Decoding Health Care

Part 8: Physician Compensation

In over 20 years of practice as an oncologist, I never felt I was overpaid. I needed to work hard to get into and through medical school. I did not come from a wealthy family (and neither did my wife) so I needed to take out loans to pay for med school. After medical school, for the seven years I was a resident and fellow, I worked long, hard hours and was paid minimum wage. By the time I was in private practice, I was 39 years old and was married with two children. I could not pay off my school loans until I was in my 40s. My college classmates who went into business or law had been well compensated for many years by the time I got a real paycheck. It’s not that I felt entitled, nor that I was destitute; rather, I felt it was fair that I finally made a nice living. I guess you could say I am part of the problem. There are no innocent parties when it comes to the problems with US health care.

US physicians are very well compensated. Although there are many sources of data regarding phy comp, the consensus is that the average physician in the US makes between $300-350 K per year (https://www.washingtonpost.com/business/2023/08/04/doctor-pay-shortage). That places US doctors in the top three around the world (behind Luxembourg and Switzerland). US doctors make about one third more than their Canadian counterparts and 4-5 times as much as Mexican physicians. And US doctors make twice as much as their British counterparts. Just as there are differences from country to country, there are huge differences within the US.  Averages can be very deceiving. There is a massive difference (again 4-5X) between what general practitioners make and what plastic surgeons make. Older physicians make more than younger ones. Where you practice matters; physicians in Florida do very well. Men do better than women and whites do better than minorities, but this isn’t as much as it used to be and is partially explained by the medical specialties they practice. Physicians in private practice make more than employed physicians. The top 10% of physician earners make more than a million dollars a year.

How can doctors make so much money? The answer, as you might guess, is complicated. Physician payment is based on a system called the Resource Based Relative Value Scale (RBRVS) which Medicare adopted in 1992 (and subsequently adopted by almost every commercial insurance company). Prior to that time, doctors got paid what they billed (sort of). The previous methodology employed was called “customary, prevailing, and reasonable”. Basically Medicare looked at what doctors were billing for a given procedure, looked at the median charges of the treating physician and the charges submitted by peers for the same procedure and arrived at a number. Not very scientific. The RBRVS system is based on three factors: the complexity of the care, how much “overhead” the procedure entails, and a minor component related to the malpractice expense. The complexity and the overhead numbers are submitted by the specific subspecialty. Much of this process is controlled by the American Medical Association and the subspecialty societies. For example, which procedures (identified by CPT codes) merit coverage is decided by the AMA. And the allowable charges for the various procedures is determined by the Relative Value Update Committee or RUC. The members are appointed by the medical specialty societies. This is clearly a case of the fox watching the henhouse.

The composition of the RUC is heavily weighted towards subspecialists which explains why they get paid more. And subspecialists with a procedure get paid a lot more. There is a limited pie and those procedural specialists made their slices as big as possible. It is true doing a cardiac bypass operation is more complicated than treating a sore throat, but things got ridiculous. And this lower reimbursement for primary care is felt to be a major contributor to the shortage of primary care doctors. Perhaps because of this shortage and at least in part because it just looked bad (cataract surgery was a favorite target of critics), primary care reimbursement has gone up 15-20% over the last 10 years. But there is a lot of ground to make up and they are still lagging far behind.

The system I have described is flawed, but it doesn’t really explain how doctors make a million dollars. Part of the answer is that doctors get paid more for doing more. In today’s physician reimbursement world, called fee for service, the more patients you see the more you make. And if you do more expensive things, so much the better. That’s why interventional cardiologists (who spends their day in the cath lab doing cardiac catheterizations and putting in stents) make a lot more than the cardiologist who sees patients in the office all day. But again, there are only so many hours in the day. And Medicare and the RUC pay close attention to abuses related to overutilization. So there must be another explanation why some doctors make so much money.

Physicians are entrepreneurs and they are opportunistic. Given a chance to make a buck, within some limitations, they will. There are things that are clearly not allowed. Paying physicians for sending a  referral is definitely a no-no. Hospitals cannot pay doctors for referring a patient. And you cannot use “inducements” for doctors to prescribe certain therapies that might be lucrative. Pete Stark, a California congressman, oversaw the construction of a set of rules that make these practices illegal and are fairly aggressively enforced. But as you might expect, there are loopholes. I’ll give you an example.

