SPEAKER 1: I’m here with
Professor Laurence Baker who’s a professor here at
Stanford Medical School, and what are we
going to talk about? LAURENCE BAKER: Well,
we pay physicians a lot of different
ways in this country. And I thought it would be useful
to spend a minute thinking about the different
ways that we do that, the concepts,
organizations, different practices
that are out there. SPEAKER 1: So, literally,
how do physicians receive their compensation? LAURENCE BAKER: Yes. SPEAKER 1: OK. LAURENCE BAKER: Yes. So we can go through this in
a couple of different ways, but there are three ways that
we can start out talking about, three general ways
that we organize the payment of physicians. And they turn out to
be fee for service– SPEAKER 1: Fee for service. Let me write this. Fee for service. Keep going. I’ll catch up. LAURENCE BAKER: Yes, sometimes
we say FFS, Fee For Service. SPEAKER 1: FFS. OK. Makes sense. LAURENCE BAKER: Second
one, we call capitation. And the third one,
of course, salary. SPEAKER 1: Too close
to decapitation for me, but maybe it’s not related. But OK. And then salary. LAURENCE BAKER: And then salary. SPEAKER 1: OK. And so fee for service. That seems to be a
little bit common sense. Is that literally it? LAURENCE BAKER: Fee for service. In a fee for service
system, a physician gets paid a fee for every
service that they do. It’s kind of like
going to a restaurant. You order the drink. You order a salad, maybe
an entree, a dessert. The restaurant keeps a
list of all the things that you ordered and,
at the end of the night, there’s a price
associated with each one. And you add up the
price associated with each of the things you got. That makes your total bill. That’s the fee for service– SPEAKER 1: I see. And so this is kind of what
a doctor in private practice would face. LAURENCE BAKER: Well, doctors
can be paid fee for service in a lot of different
arrangements. So they might be in private
practice paid this way. Some physician groups
are paid this way, and fee for service
concepts come up, even, in large organizations, like the
Stanford Medical School where some people are sometimes paid
for their work in a hospital according– SPEAKER 1: I see. But the general idea is that if
they’re not providing service or if there’s a slow
day then they’re not going to be
making money that day. LAURENCE BAKER: Right. Right. The more services they do,
the more expensive services they do, the more
costly that they do, the more revenue that their
practice will generate. SPEAKER 1: I see. And we’ll talk later about
whether that’s a good idea. LAURENCE BAKER: Of course,
that has implications for the way that physicians act
and the way that they practice. SPEAKER 1: So what’s capitation? Because I’m not
familiar with that. LAURENCE BAKER: So
capitation– the general idea is to do something quite
different than fee for service. The term capitation comes
from the Latin, per head. SPEAKER 1: Oh so it is related
to decapitation, literally, per head. [INTERPOSING VOICES] LAURENCE BAKER: So we’re going
to pay physicians per person that they have in
their practice, and the kind of building
blocks of a capitation system would be, one, a
panel of patients who are assigned to a doctor. So the doctor might
have 1,000 patients for which he or
she is responsible. We’ll call that group
their members, their panel. Sometimes people call
it their covered lives. Second piece of a
capitation arrangement is an agreement about
what the physician is going to be responsible
for under the agreement. So we might say it’s primary
care services, all the office visits, and basic
tests, and follow-ups that those patients
might need, but maybe not their hospitalizations or their
expensive surgeries, things like that. So you have some
group of patients. You have some agreed
set of services, and then you would define a
payment, which in the jargon gets called the PMPM the
Per-Member Per-Month. SPEAKER 1: Per-Member Per-Month. And who is making this payment? It is, I guess, the
employer of the doctor. So this definitely would not be
the case with a– oh, go ahead. LAURENCE BAKER: So it would
be the insurance company, generally, that’s going to
pay the doctor this payment. So when an insurance
company, let’s say Blue Shield Blue
Cross, Aetna, Cigna, any number of
different companies that might be out there, has
an arrangement with a physician that they take– some number
of their insured people become part of the
panel of that doctor, they could arrange to pay that
doctor on a capitation basis, by saying, you’ve got
1,000 of our patients. Here’s what we’re going to
pay you to take care of them. SPEAKER 1: I see. And it seems to
make a lot of sense for the insurance
company, because now you don’t have this incentive
for the doctor to– LAURENCE BAKER: You change the
way the whole incentive works. So now, if a
physician gets, say, $25 per member per month for
taking care of their 1,000 patients– they get
$25,000 a month– they’ve got to do what needs
to be done for those patients. But they don’t get paid extra
if they do something additional, if they do a more expensive test
as opposed to a cheaper test, they get paid the same amount. So you take away
the incentive that exists in a
