Physician payment in Canada, Germany, and the United States

Physician Executive, May-June, 1993 by Robert S. Galvin

As the debate about reforming the U.S. health care system intensifies, interest has focused on three alternative delivery systems: the predominantly private-sector model in the United States, the provincial government health insurance model of Canada, and the social insurance model of Germany. The organization of physician payment is an important part of all these health care systems. To maintain an affordable system that delivers high-quality care, payment to physicians must be sufficient to attract and maintain an able group of doctors, while not exceeding an amount that the country can afford. In this article, these three systems will be examined, and an attempt will be made to apply the lessons learned from Germany and Canada to the direction of physician payment reform in the United States.

The two major issues in physician payment are the mechanism and the amount of payment. In terms of the mechanism of payment, the key factors are the complexity and the predictability of the system and how, if at all, the system intrudes on professional autonomy. For the purposes of this article, professional autonomy will be divided into two components: clinical autonomy, in which a physician has the power to determine the clinical treatment of his patient, and financial autonomy, where a physician has the power to determine the dollar-value of his services.

Physician Payment--United States For the most part, U.S. physicians are paid on a fee-for-service basis. There is a small percentage of U.S. physicians who are either salaried or work under a capitated payment model. For the vast majority of physicians who are fee-for-service, billing requirements differ from payer to payer; at last count, there were 1,500 separate payers. The largest of these payers is state and federal government. Both Medicare and Medicaid reimburse doctors on the basis of a fee schedule. In the case of Medicare, these fees have been historically determined as a percentage of what doctors have charged by region; this is the so called "usual, customary, and reasonable" (UCR) formula.(1)

However, as of January 1, 1992, a resource-based relative value scale has been instituted, which pays doctors on the basis of the resources used for a particular service? In the case of Medicaid, each state has an agency that sets fees, and the formula for determining the fees differs across the states. On average, Medicaid fees are 40-50 percent below those of commercial insurers.

Each of the nongovernment payers has the right to set fees and to require that its billing forms be used. In practice, almost all of these payers use similar forms and a coding method based on uniform categories-the CPT codes and the ICD-9 classification system. Determination of fees paid do differ by payer, although the methods fall into two broad categories. For nonmanaged care payers, a variation of the "usual, customary, and reasonable" formula is used. For managed care payers (including non-staff HMOs and PPOs), fee schedules are set by the payer and, on average, are 20-30 percent below the amounts paid by nonmanaged care entities.

The managed care payers also use a reimbursement technique called a "withhold". From 5-30 percent of fees is "withheld" by the payer, and subsequent payment of this fee is based on the financial performance of the managed care firm.

U.S. physicians also bill their patients directly, and this practice accounts for up to 20 percent of their reimbursement. Direct payment is in the form of a copayment for part of the predetermined fee or is part of what is known as balance billing. Whereas 10 years ago, balance billing was widely used, today there are significant restrictions on its use. Specifically, it is not allowed in Medicaid or in any managed care model. As of January 1991, its use was restricted for Medicare patients. By 1995, a cap of 10 percent in excess of the Medicare fee will be established.

Direct billing and billing of multiple payers require that physicians have sophisticated billing procedures and personnel in their offices. On average, approximately 10-30 percent of a physicians' billings are not reimbursed and are considered bad debts. These bad debts result from patients not paying their bills and from insurance carriers' rejecting or paying less than physicians' claims. It is the prerogative of physicians to pursue this bad debt through collection agencies or formal appeals to third-party administrators.

Third-party payers extensively review physicians' claims through utilization review. As of 1990, 90 percent of payers had varying degrees of UR. These reviews take the form of prospective assessments of the necessity for elective hospital admissions, surgeries, and invasive procedures; concurrent assessment of the necessity of inpatient stays; and retrospective denials of payment for services deemed not medically necessary. Each payer has its own criteria for medical necessity, which is usually not available to physicians. Initial UR decisions are made by nurses using treatment algorithms. Although appeals are available, they are timeconsuming and frequently involve significant paperwork. Although no definitive data exist, payers expect to save about 10 percent of billed charges through utilization review.