Understanding How Your Doctor is Paid and Why it is Important

We explain different ways doctors are paid including: salary / wage, capitation, and fee-for-service payments and compare incentive and non-incentive models.

TIP: Although how your doctor is paid shouldn’t affect what sort of care you get, there are cases where it can be helpful to understand the economic incentives a provider has in terms of your care.

What are Wage, Capitation, or Fee-For-Service Payments?

Some doctors are employed by hospitals or other medical service providers. They agree to work a certain number of hours for a fixed salary or wage.  They may get a bonus if they see a lot of patients. Many HMO doctors like those working for the VA System are paid a salary. As an employee, there is less paperwork for the providers to deal with and insurance is taken care of by the hiring organization.

A medical provider can also be given a specific amount of money every month for each of the patients enrolled in a managed care plan whether they need services or not. This is called capitation. There are two kinds.

Global capitation occurs when networks of hospitals, lab facilities, and providers agree as a group to be responsible for providing for the health of all enrolled members regardless of cost. In theory, capitation encourages the provider to provide screenings, immunizations, and tests required to keep members healthier and avoid expensive specialists.

Limited capitation is also applied to a particular group of providers or hospital.

Other doctors, such as those in EPOs and PPOs, get paid more when they see more patients and perform more services. This is a fee-for-service model of payment. Both Medicare and Medicaid are fee-for-service providers.

Where are the Financial Incentives?

Capitation has become controversial since it inserts economic considerations into patient care. The provider is paid a fixed sum whether they provide less expensive or more expensive care. Providers thus have an incentive to use the most inexpensive generic drugs possible, perform as few tests as possible. There is little incentive to provide services such as tests, whether necessary or unnecessary.

In an effort to balance out the bias for less care under capitation, some groups are offered bonuses for efficiency and adherence to management guidelines or perceived quality expectations. Since the contracts can be so different, there is no blanket judgment you can make of them.

Low capitation payments are making it difficult for health care providers to fund the preventive care they are theoretically meant to encourage. Further, payments lower than market averages have driven providers of services to leave managed care markets. This has become a serious problem in many parts of the country.

When a provider cannot bill for a service, he or she is likely to use billable options such as lab tests or referrals to specialists rather than performing uncompensated care. Any time health care providers see themselves as under-compensated, this is an issue.

The downside of fee-for-service payment is that it gives the provider an incentive to perform more tests and give more care than is necessary. There has always been potential for fee-for-service payment models to encourage unnecessary or excessive tests, treatments, or medications. Doctors may order more tests than they need and perhaps perform more services than required because they get paid more if they do more whether the patient benefits or not.

No matter how they are paid, medical providers now have to consider which type of health plan their patient has, what its rules are about drug restrictions, pre-approvals, and reimbursements. They are under pressure to see more patients in shorter amounts of time.

What does that mean for the patient who may only have ten minutes with the provider, if that? It means that it is critical to know if your insurance’s payment to your provider encourages them to provide as few services as possible or perform more than necessary services. Once you know their bias, you can either advocate for more diagnostic tests or more efficient medications or you can ask yourself if another x-ray, MRI, or CT scan is really necessary.

It is increasingly important for consumers to be educated and assertive without assuming that half an hour of internet research automatically brings expertise.