Physician ownership of hospitals, imaging centers, and surgicenters is fairly common. For example, a bunch of ophthalmologists might build a surgicenter that exclusively does cataracts. These centers can capture not only the physician fees associated with that surgery, but also all the operating room fees. And these centers are really efficient. I have personal experience when my wife had her eye surgery. The waiting room looked like a well attended AARP convention. But that’s the tip of the iceberg. There are heart hospitals and orthopedic hospitals. They are clearly for profit and don’t take just any patient off the street. They select the healthiest patients with the best insurance. They advertise “better outcomes” and concierge service. And these hospitals are very, very lucrative enterprises. These facilities do not violate the Stark regulations because there is an explicit “whole hospital exception” that allows physicians to engage in this behavior, a so-called safe harbor (Physician-Owned Hospitals and Self-Referral | Journal of Ethics | American Medical Association (ama-assn.org). Go figure.

But even aside from this egregious example of profiteering, there is a much more subtle and even mainstream example of physicians profiting financially from services they do not directly perform. I am speaking of how we pay for chemotherapy. Unless you work in oncology, it is very unlikely you know anything about this. And its not something oncologists are particularly eager to discuss but will defend to the death. I know this because I was a Jedi master of chemotherapy administration and billing.

Prior to the mid 1980s there was little chemotherapy administered to patients with advanced cancer. There were few drugs and they didn’t work very well. And when they were given it was usually in the hospital. From the mid 1980s through the 1990s there was an explosion of new drugs and they did not require hospitalization. And hospitals were poorly equipped to deliver them in the outpatient setting. So community oncology practitioners responded by building outpatient chemotherapy infusion centers. This was not a trivial exercise. Oncologists needed to hire expert pharmacists and nurses to prepare and administer the drugs. They needed dedicated space (an infusion suite) with comfortable beds or chairs. And they needed access to resuscitative equipment in the rare event of a serious adverse reaction. They also needed to get paid for all of the trouble they went through to make this happen.

Medicare (and commercial payers) recognized that giving these drugs in the office was going to be way better than in the hospital. So a process called buy and bill became firmly established as the way to deliver and pay for outpatient chemotherapy. Under this system, physicians (or hospital outpatient departments) purchased the chemotherapy drug, typically from a pharmaceutical wholesaler, administered it to the patient and billed the insurance company: hence, buy and bill. The bill was a mark-up over the acquisition price paid by the practice; this margin was designed to offset the overhead cost of the infusion suite, as well as some amount for the cognitive effort associated with supervising the use of these complex and potentially dangerous drugs. The standard physician reimbursement for a physician office visit, and the fairly nominal reimbursement for nursing services (so called infusion codes) just wasn’t enough.

As it turns out, buy and bill was plenty enough to cover overhead. And there was some room to sweeten the pot further. There were a lot of negotiations on the actual acquisition cost of the drug. As we have previously discussed, pharmaceutical firms do this all the time. Really big practices got rebates for their high volume business, and these weren’t reflected on the bills that were sent to Medicare and the commercial payers, resulting in enhanced profit margins. When this came to light, the government decided to crack down and the Medicare Modernization Act of 2005 led to a system of transparent reporting of net prices by pharmaceutical firms to the government. Despite intense political pressure brought by the oncologists, this became the law of the land and remains the basis for how chemotherapy reimbursement is calculated.

But that is far from the end of the story. Medicare pays a modest mark-up of 6% above acquisition cost to both community practices and hospital outpatient departments. Commercial insurers pay a lot more. They pay about 20% above acquisition to community practices. But as we have previously discussed, they pay hospital outpatient departments a percent of charges billed based on the hospital charge master. A recent paper puts this mark-up at acquisition plus 300% (N Engl J Med 2024; 390:338-345
DOI: 10.1056/NEJMsa2306609). This has made hospitals very eager to acquire oncology practices, and they have aggressively done so with a little more than half of all oncologists now working for hospitals (when I started in private practice in 1998, 85% of oncologists were in the community).

I mention all of this because it directly impacts the compensation received by oncologists. As of 2024, somewhere between 50-70% of a community oncologist’s income is related to this chemotherapy margin. And it has been going up steadily because the new chemotherapy drugs are all super expensive. The average income of an oncologist in 2022 was $463K, up 13% over the previous year simply because the drugs are more expensive. Hospital based oncologists also benefit financially but by a different mechanism. Hospitals generally cannot share chemotherapy profit with an employed physician (thanks to Pete Stark). But they can offer a very generous salary and they do. At the local “non-profit” hospital where I practiced the salaries are matters of public record and the two highest paid employees are the hospital CEO and the medical oncologist; both make well over a million dollars a year.

