American medicine has a money problem. But not the kind most people are talking about. 

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Between this century and the last, practically everything about American healthcare has changed.

Patient problems went from mostly acute and unexpected (think: broken bones and appendicitis) to predominantly chronic (heart disease, arthritis, diabetes and so on). As medical problems got more complicated, treatments became more sophisticated and wildly expensive. With the rise of for-profit insurance and “managed care” in the late 20th-century, doctors were driven to see more patients per day—spending up to half those visits on the computer for insurance and billing purposes. As a result, the relationship between patients and doctors changed and not for the better.

Amid these ups and downs, one aspect of healthcare has remained the same: the way we pay doctors.  As it was in the last century, physicians still get paid quid pro quo: They provide a service, submit a bill, receive a check, repeat. But in the 21st century, that rule no longer makes sense.

Breaking the ‘rules’ of healthcare

In hospitals and doctor’s offices across the country, physicians adhere to two sets of rules. There are the written rules, covering everything from human anatomy and physiology to the current laws and regulations that govern the profession.

Then there are the unwritten rules, which dictate the “right way” for doctors to act. These are the norms of the profession. Many of them persist long after scientific or societal advances render them obsolete.  

This article, part of a new series called Breaking The Rules Of Healthcare, takes a close look at an outdated and unwritten rule of healthcare payments.

The rule: The best way to pay doctors is transactionally

Transactional payments are the basis for nearly all financial interactions. A seller provides a good or service in exchange for payment. This is how we hire piano teachers, rent apartments and procure Girl Scout cookies. It’s also how we pay for 95% of physician visits today.

Paying transactionally for healthcare made sense in simpler times when doctors could deliver only a fraction of the “products” and “services” they provide today—and when patients trusted they’d always receive the best care available at reasonable prices.  

These days, researchers and policy experts point out that 25% of the $4 trillion spent on American healthcare each year is wasted (much of it on unnecessary or ineffective treatments). That’s an inevitable and well-documented consequence of quid pro quo payments in healthcare. But the harm done isn’t just limited to America’s economy. Often overlooked are the ways that transactional payments cause harm to (1) patients, (2) doctors and (3) the doctor-patient relationship.  

1. Transactional payments compromise patient health

As medical science advanced in the 20th century, American longevity climbed from 46 years (in 1900) to 75 years (1999). But when American medicine hit the century mark, an odd thing happened: life expectancy plateaued. For the past two decades, the average length of a person’s life in the United States held between 76 and 77 years.  

Many societal factors have contributed to the relative flatlining of life expectancy in the U.S., but chronic diseases are an undeniable culprit. Ongoing ailments (e.g., diabetes, kidney disease and heart disease) account for 7 in 10 fatalities each year and cost hundreds of billions of dollars each year to treat.

It is possible—with a mix of patient effort, clinical assistance and aligned incentives—to effectively manage and even avoid chronic illness. But not in a transactional payment model.

With transactional reimbursements, doctors get paid to fix specific and identifiable problems. When someone has a heart attack, the cardiologist gets paid to perform angioplasty. When a kidney or lung fails, the surgeon gets paid to transplant an organ.

These are remarkable and life-saving procedures, but doctors of the 21st can do something even more remarkable: with preventive screenings, frequent check-ins and the right medications, they can help prevent hearts, kidneys and lungs from failing in the first place.

Herein lies the transactional payment problem: How do you pay someone for something that didn’t happen (like a heart attack or a stroke)? As it stands, a primary care doctor has to file an insurance claim for each step in the process. To help just one patient effectively manage or prevent even one chronic disease, a physician has to file dozens of claims. When you consider that 133 million Americans suffer from at least one chronic illness, it’s clear that paying doctors transactionally is a costly error.

2. Transactional payments harm doctors

In the 21st-century, insurers have sought to reduce healthcare costs by lowering payments to doctors and implementing strict prior-authorization requirements. In a transactional payment model, these are the most powerful tools a payer has to curb medical spending and dial back unnecessary services.

