Medicare Costs and the Income Trap
Paying Doctors Less Is the Key to Better Coverage
SOURCE: iStockphoto
Biomedical research cannot solve all the problems of public health. An effective overhaul of the current system won’t happen without attention to some basic psychology and economics.
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Conservatives propose to control healthcare costs by bringing the discipline of the free market to bear upon the healthcare system. Some progressive groups advocate controlling costs with a more interventionist plan. But neither approach, as far as I have seen, adequately confronts one of the biggest barriers to controlling healthcare costs—the strong psychological desire physicians like me have to maintain our often phenomenally high incomes.
To help you understand this psychological phenomenon, I want you to imagine that you have ten years left in your career, and can choose between the following two income streams over those ten years: In the rising salary stream, you would start at salary X, and then receive a steady raise in your salary over the next ten years till you finish at salary X+Y. In the falling salary stream, you’d start right now at an salary of X+Y, and your salary would steadily decline across the ten years to end at salary X. Both choices would leave you with the exact same amount of salary over these ten years, only differing on whether your salary grows over time or declines.
What would you choose?
When I was given this hypothetical choice, I chose the increasing salary stream. I wanted to see my earnings get bigger over time, not watch them fall. Behavioral economist George Loewenstein created this hypothetical choice to illustrate an irrational side of human nature. You see, if I had been rational, I would have chosen the falling salary stream, because in theory I could have invested some of that early money and watched the interest compound over the ten years, leaving me richer at the end of the day than with the strategy I chose. Reason, in my case, lost out to instinct.
Most people, when given this hypothetical choice, are like me and choose the increasing salary. Most of us feel that our incomes are supposed to rise from year to year. The thought of watching our paychecks shrink over time goes against our instincts.
Recent battles over President Bush’s proposal to reign in Medicare costs revealed the power of this instinct. The Bush administration wanted to control costs in part by reducing physician reimbursement. On one level, the political battle was straightforward: A powerful interest group (physicians) stirred up fears to enrich itself. But on another level, the battle was more subtle. Physicians in this case weren’t after more money. They were trying not to lose money.
Daniel Kahneman won the Nobel Prize in part for elucidating people’s powerful psychological desires to avoid losses. (He conducted much of this work with Amos Tversky, who unfortunately died before the Nobel was awarded.) Kahneman and Tversky showed that people feel much worse about a modest loss than they feel good about a similarly-sized gain. In fact, people look more favorably upon a surgical intervention with a 90 percent survival rate than on one with a 10 percent mortality rate, even though there is no difference between the interventions. The mere framing of a choice as potentially involving a loss (of money, of life) triggers strong negative emotions. Human beings are hardwired with an aversion to losses.
Here’s the challenge raised by this psychological phenomenon: If we as a society want to control healthcare costs, one of the things we need to do is control physician income, which in the United States dwarfs that of most other advanced countries. (The most egregious physician incomes are generally earned by procedural specialists, with other groups, such as primary care pediatricians, receiving much more modest incomes.) But if we threaten to reduce physicians’ incomes, we will face tremendous resistance. Psychological resistance. Physicians won’t want to see their incomes go down.
The only way to control physicians’ income is to allow their income to grow over time, while controlling the rate of growth so that physicians’ incomes fall in relation to inflation. An oncologist making $400,000 last year (yes, that’s a pretty common income for such physicians) will probably fight aggressively to keep someone from reducing his income to $395,000 this year. Now, if through a new Medicare plan his income grows 1 percent this year, a rate significantly less than inflation, he will make $404,000. Psychologically speaking, he will feel like his income is growing, and he will probably be less likely to become politically active fighting the plan.
There’s another reason people fight hard to keep their incomes from declining: they often buy homes based on their income expectations. I’m not asking anyone to feel sorry for an orthopedic surgeon who, due to a loss of income, is forced to downsize from his 6,000 square foot home. But I am asking you to imagine yourself in that person’s shoes: you’ve bought your dream house and now, because of a shift in Medicare policy, you may have to move to a smaller house. How hard will you work to maintain your income? Will you donate money to a lobbying organization that will fight the Medicare plan? Will you buy a radiology practice, so you can start making money on your patients’ x-rays? Will you start operating on patients more often, including on elderly people who, in the past, you would have referred to a physical therapist?
Any politician who wants to change the healthcare system should heed the psychological power of loss aversion. Not to do so is a recipe for failure.
Peter Ubel, MD is the director of the Center for Behavioral and Decision Sciences in Medicine at the Ann Arbor VA Medical Center and the University of Michigan. His book Free Market Madness: Why Human Nature is at Odds with Economics—And Why it Matters (Harvard Business Press) is being published in January 2009.
Comments on this article
I think you miss the point to some degree. Physicians’ incomes should not be expected to diminish; their office and personnel costs certainly do NOT go down. The present Medicare model balances the costs on the backs of the providers, which is not fair either to the providers or to the patients. I am not a physician but I have seen our PCP struggle to pay his staff, keep abreast of insurance requirements (hello, that’s where a LOT of medical costs go: to insurance and pharmaceutical middlemen) and still provide services for we the patients who need them. We need to completely overhaul how health care is delivered in this country. Other countries successfully provide both health care and reasonable physician salaries, so why don’t we???
November 26th, 2008 at 3:09 pmIt is well understood that PCPs are underpaid vis-a-vis oncologists and other specialists because of the AMA’s RBRVS. But isn’t just price. Physician income is determined by price times volume in our fee-for-service system. So PCPs squeeze more and more patients in shorter and shorter visits into their harried days (driving many from the profession); while specialists cram more and more procedures and images into their lucrative days, and drive away in Porsches.
There have been many proposals to increase for PCPs while holding specialists’ relative pay constant (above zero, but below inflation). But specialists have gotten around these efforts by increasing volume. To fully follow Dr. Ubel’s prescription, we would have to get both PCPs and specialists into salaried positions within group practices that can implement evidence-based medicine rather than volume-based medicine; hold the specialists pay at slightly above zero (but less than inflation so that the spread will decrease over time); and then reimburse the group practices based on quality standards. Over time, this would bend the cost curve down while improving the health care system. But it’s no quick fix for either the disparity in physician income, the outsized pay of specialists, or the current poor performance of the system. It’s merely the only hope we have of reforming the system without running into the buzzsaw of opposition correctly predicted by Dr. Ubel.
November 26th, 2008 at 5:17 pmOne thing that would help is reining in the incomes of the people physicians compare themselves with — health care executives, financial services managers, attorneys, etc. If you see someone in a cushy office making many times as much money while doing much less real work, it’s hard to accept a pay cut.
December 7th, 2008 at 11:46 amThis article ignores completely the influence of patient demands on increasing health care costs. When someone hears a squeaking sound under the hood of their car, they don’t go to the garage and demand that the mechanic inspect and swap out everything that squeaks. Instead, they ask the mechanic to look to see what most likely is squeaking and go from there.
As a physician, I am asked daily to inspect from bumper to bumper and replace the engine for good measure. If I don’t comply, the angry customer (who used to be called a patient) may file a complaint and call me a “bad doctor.” Physician salaries should be addressed, but only after a couple dozen other high-cost wrinkles are ironed out.
By the way, I’m a primary care physician in training looking at stagnant/declining income future. But for the system (i.e. for public health) primary care is where money is best spent.
Feel free to continue to cut my reimbursement as a reward for a lifetime of dedication to a subject you feel important enough to merit a modicum of your time.
January 20th, 2009 at 11:54 pm