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Physician Income in The New Age of
Health Reform Frugality

A University of Pennsylvania Roundtable Discussion

PHILADELPHIA -- Although one in five of them is among the wealthiest 1% of citizens, growing numbers of American physicians face unexpected financial challenges as the new frugalities
U.S. physicians remain the world's highest paid but face a number of new challenges to the business models and traditions that support those compensation levels.
of health reform continue to envelop their profession.

Evidence of this is widespread in general press reports. A recent survey of 239 large medical groups found that 55% of them were operating in the red. Other reports cite a 30% decline in the revenue of independent-practice physicians over the last 24 months. Small Business Administration and bank loans to physicians have increased dramatically. Record numbers of doctors, both primary care and specialists, are leaving private practice to take jobs in hospital systems. Meanwhile, federal and state regulators, along with insurance companies, continue to press for lower health care costs and new payment systems designed to get more care for less money. And above all of this hovers the threat of the "DocFix" -- or Sustainable Growth Rate (SGR) adjustment -- that could abruptly lower physicians' Medicare fees by 30%.

The issue of how much physicians make and what they do to make it is as complex as it is important to the management of health care and the ultimate outcome of health reform.

Four Penn experts
The LDI Health Economist convened a panel of four University of Pennsylvania health care experts to explore the latest developments. The first question they were asked: Is the general financial situation of American doctors as bleak as news stories portray?

The first to answer was Wharton School Professor Mark Pauly. "U.S. physicians don't know what hit them," he said.

"The random news stories give you a contradictory picture," he continued. "On one hand, U.S. doctors have the world's highest fees but on the other, growing numbers of them are leaving private practice. It makes many people ask
panel header Mark Pauly

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Mark Pauly, PhD, is a Leonard Davis Institute of Health Economics Senior Fellow and Professor of Health Care Management at the University of Pennsylvania's Wharton School.
David Asch

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David Asch, MD, MBA, is Director of the University of Pennsylvania's Leonard Davis Institute of Health Economics.
David Grande

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David Grande, MD, MPA, is a LDI Senior Fellow and Assistant Professor of Medicine at Penn's Perelman School of Medicine.
Zack Miesel

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Zachary Meisel, MD, MPH, MS is a LDI Senior Fellow and Assistant Professor of Emergency Medicine at Penn's Perelman School of Medicine.
'What's really going on?' The answer is that there's a difference in the level and rate of growth. The level of fees, income and everything else about physician practice in America is higher than the rest of the world. But in the last decade, according to some estimates, the growth in physician incomes hasn't kept up with inflation. So, while physicians are well off, they're not getting better off. They never saw that coming."

'Difficult to be upbeat'
"The big difference now," Pauly said, "is that in days gone by if your income fell you could, as a physician, always do something to make more money. It might require taking a loan for a new piece of equipment or working more hours but you could do it. Now it's much harder because managed care generally controls what you do and also limits what you'll be paid for using that new piece of equipment. Doctors feel much more constrained because they are much more constrained. And, of course, with the Medicare DocFix waiting in the wings, it makes it even more difficult to be upbeat about the future financial aspects of the practice of medicine."

Pauly, who is widely recognized as one of the country's top health economists, was joined in the session by three other LDI Senior Fellows: David Asch, Executive Director of the Leonard Davis Institute of Health Economics (LDI); David Grande, Assistant Professor of Medicine at Penn's Perelman School of Medicine; and Zachary Meisel, Assistant Professor of Emergency Medicine at the School of Medicine.

'What's a reasonable wage'
"When a physician says his or her practice is doing poorly," said Asch, "I want to know what the reference point is. If it's how well they were doing last year, I suspect the feeling of doing poorly is very widespread. If the reference point is 'What should I be making in some absolute moral or comparative sense,' I'm not so sure. By almost any standard, physicians make a very generous amount of money. Certainly, compared to the rest of the world, U.S. physicians make an enormous amount of money. If they compare themselves to what's a reasonable wage for the kinds of things they do, their situation might not seem so dire."

"The frustration is not just about income," Asch said. "It's about how many of those who signed up for medicine didn't anticipate how the field might change 15 years later. I have physicians dropping in to see me because they want to talk about getting their MBA. By and large they're running away from things that are no longer attractive to them because the medical profession is no longer what they signed up for. Their sense is that the status and authority and control of physicians have gradually been shifted to health system executives -- to the 'blue blazers'. Money is embedded in their concerns but it's status, authority and control that they talk about most."

