Physician Payment Mechanisms: Overview and options for Canada

by Pierre-Thomas Léger | Mar 15, 2011

Pierre-Thomas Léger
Associate Professor and holder of the Professorship in Health Economics, HEC Montréal 

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Key Messages

  • Canada’s healthcare costs are rising and now constitute an important share of GDP. In response to healthcare growth, governments can act to contain spending and/or improve efficiency within the healthcare system.
  • An often cited source of inefficiency in the Canadian system is its overwhelming reliance on the fee-for-service (FFS) physician payment mechanism. Inefficiencies resulting from FFS payments are especially important since physician expenditure is second only to hospital expenditure as a share of total public-sector spending on healthcare.
  • The FFS payment mechanism creates financial incentives for physicians to encourage overconsumption of care, since physicians are rewarded for a higher volume of services. In other words, physicians get paid more when their patients consume more care. Further, the FFS 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.
  • Alternative payment mechanisms that aim to reduce health expenditures by curtailing the provision of excessive (i.e. inefficient) care have been proposed and implemented in Canada and abroad. Such mechanisms include capitation, fundholding (a more complete form of capitation), mixed payments, pay-for-performance and profit sharing.
  • Although capitation and fundholding provide straightforward ways to control healthcare costs namely by tying the physicians income to his or her patient’s use of care), these payment mechanisms may lead to issues of stinting (providing less than efficient levels and quality of care) and accessibility.
  • A mixed payment system that includes capitation and FFS components is a promising solution for Canada. Implementing a mixed payment system in combination with physician monitoring will provide physicians with incentives to consider costs and benefits of different treatment options, and thus lead to an efficient level and quality of care.
  • Group-based profit sharing programs may be an interesting option for Canada in the long term. However their applicability in the short to medium term is unlikely. Profit-sharing programs allow hospitals to provide bonuses to physicians based on hospital savings created when physicians coordinate their use of drugs and devices (quantity and market share discounts). That is, the more that a hospital purchases of a particular drug or device from a particular vendor/manufacturer, the more they benefit from quantity and market share discounts.
  • Adding profit-sharing programs to the current FFS system may provide a powerful way to align physician incentives with those of the hospital and of policy-makers. However, little is known about the effect of these programs on patient outcomes, and current regulation in Canada does not allow hospitals to pay physicians in such a manner. Actual experiences in U.S. hospitals may be informative in this case.