Sunday, January 19, 2014

Hang 'em out to dry! Wait, "them" is us!

I can already predict the result.  The New York Times publishes a story about the rise in specialists' incomes, much of which is based on procedures they carry out.  Outrage follows, and health care public policy experts say, "You see, the solution is to move away from fee-for-service medicine and towards capitated, or global, payments."

Sure, that's one answer, but not one that will solve this problem.

You see, even under a capitated system of care, someone has to decide how to pay the various kinds of doctors within a health care system for their work.  That internal transfer pricing is what matters most, not some global payment that the provider organization collects per month per patient. To calculate the physicians' compensation, most organizations use a fee schedule based in some way on the Medicare fee schedule.  What's the basis for that fee schedule?  The Times explains:

Medicare’s valuation of physicians’ services is based on a complex algorithm that is intended to take into account the time and skill required to perform a medical task, with an adjustment made for a specialty’s malpractice rates. 

Buried in the back of The Times story, we find the real problem:

But renegotiating payments involves a highly contentious process that plays out behind closed doors at the American Medical Association’s Relative Value Scale Update Committee, which consists of doctors representing 26 medical disciplines who advise Medicare. In dermatology trade journals, Dr. Coldiron, who has served on the committee, describes it like this: “Everybody sits around a table and tries to strip money away from another specialty.” It’s like “26 sharks in a tank with nothing to eat but each other.”

Primary care doctors — who make up only 12 percent of physicians in practice — say they have little clout, with at most five representatives on the panel. “That committee keeps the perverse incentives in place,” said Brian Crownover, a family physician from Boise, Idaho.

This is not news. The Wall Street Journal described this in detail in 2010

Three times a year, 29 doctors gather around a table in a hotel meeting room. Their job is an unusual one: divvying up billions of Medicare dollars.

The group, convened by the American Medical Association, has no official government standing. Members are mostly selected by medical-specialty trade groups. Anyone who attends its meetings must sign a confidentiality agreement.

Yet the influence of the secretive panel, known as the Relative Value Scale Update Committee, is enormous.

I gave an update in 2012, citing an excellent article by Brian Klepper, who quoted Tom Scully, CMS administrator for President Bush:

One of the biggest mistakes we made … is that we took the RUC… and gave it to the AMA. …It’s very, very politicized. I’ve watched the RUC for years. It’s incredibly political, and it’s just human nature…the specialists that spend more money and have more time have a bigger impact… So it’s really, it’s all about political representation, and the AMA does a good job, given what they are, but they’re a political body of specialty groups, and they’re just not, in my opinion, objective enough.
The Obama administration remains complicit in this approach.  I reiterate a solution:

I would like to make a simple proposal to President Obama, Secretary of HHS Kathleen Sebelius, and CMS administrator Marilyn Tavenner.  Keep the RUC but insist that all of its meetings and deliberations be made public.  That is within the immediate power of the Executive branch, requiring no judicial review.  This is an administration that has prided itself on transparency.  Surely they can insist that one their key advisory panels, one that will help determine the success or failure of health reform, should perform its functions in the open.  Let’s shine some sunshine on the process and logic used.  If the RUC’s methodology is sound, we will all learn from that.  If it is flawed, the public outcry will make it change its ways.  
Meanwhile, for those who insist on promoting global payments, let remind you of a point I made on this topic three years ago:

Now, though, let me let you in on a little secret with regard to capitated care. Underneath the global budget, there is still a fee-for-service arrangement establishing the transfer prices among the providers in a network. That GI specialist will still get paid for each colonoscopy. The big thing to work out in this system is the allocation of any surplus or deficit in the annual budget among the various specialists.

Unless that allocation is skewed heavily towards primary care doctors, decisions about the level of care given will not change. But, if the allocation is skewed too heavily towards the PCPs, there is no real income signal for the specialists, leading to a danger that they will not feel invested in the end result. Unless the system is accompanied by intensive, real-time reporting, along with clear penalties for excessive care, it will not work.

Did I say penalties? You bet. Without those, there is no enforcement of the global budget. But with those, global budgets are likely to raises hackles and resentment among specialists. I predict that the biggest issue facing physician groups in the coming years is the perceived interference by the global payment risk unit in the clinical decisions made by specialists.


JeanneFromClearhealthcosts said...

Very nice piece, Paul. Making RUC deliberations public would be a huge step in the right direction.

Also: posting prices. Everybody should. Yes, sometimes prices are not so meaningful (e.g. chargemasters). Yes, sometimes they lack context. Yes, it's particularly hard for big-ticket and emergency items.

