Saturday, April 1, 2017

A Theory of Relativity, Part I

A look at one of the most contentious issues in all of health care.

In my early days of practice, working ER shifts in Atlantic Canada, it was easy to tell which doctors would be around for a consult by the cars parked in the staff lot. The Family Docs all drove Subarus, the Internists drove European sports sedans, and the Radiologist rode around in a $90,000 sports coupe. These docs all got along for the most part, but most communities aren't so lucky, and medical associations are notorious for internal battles between specialties over income. For all the finger-pointing and name-calling, this, in a nutshell, is what policymakers and pundits are getting it when they raise the issue of relativity: how much should one doctor be paid relative to another?

Why is doctors' relative pay such a sticky issue? Outside of the obvious - every doctor believing his or her work is underfunded and/or underappreciated, and income affects how medical students choose a specialty - there are a few wrinkles to the problem that aren't as easily fixed as you might think.

Gross vs. Net Income

First off, and this can't be stressed enough, the public is by and large misinformed about the economics of medical practice. Disclosing the incomes of salaried doctors on a "sunshine list" is one thing, but publishing doctors' gross billings - generally for the purpose of scoring political points - ignores overhead costs (rent, staff, equipment) and volume of work, that can vary widely and wildly within and between specialties.

I'm going to illustrate this, using some not-unrealistic but somewhat arbitrary numbers. Let's say a doctor bills the provincial insurance plan $250,000 in a year. Sounds pretty good, right? From that amount, though, the doctor must pay for: renting office space; utilities; medical and office equipment (exam tables, scales, computers, phones); salary for a receptionist and/or nurse; medical and office supplies (needles, bandages, paper); business insurance; and other expenses such as bookkeeper's and/or accountant's fees. Beyond that, the doctor also has to cover a variety of professional expenses: malpractice insurance; licensing; medical association dues; and conferences (including travel and hotel costs).

If it's a family doctor, upwards of 40% of that $250k can end up going to these overhead costs. Apart from salaries, which is dependent on how many hours a week the office is open, most of those overhead costs are fixed. He or she must pay for rent and licensing and insurance and dues, whether the number of patients seen in a day is 5 or 50. The net income is still nothing to scoff at, but to say that doctor makes $250k is incredibly misleading.

In contrast, a psychiatrist might take in significantly less in gross billings, say $200k. However, the psychiatrist almost certainly has lower overhead costs - space demands are much less (one room plus a waiting area), and no nurse or medical supplies need be on hand. Professional expenses are the same if not more, as specialists usually pay more for malpractice insurance and conferences. But the overall amount paid for overhead will be significantly less, say 25% for the purpose of illustration. In terms of net income, the psychiatrist is probably a little better off than the family doctor. But if the papers and the politicians only concern themselves with gross billings, who's more likely to face scorn? (Really neither at that level of billings, but I hope you get my point.)

So when you see a doctor with $1 million or more in billings - which is a lot, don't get me wrong - is that truly reflective of the doctor's net income (and therefore take-home pay)? What if that doctor's specialty has substantial equipment costs, like Gastroenterology? Higher rent because of specialized construction needs, like the lead lining in the walls of an X-ray suite? The point isn't to bemoan the pay in some specialties, it's to point out that gross billings rarely reflect a doctor's income accurately. Moreover, what happens when doctor-government negotiations don't go smoothly, and public opinion is looked to as a mediating factor?

The Billing System Problem

The second major headache when it comes to relativity is that doctors are traditionally paid by the government insurance plan on a fee-for-service basis. That's certainly changed a great deal in the past two decades, notably in teaching centers and family practice. Still, alternate funding schemes haven't solved the relativity problem per se, so much as they've changed the incentive structures - not necessarily for the better - and provided more predictable incomes in some fields of practice.

For better or for worse, fee-for-service medicine is the "legacy" payment system we're stuck with in health care, in particular for specialists. Therefore, any attempt to change how much doctors earn relative to one another must necessarily be translated to a change in the fee schedule. Even if the respective medical association and government come to an agreement on what, for example, a Pediatrician should earn as compared with a Cardiologist, determining how that balance should be reached is no small feat. Again, an example helps to illustrate this.

Let's say the government wants to increase the pay of Geriatricians as an incentive to get more trainees into the field. For the sake of argument, let's further assume there's consensus that a Geriatrician should earn roughly the same per hour as a community Neurologist, and right now Geriatricians earn 10% less. How should the money be allocated? Should the fee for consultations be increased? Follow-up visits? Should a new billing code be created for coordinating management of the patient with Home Care providers?

What happens when you go through this process for procedure-intensive specialties, like Otolaryngology or Ophthalmology? How do you determine which procedures to increase or decrease fees for? Will that significantly change how doctors in that specialty practice, creating unintended incentives to favor some procedures over others? What effect will that have on wait times for certain surgeries? It's not hard to see how the complexity of the issue can balloon beyond anyone's ability to control.

Who's the Boss?

Perhaps the biggest conundrum with the problem of relativity is the question of who should decide how much one doctor earns as compared with another, independent of what the comparative earnings should be. Is it the political party in power, acting as the agent of the general population? Is it the Ministry/civil service, acting as the executive arm of the government? Is it the profession itself, deciding by whatever internal mechanism it deems appropriate? If so, would the medical association employ an empirically derived formula? Or would the outcome flow from an exercise of power by some factions over others?

None of these answers is clear. The ready response, an appeal to basic economics, fails miserably. Health care simply does not obey the normal rules of supply and demand, which is a major reason it's funded through a socially subsidized insurance plan rather than left to market forces. Those most in need of health care are generally least able to afford it, and the public's demand for health care has been proven everywhere to be more or less insatiable.

Nevertheless, and as argued above, relative inequity in how doctors are paid creates major problems for the health care system. It can warp the choice of specialty for doctors in training, leaving some fields chronically understaffed. It's led medical associations to become little more than alliances of infighting tribes, rather than the single unified voices put forward by proper unions. However, there are better ways to address the problem than unilateral fee-slashing by governments.

Next time: guiding principles to address relativity


  1. I've never ever considered the issue of relativity in regards to the income for doctors before reading your blog. What should the criteria be for compensation? Is fee-for-service medicine really the answer? With the state of the current government, I doubt that the government and the medical association will come to an agreement on what doctors should earn anytime soon.

    Frank George @ Dutch Hollow Supplies

    1. Indeed, relativity is something that's of much greater concern to doctors and policymakers, but it does ultimately affect the public.

      How doctors should get paid (salary, fee-for-service) is an entire discussion in and of itself. The problem is that fee for service is what we have. Since most doctors are responsible for their own business costs (rent, equipment, salaries), putting them all on salary is simply not possible. Many docs are now on other payment models, but they're not at all perfect. Ultimately, the problem is that these decisions are made without a clear goal in mind. Are we trying to save money or improve access? Improve "quality of care" (whatever that means) or use a guaranteed income as a carrot for recruitment to underserviced areas?

      As to the government, if the docs can't reach an agreement, the government would almost certainly take its own rather blunt steps. In Ontario, any moves towards unilateral fee cuts are now subject to arbitration, but the government has 1000 ways to take your money.

      Thanks for the comments!

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