'Cookbook medicine'
Meisel agrees. "Physicians' fear of losing control and authority is sometimes a barrier preventing them from thinking about more productive ways to improve the efficiency, value and quality of care," he said. "Whether it's guidelines or development of best practices, or regulations on the payer side, it's often viewed as ramming 'cookbook medicine' down physicians' throats."

Grande thinks uncertainty driven by years of high profile political wrangling over the Medicare Sustainable Growth Rate (SGR) -- the "DocFix" which is supposed to prevent payment rates from exceeding GDP growth -- underlies many physicians' sense of gloom. He also thinks the drumbeat of DocFix reports has distorted the public's sense of the amount doctors earn or how much that actually affects overall health costs.

Pauly noted that the total net income of the country's physicians accounts for 11% of health care spending and that "even if you suddenly paid doctors bus drivers' wages, the savings would amount to only one year's growth in healthcare spending."

How likely is it that SGR/DocFix cuts will happen and eliminate 30% of Medicare physicians' income in the midst of health reform's other cost reductions and payment model changes?

'A deep breath and hard swallow'
"Not very," said Grande. "The threat makes good headlines but a drop off of that magnitude would be politically untenable, particularly when you understand how it would impact seniors' access to care. I think the way the SGR will eventually be rectified is with a small cut in payment rates and a Congress willing to take a deep breath and a hard swallow as it rolls the fix onto the deficit or into tax packages down the road."

Beyond the DocFix, the panel's consensus was that American medicine is under siege during a time of sweeping change, but Asch suggested that many doctors suffer a disconnect with that reality. "A lot of them recognize that costs are too high," he said. "And they even recognize that physicians are part of the problem but they often fail to internalize that. It's quite common to see physicians and other stakeholders in the industry have some abstract understanding of where the problem is and, at the same time, no sense of real ownership of the fact that they are part of that problem."

The panel emphasized that the issue of physician income is about more than just fee rates or provider payments. For instance, the debate over income variations among different types of doctors is a major point of contention within the profession. It's usually framed with charts showing primary care doctors and pediatricians at the bottom and specialists like cardiologists and neurologists at the top, making twice as much money.

'Incomes far out of proportion'
"On that," said Grande, "the issue is both one of fairness and of 'how do we establish a balanced workforce capable of producing the type of healthcare we think the country needs?' Primary care physicians look at the specialists and see that their incomes are far out of proportion to the additional training those specialties require."

"The other part of this," said Asch, "is that another form of compensation is the degree to which you can control your professional life; primary care physicians are increasingly losing that. The health care system is asking for more and more care coordination but doesn't have very good systems for providing that. So, the first answer is 'Well, we'll just let primary care physicians do that.' As a result, primary care physicians feel incredibly exposed to anything that can happen in the patient's health care life -- which is now increasingly viewed as including what happens outside of the doctor's office. This is somehow now the primary care doctor's responsibility. They must play cleanup on everything. It's incessant, relentless and oppressive, even if it is, in some way, the right answer for improving health. Specialists don't face the same limitless exposure."

Medicare's nightmare
But readjusting these intramural fee disparities among different specialties is its own kind of puzzle. "That's why Medicare has been like a deer in the headlights with it," said Pauly. "What their nightmare would be is 'if we reduce surgeons' fees, they'll respond by doing more surgeries. It's not so much the extra payment to the surgeons as they grow the volume; it's payment of all the additional ancillary hospital costs. So we'll be spending more there. Then, if we raise primary care doctors' fees, they'll provide more primary care service and they'll spend more there, too. So, we might as well stay put.' Beyond that, there are political issues about redistributing across specialties, so I guess you could say that physicians haven't been able to work it out among themselves -- but we don't ask other professions to negotiate; we usually use markets. But markets haven't worked it out on this one either."

So, what's the bottom line on the future of physicians' income?

'Change the way we pay'
Asch sees the issue as one of subtly reengineering compensation systems in ways likely to achieve health reform goals. "It's not what physicians make, it's how they make their money that will have a bigger effect," he said. "The way to control costs overall is to change the way we pay for services and perhaps change the kinds of services that we pay for."

Pauly, the economist, on the other hand, takes a starker view. "If you're going to cut spending," he said, "somebody's income has to be significantly reduced, so we're just talking about how. I think aggregate physician income has to take something of a hit. You could sugarcoat that by saying well, it's just a slower rate of growth but what's actually built into Medicare under ACA is 'no growth.' So, how do you get 'slower growth' to add up to 'no growth' if somebody's income isn't stopped or cut?"

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Hoag Levins is the Managing Editor of the LDI Health Economist.

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