But! for non-emergency items and procedures, like the ones we survey on at, there's no reason why providers can't post prices: cash or self-pay prices would be enough. Some walk-in clinics are showing the way by posting a per-procedure price list.

The MA experiment with pricing publicly has not been a huge success so far, but it's a step in the right direction.

Medical Quack said...

Here you go, food for thought with quantitated's a big deal with what we are reading today and sometimes numbers are just not correct:) Yes, the hard part is sorting it out as to what has value and what does not.

CMS with releasing their's a boom for journalists to write about today as things are changing with the rise of "interviewing data bases, and I included a nice video here from one of the editors of the Economist and he explains the changing face of journalism and the use of bigger teams that hopefully will help in getting an article out there that can take the data and create a story that is representative..and see High Tail, the bot that can create news content farms..a big deal as you Forbes out there with their bot that does some of this and they are trying to sell it.

Not to be sarcastic but this might be above the head of Kathleen Sebelius to understand, i.e. the handling of Healthcare.Gov:) Just recently I found it interesting that the state of Minnesota in view of all the IT issues with exchanges called on her as expert to get a recommendation for a contractor to fix their exchange and she obliged:) We have a new world of Health IT expert emerging for sure:)

Patricia L. Hale said...

From Facebook:

I think raising the representation and clout of primary care in the RUC is immediately needed along with transparency as you propose. Dramatic changes in reimbursement for primary care and especially primary internal medicine for our aging population is way overdue and a huge impending disaster. Too many of us have been forced out of independent practice because we could not keep our offices open despite having way to many patients wanting our care. I gave up after still not being able to survive after taking no salary for six months and have not seen anything substantial change in 15 years despite catchy names like "primary care medical home" which obfuscate the lack of any real change!

Jane Sarasohn-Kahn said...

From facebook:

Paul Levy is spot-on.

Transparency, and bringing those RUC meetings out in the light, will help get us some of the way there. Brian Klepper and Dr David Kibbe have been fighting this battle for several years, with very little satisfaction from the medical powers-that-be. Here's one of Brian's latest missives on this topic:

Paul Levy said...

Sorry, here's that link:

David Harlow said...

Jane, Paul - Thanks for linking to my conversation with Brian.

Paul, while of course global payment systems still require piecework payments, another path to cost and quality control is to limit the volume the high-cost services. This may be accomplished as it has been by a number of innovators around the country who I had the chance to interview last year. The model is essentially "primary care on steroids." Using rough numbers, by doubling the spend on primary care from 3% of the current healthcare dollar, it is possible to save 15% of the total health care spend, by avoiding specialty care and hospitalizations. See the interviews collected here: HealthBlawg: Primary Care is the New Black . Greater savings may be realized by moving to reduce the differential between primary care and specialty care reimbursement.

Paul Levy said...

Fascinating. Thanks, David. I've been making that argument for a long time, without analytical support. Nice to see that someone has thought it through.

Anonymous said...

Paul (&David), a few thoughts -

One of the biggest factors in specialist income is related to length of training and expectations of income. Compare the years of postgraduate training for an internist – three, compared to that of an interventional radiologist – seven. The IR generally makes more than the internist. Take away those expectations, and apart from a few souls choosing for love, you will find most people rationally selecting that which makes the greatest salary for the shortest time spent.

In the bond market, longer time frames usually garner higher interest rates. There are times when shorter maturity bonds are higher yielding – the inverse yield curve – and it usually indicates a problem in the economy. Perhaps this trend towards devaluation of specialty care and over-valuation of primary care is a similar phenomenon.

I’m biased as a specialist, but the CMS move seems mean-spirited and designed to raise the public’s ire against physicians in general. Physicians earn more than most Americans, but less on a per hourly basis when their years of school and residency are included. Student loans, office rent, medical assistants, nurses, billing managers and staff, and other overhead charges aren’t included in that data dump. I don’t see how this will assist in fighting waste and fraud.

Finally, your point in engagement is real and salient. Up-ending the care paradigm might lead to a medical “great leap forward” where the best and brightest go into primary care and specialty care is left to the less capable members of the medical school class. I’m worried about the long term effects upon American medicine in this scenario as our specialist luminaries enter retirement (possibly earlier than wanted).

Paul Levy said...

Thanks for offering that perspective.

Paul Levy said...

Another thought: If you are correct that specialists warrant higher payments for their activities, it would still seem to be to be worthwhile to have a public--rather than secret--process during which those factors are made evident and debated.