fee-for-service system that tends to get people to
try to do more things, or at least creates
a world in which it’s possible to do more things
and get paid for it. SPEAKER 1: And it’s more
predictable for the doctor, too. LAURENCE BAKER: Well, it could
be predictable for the doctor. Although, in some
sense, it’s predictable. And in another sense, it’s not. An important difference between
fee-for-service and capitation, we’ll say, in health
policy, is associated with risk or this
concept of risk. And when we talk
about risk here, we mean financial
risk associated with the health of the
patients or variations in the needs of the
patients in a given month. So if you’re being
paid fee-for-service, the doctor doesn’t
face any real risk. If it’s a bad month,
everybody’s sick, everybody needs lots
of care, they’re going to get paid for
delivering that care. Under capitation, the doctor
does face more of that risk. They’re getting
paid a fixed amount. They’ve got to deal with
whatever the patients need. SPEAKER 1: I see. In a high-volume
month, the doctor takes the hit in capitation. But in a low-volume month,
the insurance company takes the hit. So it goes both ways
and kind of evens out. LAURENCE BAKER: Right. The doctor benefits in
the low-volume months. Right? The doctor kind of averages out. In a good arrangement, this
will be sort of even over time. The doctors will come out OK. But these risk issues have been
problems in some capitation arrangements, especially if
you’re a small doctor practice and you’ve got a lot of
variation from month to month. Maybe you’re not
a great manager. You can go out of business
if you have a few bad months. SPEAKER 1: Who
decides that it will be capitation or
fee-for-service? Is it the doctor’s
choice or the insurance company says, you will do this? LAURENCE BAKER:
So, over time, it’s been a bit of negotiation
back and forth. So insurance companies
have preferences about how they do
this, and doctors have preferences about
how this happens. And so sometimes some of
it’s driven just by history. The Medicare
program, for example, got started in the 1960s
when fee-for-service was the most common way
for physicians to be paid, and that’s largely
persisted in that program for historical reasons. It’s just worked out that way. In the 1990s, a
lot of health plans decided, the insurance
companies decided, that, in the private
market, they’d like to do more
capitation, so they did. And they started pushing
these arrangements, trying to get
physicians to agree. They were successful
for a while. And then, lately, it’s been
a little more– physicians have said, we don’t
like capitation so well. We’d rather go back
to fee-for-service. That’s working better. So the negotiations have gone
a little more the other way. SPEAKER 1: Have
there been studies that showed when doctors who
are compensated under capitation don’t order as many services
or perform as many services? LAURENCE BAKER: So
the literature on this is pretty clear that
it makes a difference. We would like to think that
it doesn’t make a difference. SPEAKER 1: Most of them
are all about the health of the patient, but– LAURENCE BAKER: Well, so there
are hundreds of thousands of doctors in the country
and, undoubtedly, out there are some that pay close
attention to the financials. But I think, actually,
you’re right. Most of them probably don’t,
on a day-to-day basis, pay close attention. And at the end of year,
they’ll see the financials from their practice. Maybe they don’t
think it through. SPEAKER 1: But if you got
to pay the college tuition, then all of a sudden,
hey, maybe an MRI wouldn’t hurt or a little
extra this or that. LAURENCE BAKER: I think
that’s part of it. But the other thing that I think
is going on in the background is the general, maybe
almost subtle– the things that you don’t notice
that create a system and let a system evolve
in a particular way. So doctors like to do
things for their patients. Patients like to have
things done for them. A fee-for-service
system creates a world in which everybody
is fine with that. You can do that. And so, pretty soon, you
get used to doing that. Which becomes the
first thing you think of when you do
these extra things. SPEAKER 1: Right. Neither party, neither the
doctor nor the patient, has any incentive,
really, of saying, wait. Who’s paying for that? Oh no, someone else is. OK. LAURENCE BAKER: And it
creates in the background these incentives for people
who develop new products and services to develop them. And it makes it
easy for a hospital, say, to put in a big
new piece of equipment that they’re pretty
sure they can pay for. And once it’s sitting there
and you pass it every morning on your way into the
hospital, it just becomes that much
easier to use it. And so it sort of guides
the evolution of our system in a way that has
led us to a point now where we consume
a lot of health care, maybe, sometimes, health
care that we don’t need. It’s often health care
that’s beneficial, but it’s all costly,
and so that sets us up for the kind of dynamics and
the challenges we have today. SPEAKER 1: How common is– maybe
we should talk about salary before we talk about
how common they are. LAURENCE BAKER: Yeah, we can
