to work together to assure that patients receive the best
possible care. Today, too often, doctors and hospitals compete. Often
they work at cross-purposes. By contrast, at a place like the Mayo
Clinic, everyone understands that 21st century medicine is a team sport.
Finally, do I think we pay doctors too much? No—but I think the
healthcare dollars that we pay for physician’s services need to be
redistributed. We should pay the generalists who provide preventive
care and practice cognitive medicine more. At the same time, we need to
cut the salaries of some specialists who focus on the most aggressive
care—especially in cases where it appears that they are talking
patients into unnecessary procedures. We might consider putting a cap
on how many operations they can do in a given year. And, as I
mentioned, I also would favor taking some of the dollars that we now
pay for physician’s services and use it to subsidize medical education.
In total, we would be funneling the same amount of money to physicians,
but in very different ways.
Going forward, we cannot afford to watch spending on doctors’ services
jump 6 percent or 8 percent a year. Here, as in other areas of our
health care system, if we want sustainable high quality health care for
all, our outlays cannot continue to grow faster than per capita GDP.
Healthcare is an important part of the economy, but we cannot let it
swallow the economy.