Anonymous said...


Didn't address this in 1st post due to length of the post.

As far as the RUC is concerned, it has evolved as like most things in the health care world have evolved - intelligent fixes at the time which might not be applicable as the system evolves.

I don't have a problem with the RUC being changed into a more open forum. The components of reimbursement set by the RUC are related to complexity, skill, and risk. For primary care to earn more in such a process, the old AAFP paradigm of 20% of the visits being significant illness and the remaining 80% being divided between psychosocial, well-visits (which do nothing), intercurrent illnesses, and monitoring of stable chronic disease.

Realistically, our primary care colleagues will see a shift in care as that 80% can be administered more effectively by physician extenders, retail clinics, smartphone apps, and care managers.

So when Primary care gets a bigger piece of the pie, you can expect them to complain about the complexity of the cases and how their bread and butter has been cherry picked away.

I'm OK with open debate. But if the conversation is started or managed in an environment where sentiment is likely to produce a certain result, I have a problem with it. The science-based progress of the last 90 years are being rapidly stripped away in the last 10, as medicine feeds upon itself. It reminds me of China's "great leap forward" where people melted down good steel to meet production quotas, but the resultant steel was unusable.

I hope we don't do the same with our human physician capital. I am not optimistic.

Paul, while I suspect we will disagree on this issue, I just want to thank you for an informative and useful blog. Keep doing what you do.

InformaticsMD said...

See Roy Poses' many posts on the RUC at

Barry Carol said...

Not surprisingly, I’m all for bringing transparency to the RUC meetings and how they develop their payment recommendations. Since CMS already has the power to make this happen and they are presumably interested in mitigating cost growth, why haven’t they done it already? I guess campaign cash from the powerful physician lobby still carries a lot of weight.

Regarding the payment of doctors within a capitated system, I understand the internal transfer price approach within a fee for service sub-system. What I don’t understand is why hospitals would continue to determine physician bonus compensation based on relative value units billed when the objective should be to drive utilization down while still providing high quality, cost-effective care. Kaiser, I’m told, doesn’t use the relative value units billed approach to bonus compensation for doctors. I’m not sure what metrics they do use but whatever they are, if they work, hospitals should be able to replicate them. Shouldn’t they?

That said I do think specialists should be paid considerably more than primary care doctors because of both the extra years of training needed to become board certified in their specialty and also the relatively high opportunity costs in the U.S. of compensation that could be earned in such fields as finance, business, and real estate which I think is higher here than in most other developed countries. The number of years of training needed to enter those fields is also significantly lower. At the same time, I also think primary care doctors are also underpaid. The question regarding specialist compensation, though, is when do we say enough is enough? I, for one, don’t know. What I do know is that no matter what the job is, we have to pay enough to attract and hold qualified people.

Brad F said...

@anonymous, 1:07P

If length of training only consideration, hard to reconcile same post residency time in fellowship and huge variation between GI, cards, etc vs ID, rheum, etc.

Additionally, not taking any sides here, just passing on. RUC recently changed their meeting protocol to promote greater transparency:

Probably wont satisfy critics, but they obviously hear the knocking at the door.


Gary Levin said...

Paul, The RUC is obsolete. AMA represents less than 25% of the physicians in the U.S. So 25% give or take, represent all physicians. Since RUC reflects that why should the AMA and/or RUC control fees?

Brandon Betancourt said...

From G+:

I absolutely support the notion to make the RUC proceedings public.

I find if appalling that in the US, we have a secret society, that determines how doctors are to be compensated. Not to mention the members don't even represent the medical sector appropriately.

As noted, primary care barely is represented yet it is the largest group of physicians in the US.

David L. Brown, MD said...

From LinkedIN:

Global payments allow for the possibility of salaried physicians in an integrated system.

Paul Levy said...

That possibility (salaried physicians) exists and has been in practice in some health systems even under fee for service.

In any event, aren't the salaries based on a broader marketplace that is the product of the RUC rate structures? I suggest we still need an open process on that front.

Barry Carol said...

I read in a paper by Princeton health economist, Uwe Reinhardt, some time ago that Medicare’s relative value unit structure breaks down as follows: 52% covers the physician’s time, skill and technical effort, 44% compensates for practice overhead and 4% is attributable to malpractice expenses. For certain surgical specialties, of course, malpractice insurance is considerably higher as a percentage of practice revenue.