In turn, doctors have been forced to see more patients per day to maintain their incomes, and they spend up to half of each day on insurance-related tasks—chasing down authorizations and filing paperwork.

Physicians today find themselves on a care-delivery treadmill, forced to run faster and faster (seeing more and more patients each day) just to stay in place. As a result, the average patient visit is now down to just 18 minutes—not nearly enough time to for doctors to adequately address all patient complaints.

Under these circumstances, it’s no wonder physicians have grown dissatisfied, frustrated and fatigued (the classic symptoms of “burnout”).

3. Transactional payments erode the doctor-patient relationship

In a 2019 survey, physicians said that gratitude from, and relationships with, patients were the most rewarding aspects of medical practice. And yet, 87% of doctors say patients trust them less now than a decade ago.

Many factors contribute, but more than half of physicians (56%) point to healthcare costs as the primary cause of patient dissatisfaction. Increasingly, these financial frustrations spill over into the exam room, straining the doctor-patient relationship.

Once again, healthcare’s transactional payment model fuels the problem. Whenever the number and complexity of services dictate the payment amount—be it in medicine or car repair or home remodeling—the recipient of the service fears the provider may be trying to “upsell” them. For patients and doctors alike, this fear proves unhealthy, threatening the very fabric of their relationship.  

Breaking the rule: A better way to pay physicians

Both the federal government and private insurance companies have tried to fix the problems of physician reimbursement with “pay for value” and “pay for performance” incentives. These programs have failed to make much difference because they simply replace one form of transactional payment with another.

Instead of paying doctors per visit or per procedure, so called value-based models reward doctors for meeting dozens of preventive screening targets and other “high-value” benchmarks. Few of these programs have moved the needle on clinical quality.

Instead of a quid pro quo payment methodology, American medicine needs a relationship-based reimbursement model.

From transactional to transformational

Breaking a centuries-old rule of healthcare payments won’t be easy. And it can’t be accomplished overnight. However, a solid starting point would be for the Centers for Medicare and Medicaid (CMS) to shift primary care payments in the Medicare program—in a way that allows physicians and patients to form “healthier” relationships.

Here’s how a transformational, relationship-based reimbursement system might work:

• Medicare enrollees select a primary care doctor as their accountable physician.
• CMS would then pay that physician a single, upfront sum to provide a year’s worth of medical care to these patients (instead of a single payment after each medical service).
• The doctor’s base compensation would depend on (a) the number of Medicare enrollees they care for and (b) the complexity of each patient’s current medical problems, which helps to forecast the amount of care they’ll need.
• Each primary care physicians would be eligible for added payments each year, depending on the patient’s experience. At the end of the year, enrollees would answer a series of questions about the impact their physician had over the previous 12 months: Did the doctor help you live a healthier life? Did he/she help you make good medical decisions? Do you value your relationship? Do you trust your doctor’s recommendations?

The benefits of this transformational payment model:  

Greater satisfaction. Because doctors would no longer be paid for each service, they’d be able to spend much less time on paperwork. In place of these dissatisfying bureaucratic tasks, physicians could spend that time doing what matters: helping their patients prevent and manage their diseases.

A meaningful difference. Transformational payments shift the incentives from what a doctor does to the impact a doctor has on the patient. Rather than evaluating physicians on a litany of individual actions and clinical metrics, the transformational model rewards physicians for the positive impact they have on the lives of their patients. That is, after all, the reason people choose to become doctors in the first place.

Even with an incentive payment equal to 10% of a physician’s salary, the added cost of the program would be relatively low. That’s because the income of primary care doctors is a tiny fraction of total healthcare expenditures. And the potential return on the investment would be massive. By moving from transactional to transformational payments, patients could better manage their chronic diseases, live a more productive life, and reduce their risk of experiencing a heart attack, cancer or stroke.

Undoubtedly, debate would center on the program’s written rules and implementation. But if we don’t break the current rule of how doctors are paid, we can expect our nation’s healthcare problems to get worse. Click here and press the “follow” button to receive future articles on breaking the rules of healthcare.