WhatIf

Pierre-Thomas Léger, HEC Montréal

The policy option presented here was chosen to stimulate discussion, but is only one of several options examined by the author in the reportPhysician payment mechanisms: An overview of policy options for Canada”.

Summary

About the presenter

Pierre-Thomas Léger is associate professor of health economics in the Institute of Applied Economics at HEC (Hautes études commerciales) Montréal. He is a fellow of the Inter-University Centre on Risk, Economic Policies and Employment (CIRPÉE) and the Centre for Inter-University Research and Analysis of Organizations (CIRANO) and an associate fellow of France’s Centre pour recherche économique et ses applications (CEPREMAP). He was also a visiting researcher at the Paris School of Economics in 2006-2007. He holds a BA in economics and political science from the University of Ottawa and received his MA and PhD in economics from the University of Western Ontario.

Main concern/problem

In many healthcare systems, physicians make decisions regarding the use of drugs and devices that in turn affect the costs borne by the hospital and the system. The fee-for-service payment mechanism creates financial incentives for physicians to encourage overconsumption of care—physicians are paid more when their patients consume more care. Further, the fee-for-service system does not encourage physicians to consider the cost of the treatments they provide to their patients and their remuneration is not tied to patient health outcomes.

Proposed Option

Profit-sharing programs allow hospitals to provide bonuses to physicians based on hospital savings. As a result, physicians have an incentive to consider the costs of the drugs and devices they use for their patients.

Benefits

Adding profit-sharing programs to the current fee-for-service system (or any other payment mechanism) may provide a powerful way to align physician incentives with those of the hospital and of policy-makers. This approach could influence the choice of drugs and devices and encourage substitution toward cheaper drugs and devices. It could also encourage standardization of drugs and devices used by physicians and allow hospitals to benefit from quantity and market share discounts.

Experience/evidence of success

Hospitals (or certain groups within the hospital) in the U.S. have been permitted to implement some group-based profit-sharing programs, also known as gainsharing. In these programs (targeting cardiologists and orthopedic surgeons), physician groups split bonuses based on savings (relative to a historical baseline) on different drugs and devices. Preliminary results from Ketcham, Léger and Lucarelli (2010) suggest that these group-based profit-sharing programs can help reduce drug and device costs and that a significant proportion of the savings comes from lower per-unit prices (which occur through both better bargaining power and quantity and market-share discounts).

Challenges and limitations

Regulatory barriers in Canada prevent such programs from being implemented in any meaningful way (hospitals are prohibited from providing direct payments to physicians). Furthermore, little is known about the effect that such profit-sharing programs have on quality of care and patient outcomes.

Considerations for Canada

Policy-makers may want to consider add-ons to existing (or future) physician payment systems such as group-based profit-sharing programs, which can provide additional incentives for cost control depending on its relative importance and the institutional/legal environment. Combining profit sharing with physician monitoring may provide a powerful way to align physician incentives with those of the hospital and policy-maker to ensure cost control and quality of care.

Presentation