A large and growing percentage of doctors coming out of medical school in recent years prefer to work for a salary + bonus instead of running a business with all its attendant headaches including hiring and firing people, negotiating office leases and buying equipment. There is probably also the potential for more reasonable and predictable work hours, at least for most specialties. Finally, knowing that the hospital is also paying the cost of malpractice insurance, often through a captive insurer, brings peace of mind as well. Those with the most entrepreneurial bent and interested in getting rich are probably better off going to Wall Street.

The bottom line is that hospital systems and large multi-specialty group practices have a lot to offer doctors without fully meeting the earning power that some are able to earn in private practice after practice expenses. At the same time, let’s have transparency in both RUC rate setting practices and actual contract rates received by hospitals and doctors so we can more easily direct care to the most cost-effective high quality providers.

Anonymous said...

One would certainly never guess that specialists' incomes are soaring from the incessant complaining that goes on in physicians' forums. I certainly agree the RUC needs to disappear.
As for salaries, I too have heard that a lot of graduating physicians prefer the security of a salary to pay off their huge loan debts from training. However, I worry about all of the power in medicine devolving to hospital administrators (sorry, Paul). I have also heard the argument that salaries kill all innovation and initiative.

Physicians had their chance to initiate physician-led organizations like the Mayo, but leadership has been sorely wanting. The AMA only wants to preserve the status quo so is of no help.
I predict we will evolve through some unsatisfactory models before a reasonable equilibrium is reached. But physicians need to understand they are so much better off, as are the patients, if they are proactive and lead rather than being dragged kicking and screaming as is happening now. Don't fight the transparency movement; you can't win it. Lead it instead, as well as in other arenas.

nonlocal MD

Anonymous said...

I think its hard to make an unbiased argument against increased transparency, either for the RUC or provider payments. The only real debate is on how to represent costs in a fair and balanced way in public reporting, to minimize misinterpretation.

Regarding the specialist vs PCP vs other specialists compensation argument, I am pretty certain that the opportunity cost of a six year (now the norm for most advanced specialties) vs three year residency, especially because we are really talking about 11 vs 14 year post secondary comparison, doesn't justify the shockingly wide pay disparity when examined through economic analysis of opportunity cost and time value of money (these analyses have been done). Arguments about talent and expertise of those going into specialty medicine are valid to an extent, but I don't think they fully justify current earning disparities. Should specialists be well compensated? Yes (and they are). Should they be paid more than PCPs? (yes, and they definitely are). Is the degree of disparity justified or excessive? I think right now there is a bit too much here. I also don't buy the argument that without wall street-like salaries all the innovation and talent will disappear- it's important to compensate fairly, and most deserve it, but this isn't the main reason for entering medicine (scientific breakthroughs have continued for thousands of years with widely varying promise of economic reward- even in medicine most advances come from academic MDs many of whom earn less than private practice counterparts [aware that in Mass this isn't necessarily true]). Also, a much smaller percentage of MBAs, wall street hopefuls, etc. ever make it big (and most graduate with 200k MBA debts, just like MDs), and even fewer last 10+ years working in finance compared to MDs who sustain earning power over longer careers (on average), so I think that comparison is overused.

Barry Carol said...

Anonymous 12:42 PM,

I appreciate your last comment. I also agree that we don’t need to pay doctors Wall Street like salaries to ensure innovation. It’s important to note that the U.S. is not the sole source of innovation in medicine by a longshot.

Medicare paid physicians about $80 billion or so in the past year or about 15% of total spending for the program including Part B premiums and IRMAA surcharges paid by beneficiaries. I don’t think excessive specialist compensation is a huge driver of comparatively high healthcare costs in the U.S. though it is one factor among numerous others including much higher prices for brand name drugs as compared to Canada and Western Europe, higher cost hospitals, a more litigious society that drives more defensive medicine here, fraud in the Medicare and Medicaid programs, more administrative complexity because of multiple payers with different rules, more futile and marginally useful end-of-life care and higher prices (contract rates) per service, test and procedure. Differences in patient expectations may also be a factor.

Back to compensation, I’m told that at the Mayo Clinic, all of the doctors earn essentially the same salary regardless of specialty after five years on the job. Kaiser pays its doctors about 10% above the prevailing local market rate. Both organizations expect their doctors to work collaboratively within a collegial culture. People who aren’t team players don’t get hired and, if they do, they probably don’t last. While physician compensation may not be a huge cost driver in the scheme of things, their collective decisions to admit patients to the hospital, order tests, prescribe drugs, refer patients to specialists, consult with them and perform procedures themselves certainly are.

