How doctors are paid has changed dramatically with the rise of third-party payers.
Another significant development in medical practice over the past century has been how doctors are paid. For Dr. Smith and most others of his era, the process was simple: the patient paid them directly, sometimes on a sliding scale based on their ability to pay. Bookkeeping was handled by the doctor or an office assistant.
Fast-forward to 2023 and the picture is vastly different. Except for a relative handful in direct care or concierge practices, most physicians — or the organization they work for — are paid by a government agency or a commercial insurer.
This unwieldy and often-frustrating payment system began innocently enough, as George B. Moseley III, J.D., MBA, described in a 2008 article in the AMA Journal of Ethics. In 1929, a group of Dallas, Texas, schoolteachers contracted with Baylor University Hospital to pay $6 per year for 21 days of in-patient care.
The idea caught on nationally during the Depression years that followed, so that by 1940 there were 56 such plans with 6 million members. They joined together, backed by the American Hospital Association, to form a network called Blue Cross. By 1945, the number of plans had increased to 80 and enrollment to 19 million.
Physicians subsequently created similar prepaid arrangements to cover their fees, known as Blue Shield plans. In 1945, there were 22 such plans with a total enrollment of 2.5 million.
The Blues and similar plans received an enormous boost from the wage and price controls put in place during World War II. The controls didn’t include health insurance, meaning companies could (and often did) use it as an incentive to lure employees. Moreover, the Internal Revenue Service allowed employers to deduct the cost of health benefits from their taxable income, providing further incentive to offer such benefits.
The result was that enrollment in health insurance plans skyrocketed from 20.6 million in 1940 to 142.3 million in 1950. Further driving the trend was the rising cost of care due to medicine’s growing complexity and reliance on technology, making health insurance a virtual necessity to pay for care.
The World War II era also saw the rise of an alternative concept for health care delivery, prepaid health plans, later known as HMOs. The National Institutes of Health defines these as “a type of managed care health insurance plan that features a network of health care providers that treat a patient population for a prepaid cost. HMOs combine financing and care delivery and thus allegedly provide an incentive to provide cost-efficient quality care.”
The concept received a significant boost and federal funding in 1973 with passage of the HMO Act, so that by 1996 nearly 92 million people were enrolled in one. And although the cost-control theory behind HMOs was sound, as the concept spread it generated a lot of resistance from patients, says Joseph Betancourt, M.D., M.P.H., president of the Commonwealth Fund.
“What we saw was big blowback around the idea that your doctor was no longer in charge of your care, that there were all these bean counters and bureaucrats controlling what doctors could and couldn’t do,” Betancourt says. “It’s the point when doctors started seeing more administrative burden, like with prior authorizations. There were also feelings of a loss of agency, like ‘I have all these great tools, but I can’t use them the way I think is best for the patient.’”
The next, and probably most important, development in third-party payment was the creation of Medicare. When the program went into effect in 1966, it provided health care insurance to 19 million elderly and disabled Americans at a cost of $10 billion. By 2022 the number of beneficiaries had ballooned to almost 60 million. With a budget of $830 billion in 2022, the program accounted for approximately 20% of total national health spending.
“From a policy and payment perspective, what Medicare does and pays attention to kind of sets the conversation,” says Rachel O. Reid, M.D., an internist and policy researcher at RAND Corporation. “It’s fee schedule influences payment rates, not just of Medicare itself, but most private payers base their fee schedule on it. So the contours of the PFS (physician fee schedule) influence how we organize our practices and manage our patient populations.”
When it began, Medicare reimbursed physicians according to the “usual, customary and reasonable” standard used by private payers. That changed in the early 1990s with the introduction of the PFS and its reliance on a payment formula that favored specialists over primary care practitioners.
“Once you understand the fee schedule, you begin to see its fingerprints throughout primary care practices,” Reid says. “Our practices don’t generate enough revenue unless the physician is churning out E&M (evaluation and management) visits.”
The resulting emphasis on patient volume, she says, limits how much time doctors can spend on activities such as care coordination and population management. Moreover, since those activities aren’t billable, primary care doctors usually perform them during what Reid calls “pajama time” — evenings and weekends.
The dependence on third-party reimbursement has been a major factor behind the growth in support staff at medical practices. Lucarelli’s clinic, for example, contracts with 15 separate payers. To get paid, the clinic — like most provider organizations — must code services it provides. If the payer denies payment, someone must contact the payer to try to get the denial reversed. Two employees at Lucarelli’s clinic spend a combined 30 hours per week handling these tasks.
Nationally, in 2021, physician-owned practices had slightly more than half of a supporting staff member position per full-time physician, according to the Medical Group Management Association.
Frustration and anger toward payers continued to mount with the adoption of policies such as prior authorizations and step therapies, which were widely viewed as tactics to cut costs and increase profits at the expense of patients’ health and doctors’ autonomy. In the Medical Economics 2018 Annual Physician Report, 70% of respondents said “third-party interference” was the biggest challenge they faced.
“Third-party interference is burning doctors out because we want to take care of patients,” Ripley Hollister, M.D., a family practitioner and board member of The Physicians Foundation told Medical Economics. “Doctors enjoy the intellectual challenge, the compassion, the relationships; that’s why we went into medicine. And all of these other things get in the way.”