Being an oncologist is a tough job. But the conflict of interest inherent in a system in which a physician makes more if he prescribes expensive drugs TO A VULNERABLE POPULATION is hard to ignore. To be fair, the evidence that oncologists prescribe more expensive drugs primarily to make more money is fairly weak. But nobody can deny that it is a bad look for oncology and probably needs to change.

We can conclude that like much of health care, physician compensation needs to evolve. Once again. money seems to be at the root of the problem. Much of the discussion in physician reimbursement focuses on moving away from the fee for service model in which you make more if you do more to a model in which you are rewarded for taking good care of patients and being good stewards of the health care dollar. The umbrella term for these physician payment models is value based care. And although this sounds like a grand idea, the devil is in the details.

There are major challenges for value-based care. How do we define quality? What does it mean to practice good medicine? Now you may think I’m nuts. But let’s take oncology as an example. What matters to cancer patients? Being cured, of course! But there are many things that determine whether or not you are cured. What cancer you have, how much cancer there is, whether you can tolerate the treatment, and whether you want or can afford the treatment all affect your survival. The oncologist controls none of those. Through bad luck, your oncologist may get a failing grade because they have a large percentage of patients with incurable diseases. I can come up with a similar example for almost every other medical specialty.

Health outcomes make difficult endpoints. So most quality payment programs have defaulted to “process measures”. Process measures reflect whether or not the doctor followed the best available medical evidence in the care of the patient, i.e. did they check the right box. For example, did the doctor send their diabetic patient for an eye exam? Or did the pulmonary doctor counsel their COPD patient on smoking cessation? Saying “yes” does not guarantee a good outcome, just that the doctor is doing their job. As you might expect, these do not generate a lot of excitement in the payer world. These measures do not improve health outcomes and they do not impact cost.

What does get payers excited is holding doctors accountable for the cost of care. Can the doctor save 10% of the total cost of care?  Ideally this would be accomplished by keeping patients out of the emergency room or hospital. But unfortunately it might also occur by doctors cutting corners to cut costs. And what about the patient for whom the best therapy is also the most expensive? Should the doctor get penalized for doing the right thing just because it cost more? Managing cost of care is tough.

 Suffice it to say we haven’t moved very far from fee for service; I do not believe all the press releases CMS sends out about how many Medicare beneficiaries are in value based agreements. In fact, this topic of value based care and what we have learned will be addressed in an upcoming post.

So how big a contributor to the cost problem is how much doctors are paid? The answer is probably not much. Physician payments makes up less than 10% of all health expenditures. And physician compensation via the physician fee schedule has not increased very much in inflation corrected dollars over the last 25 years. But there are some cold, hard realities about the general physician payment construct that make change really difficult. First, all of those things in my opening paragraph about how much med school cost, how many years I was an indentured servant before getting a real paycheck, and how my college classmates were doing much better than I was are all true. Add to those issues the fact that there is clearly a physician shortage in the US. I must say that most physicians would argue that rather than them being overpaid the doctors in England are grossly underpaid. There is clearly some truth in that since there have been several physician strikes in England triggered by inadequate pay in the last year alone.

But we can agree a system in which doctors make more by providing more care without clear evidence of improved patient outcomes is nuts. That is where value based care comes in; more on that later. We can also agree that buy and bill in cancer care probably needs to go. But office based chemotherapy is an incredibly efficient and patient centric way to deliver care, even if it makes oncologists a lot of money. The solution must maintain this delivery system as well fairly compensate oncologists for the complexity of care they deliver. This also will be addressed in the value based care post. Finally physician ownership of other health care ventures also needs to go. This has started. The Affordable Care Act blocked the launch of any new physician owned hospitals (but not surgicenters). Like office based chemotherapy this may be an efficient way to deliver care but the conflicts are huge.

At this point, I have no friends left in health care at all. We have covered a lot of ground and I believe I have insulted just about everyone. But as I said in my very first post, I do not believe US health care is hopelessly broken. In the next post I will summarize what we have covered, both the good and the bad. And I will tell you how I feel about Medicare for all. Hint: I’m not a fan.