I think medical resources would be allocated much more efficiently if we had price and quality transparency because it would be easier for both patients and referring doctors to identify the most cost-effective high quality providers in real time and direct patients to them. Insurance plan strategies like reference pricing, tiered and narrow networks would also be helpful, I think.

Anonymous said...

Barry Carol,

If I understand correctly you have said, there should be two measures of compensation for specialists:

1) Number of years of training within the medical profession - I assume looking at both "opportunity cost" and expense laid out for the medical education and specialty training.

2) Comparison to other fields - such as business, legal, real estate etc.

The first yardstick I understand, I it takes 10 years of high level training after an undergrad degree, versus say 7 years, that is significant in terms of potential income forgone to get the additional training and debt build up while getting the training.

Though even this item could be mitigated by the "demand" for a particular specialty. If a particular specialty is "attractive" because of say, quality of life issues, then that might also be a form of compensation beyond dollars and cents.

So by this measure, if a specialty is "more popular" it might receive less financial compensation all other things being equal.

The second yard stick was other highly paid professions like business, law. This comparison I am less enamoured with. Medicine is a healing profession. If people are choosing medicine solely to make money, I for one wouldn't want that person as my doctor.

Medicine will always be highly paid, but whether a surgeon makes as much as, half as much, a quarter of, a tenth as much as a fortune 500 company CEO shouldn't matter one iota in my view.

Maybe I am being overly idealist, but I do think those in the healing professions should care less about money, certainly less than a business man, whose goal is to make money for owners of investors.

I hope our doctors care much more about healing than money.


Barry Carol said...

To estimate an appropriate difference between income earned by specialists and primary care doctors based on differences in skill and education alone, an economist would probably calculate the difference between what the specialist in training would have earned as a primary care doctor during the time in training and subtract residency or fellowship earnings during that period. If there were any education expenses that had to be paid out-of-pocket, those would be added in as well. I would view the calculated lump sum cost of the extra education as an equity-like investment in the individual’s human capital. The long term return from equities is approximately 9%-11% annually consisting of a 6%-7% real return plus 3%-4% for average inflation. The key factor that drives specialist earnings well beyond what would be determined by this exercise is revenue generation potential within a fee for service payment model coupled with much higher prices paid for procedures vs. evaluation and management.

In comparing working as a doctor vs. working in the financial field, the doctor can expect far greater job security. Also, doctors can work and earn a good living virtually anywhere, whereas the bulk of Wall Street jobs are concentrated in a few cities including NYC, Boston, Chicago, San Francisco and Los Angeles. The far superior job security coupled with the ability to work in many more places both have value or at least should have that would translate to a lower acceptable income level compared to finance.
If the long term trend is toward doctors working on a salary + bonus basis for a hospital system and if we want to move the mix toward a 50-50 split between primary care doctors and specialists, we need to pay primary care doctors more and specialists less. To the extent that primary care doctors are in a better position to keep patients healthy and out of the hospital, the payment model needs to move away from fee for service / DRG / case rate and toward capitation. There are a lot of moving parts here which suggests the transition from the current system won’t be easy even if we get complete transparency from the RUC.

Barry Carol said...

I wonder if anyone has any data about how much future doctors before they apply to medical school and while they are in school perceive that they are likely to earn as doctors once they’re established in practice. I also hope they are far less money driven than Wall Street types. If their estimates of potential earnings are reasonably accurate, that shouldn’t be a source of dissatisfaction later.

akhan13 said...

I think there are several different outlooks on money and reimbursement among today's young physicians and residents. A small minority see the medical profession largely as a very well compensated, secure, highly respected and prestigious field and choose it for that reason after agonizing over whether to go into Law school, MBA or other similar fields. Another small group couldn't care less about compensation and dream of providing care, doing research etc. and simply hope to make a decent living to pay their bills, support their families, and one day be free of student loan payments. the majority I see as a bit of both. they want to do meaningful work and care about their patients, but they are also ambitious and value achievement, respect and money. (To them) being a physician offers much of both worlds, in theory. They don't care only about compensation, but they see it as something they have worked very hard for, and threats to such sometimes make them question whether they should have chosen other fields. We also live in a society where we claim that those who work hard can be successful, and that money and success reflects the work people put into their lives. As such, decisions of what physicians get paid hurts them more emotionally, as somehow devaluing their dedication and hard-work. These are the ones who often feel misunderstood or maligned by others, and are either writing or sharing posts they read about the sacrifices they make:

David Harlow said...

Another data point re: increasing spend on primary care reduces overall health care costs -- the Rhode Island experience (h/t Paul Grundy):