pick that up as we go along. Fee-for-service and capitation
have been ebbing and flowing. Frankly, in the US at the
moment, fee for service is a very common way
for people to be paid. Capitation is declining. There are still places– SPEAKER 1: So even
though fee for service was where everyone
started, capitation kind of went a little bit
[INAUDIBLE] and then no one’s really a fan of it. Or the doctors
aren’t a fan of it. LAURENCE BAKER: Picked up. The doctors were less of a
fan, and so the arrangements have been shifting more toward–
insurance arrangements that would use more
fee-for-service these days. So the US is,
definitely, I think, majority fee-for-service. SPEAKER 1: Who decides what
the panel– because it sounded like the insurance
companies would pay for part of the
panel of a doctor who would be under capitation. LAURENCE BAKER: So these
kinds of arrangements can, in practice, get
kind of complicated. So the concept of paying
per head is clear, but there will be
variations that go on. So if you change the
scope of services, you change the arrangement–
If you have a primary care arrangement for capitation,
that’s one piece but, of course, it leaves off
the MRI or the surgery. And what would
happen in those cases is the health plan would have
an arrangement for primary care services with some
doctors under capitation. Then they would have
other arrangements with other doctors. They might, say, have
a capitated arrangement with some cardiologist
to do the cardiology. Or they might have
an arrangement with some cardiologists
to pay fee for service to those cardiologists,
so when the– SPEAKER 1: I see, so
it’s a big mix-up, but obviously
there’s an incentive. If you are being
paid capitation, you want the healthiest people
in that capitation panel. LAURENCE BAKER: So
there’s another incentive that’s in the background. And that’s a selection
kind of incentive. So it’s, again, a thing where
I think doctors probably don’t think about this, most
doctors, on a day-to-day basis. But it’s a subtle force
operating in the background. If you’re getting
capitation and you can take actions that would
get you a healthier patient bunch for that same $25,000,
say, you end up a little bit ahead at the end of the month. And doctors don’t, I think,
like to shift patients off. And there’s laws that prevent
certain kinds of activities. But, subtly in
the background, it helps the system evolve
in that direction. And so we would probably see
some of that kind of thing happen. SPEAKER 1: OK. And salary is what we imagine. This is how most of us get paid. LAURENCE BAKER: Salary
is what you imagine. It’s an agreement to be paid
a certain amount per year for some amount of
work [INAUDIBLE]. SPEAKER 1: This would be
from the insurance companies, wouldn’t it? LAURENCE BAKER:
So what happens– we talk about these three
as being different things, but when you get to the
real-world interpretation, or real-world looking at
systems that are out there, what you’ll see is often
mixes between these. And so one of the pieces
of disentangling this is multilevel systems. And that’s where
salary becomes kind of important to think about. So one common thing that happens
is physicians group together into larger practices. And that larger practice
collects the activity of all the doctors that
work in that practice, bills for that from an insurance
company, and then disseminates or distributes the
money among the doctors. And so what you will
often see in real life– and that complicates
the inference here– is, say, a large practice
that billed an insurance company on a
fee-for-service basis for the collective activity
of all the doctors, takes that resulting pool
of money and divides it up. Maybe pay some of
the doctors a salary. Maybe pays them a salary
with some sort of bonus that depends on how
much work they did. And does other things. And so sometimes the incentive
that an individual doctor, sitting in a room with
a patient is looking at, might be different than
the incentive based on the managers of that
practice who might then want to get the
doctors to do something that’s different than– SPEAKER 1: But the general
idea is that– I mean, the only way to get a salary
is if there’s some organization between the doctor and the
insurance companies to kind of– LAURENCE BAKER: Yes. SPEAKER 1: –insulate
the doctor. LAURENCE BAKER: So one of
the important pieces here that we think about is that
fee-for-service works in almost any physician practice, a
solo practitioner, one person working by themselves, or
two together could do this. Capitation almost
always works in any kind of physician practice,
with the exception that, if you’re a very small
practice, the risk you face from month to month,
depending on the sickness of your patients, might put you
out of business if you’re not really on top of it. So we like to think
capitation could work in any practice, but
really only larger ones. And salary is a nice
incentive in a lot of ways but requires you to
have a big organization to be able to do this. And so some of the differences
you see in how physicians get paid have a lot to do with
the size of the organization they work in. SPEAKER 1: Makes complete sense. Well, thanks for that.