Doctors Respond To Incentives

Austin Frakt is a physician who writes about health economics with some health economists and other researchers.  He has summarized several studies that show how doctors change their behavior when they are paid for services versus paid via capitation. 

Fee for service payment of physicians is often blamed as a contributor to high and rapidly growing health care costs. In an analysis of primary care physicians, Helmchen and Lo Sasso provide a sense of how physicians respond to different compensation schedules:

Using a four-year [2003-2006] sample of 59 physicians and 1.1 million encounters, we study how physicians at a network of primary care clinics responded when their salaried compensation plan was replaced with a lower salary plus substantial piece rates for encounters and select procedures. Although patient characteristics remained unchanged, physicians increased encounters by 11 to 61%, both by increasing encounters per day and days worked at the network, and increased procedures to the maximum reimbursable level.

The extra payment that so dramatically increased encounters was $5 for each reported performance of an eligible procedure. The number of procedures per encounter in each month that qualify for the $5 bonus is illustrated in the following figure by practice area:

The policy implication is obvious, right? Paying fee for service is asking for higher costs. So, we could cut costs by reducing or eliminating piece rate based (fee for service) payment. Case closed.
Not so fast! Let’s talk about what those $5 bonus payment eligible procedures were.

[T]he network began paying physicians $5 for each reported instance of most immunizations for children and adults as well as counseling and screening services aimed at detecting or preventing risk behaviors such as substance abuse, contraction of infectious disease, suicide, obesity, and the patient’s exposure to violence. Importantly, physicians were only remunerated for an average of one $5 procedure per encounter.

It is not at all obvious that the extra money spent encouraging these particular procedures was not worth the personal and population health value they conferred. Put it this way, would you argue that the individuals who received those services should not have, that those services were part of the problem of overuse of unnecessary care? That is a hard argument to make. Yet the data show that without the extra $5 the studied physicians provided fewer of those very services.
As the authors point out, to make that precise, one would need to quantify the health gains and adjust for whether the provision of extra services by these physicians didn’t just offset a reduction of services by others for the same patients (crowd out). By doing so, it is possible to make a good argument that more health spending is worth the cost (see my post on Cutler’s book that makes this very argument, but with numbers.) This is important to keep in mind. Fee for service isn’t all bad. It just needs to be applied in a more nuanced way. Not all physician compensation should be fee for service. But some should be.

 And another study found sick patients do poorly under a capitation scheme whereas healthy people do poorly under a fee-for-service payment scheme. 

In case there is any doubt, a new study using experimental methods shows that how physicians get paid and by how much does affect patient care, but it is not the only factor. The health of patients matter too.... The paper, by Heike Hennig-Schmidt, Reinhard Selten, and Daniel Wiesen, appeared in the Journal of Health Economics and is titled How payment systems affect physicians’ provision behaviour—An experimental investigation. As the title states, this was an experiment, not an observational study.... the findings:

1. Payment systems matter. More services are provided under FFS than CAP. On average, patients receive more services than are optimal under the former and fewer than optimal under the latter.
2. Patient health matters. That is, physicians do respond to how much treatment benefits patients. Still, under FFS, patients in good and intermediate health are overserved. Under CAP, patients in poor and intermediate health are underserved.
3. Payment systems affect health (or patient benefit). Patients in good and intermediate health suffer losses under FFS due to overprovision. Patients in intermediate and poor health suffer losses under CAP due to underprovision.

It should be perfectly clear from these results why patients in the real world might self-sort according to health, even aspects of health that are unobservable to the researcher. A patient in poor health attempting to optimize his benefit would do better under FFS. A patient in good health gets better results under CAP.
Even though I already stated the results, the following chart conveys them so beautifully you really must take a look.... 

 

A-E are the (abstract) illness types and 1-3 index how much medical care would be optimal. The solid, black dots show the optimal level of care. Patients of type 1 (1A, 1B, etc.) would do best with 5 units of care, etc. Notice that under both payment systems, actual quantity provided is correlated with what would be optimal, highest for type 3 patients, lowest for type 2. So, patient needs matter. Still, patients needs don’t tell the whole story. Provision of care under both payment types differs from optimality, most strongly for types 1 and 2 under FFS and type 3 under CAP. Finally, CAP levels of care are systematically lower than under FFS. Conclusion: money matters, though so do patients. Lesson: your doctors, or medical providers generally, are not just taking care of you. They’re taking care of business (themselves) too.