Examination of Medical Services : Study Hopes to Show How Doctors Structure Their Fees

Times Staff Writer

William Hsiao, a Harvard University medical economist, has heard countless stories like the one told by a California gastrointestinal specialist--and they are typical of why the professor believes major changes are almost inevitable in the way physicians are paid in America.

The Santa Monica doctor recalled the cases of two patients. The first had been referred by his family doctor after several liver-function tests produced abnormal results. Adding urgency was the fact that the patient had recently reported persistent weight loss and fever.

The initial examination took an hour. The doctor ordered a battery of specialized laboratory tests. He spent another 30 minutes reviewing the perplexing file in his office after the patient had left.

The patient returned two or three days later and the doctor, after spending another 30 minutes with him, prescribed a battery of drugs. The diagnosis: sarcoidosis , an unusual disease of unknown cause that is extremely difficult to detect. It is life-threatening if not diagnosed quickly. The doctor billed the patient’s insurance company $175.

On the same day as the liver patient’s initial visit, the Santa Monica doctor walked over to St. John’s Hospital where a patient was waiting for him in a procedure room. Using a fiber-optic device called a colonoscope, the doctor spent a total of 10 minutes removing a small, benign growth from the patient’s large intestine. Fee: $650.

More Art Than Science

It is likely that the liver patient’s life was saved by the doctor’s diagnostic skill--a set of techniques that relies in large degree on spending enough time with the patient to get a sense of what may truly be wrong. It is a talent that underscores that medicine today--even in a high-tech era--is still often more art than science. Yet for his services, which took 12 times as long as the technician-like polyp removal, the doctor will receive a little more than a quarter of the payment.

To Hsiao, who is currently organizing a complex study of the way American doctors are paid for what they do, the example could be representative of almost a standard of inequality that has come to govern since private health insurance became widely available after World War II.

What is troubling to Hsiao and other experts in health-care economics is that, by skewing its financial rewards, the prevailing system of medical economics may distort the effectiveness of the medical care many Americans receive. This proclivity makes it increasingly certain that the long, anything-goes era of fee charges that are “usual and customary” may be ending.

And therein is the reason Hsiao and a team of other researchers at Harvard have begun a 30-month, $2-million inquiry financed by the federal government’s Health Care Financing Administration. It is intended to determine if there is any rational explanation for the way physician fees are structured and, if there is not, how a better system might be devised.

Behind the decision to sponsor the study, moreover, is an acknowledgment by both the federal government and the American Medical Assn., which is participating in the research, that the time has come to resolve one of the major--though, in consumer terms, perhaps one of the quietest--controversies in medicine today.

In essence, the controversy poses this question: Are what are commonly called “cognitive services” rendered by doctors--those activities that involve thinking, reasoning and other manifestations of intellect--worth more, less or the same as those that are lumped together as “procedures": operations, biopsies, sophisticated invasive tests and the like?

In financial terms, should saving someone’s life through an intellectual process be compensated in financial terms differently than saving the same life by means of a technical procedure in an operating room? How, indeed, do doctors or can doctors financially value their services?

The debate has already attracted significant attention from federal agencies. The congressional Office of Technology Assessment released a physician payment study a month ago that focused in large degree on vagaries of how services are valued. The Health Care Financing Administration itself is expected to release a related study soon--focusing on how payment systems can be changed for federally funded health programs, in particular.

The Congressional Budget Office also is planning to release a study of physician payments--probably this week--that is reliably reported to avoid some of the questions of relative values of services but to acknowledge that it is a critical issue to resolve.

And answering these questions may eventually turn contemporary U.S. medical economics on its ear, experts interviewed across the country by The Times agree, and could result in what would amount to a vast redistribution of wealth among physicians.

Economic Upheaval

Because this new Harvard inquiry is just beginning, there is no certainty things will turn out just this way, but there is a growing consensus that doctors will be forced to cope with even greater economic upheaval than they have faced up until now. It seems nearly certain the upheaval will include restructuring of the economic priorities of medicine, taking money away from some doctors and adding rewards for others.

The process could result in elimination of the financial premium now paid for such ultra-technical things as coronary artery bypass surgery, pacemaker insertion and cataract operations--three often-cited examples of fee excess. This could so radically change the fee structure for such techniques that some of today’s heart surgeons, in the view of one nationally known surgeon watching the situation here, could end up out of medicine, selling real estate (instead of buying it).

It would be nothing short of a massive market shakeout in the medical profession, predicted the surgeon, Dr. Richard Egdahl, director of Boston University Medical Center. Working under the auspices of the American College of Surgeons, Egdahl filed an unsuccessful counter application with the Health Care Financing Administration to conduct the rate reform study now being done by the Harvard team.

“I see some people (surgeons) doing more cases and some doing less and others going into other businesses or walks of life,” Egdahl said. “There will be fewer cardiac surgeons, making the same amount of money they do now but doing more cases (since each case will produce less income). That’s what I predict, and it’s probably for the better.”

A prominent internist, Dr. C. Burns Roehrig, suggests a different analogy: Surgeons and other procedure-oriented doctors may have to learn a painful lesson from airline pilots who have undergone a downward economic revolution during this decade in the years after airline deregulation. Thousands of highly trained, previously well-rewarded pilots are unemployed or working in other fields.

Salary Changes

The changes that may occur would even affect the growing number of doctors working for prepaid health plans commonly called health-maintenance organizations, the experts predicted, because HMO salary schedules could undergo major changes.

Hsiao called what may be happening potentially a “revolution” in which there must ultimately be a collision between the results of government policy that have brought about the training of ever more doctors and the building of ever greater hospital capacity and new market forces working to restrain costs.

“I like to say there is a pot of boiling water,” Hsiao said in an interview. “We have turned up the fire by increasing the supply of hospital beds and physicians and also increasing insurance to the people, so they are demanding more services.

Putting on the Lid

“Now, at the same time, we’re putting on the lid.”

For the consumer, says internist Dr. Roehrig, what he contends is wrong with the situation and the way the system may be changed has an important, if indirect, bearing on health care. By giving the greatest financial reward to doctors when they render the most technical types of care, the existing system may actually be directly responsible for serious overuse of technical services, Roehrig said.

“It (the existing system) can’t help, even in a conscientious practice, but give the doctor the incentive to do the more expensive thing,” said Roehrig, who calculated that his hourly gross wage for doing colon examinations with a sigmoidoscope is $300 but, for working on complex diagnostic problems, it is only between $50 and $60.

Source of Mistrust

Roehrig, who is in private practice here, is the immediate past president of the American Society of Internal Medicine and he does not pretend to be nonpartisan in the controversy on which the Harvard research team is now beginning to focus. The dispute is also an integral part of a long-standing division between surgeons and non-surgeons--a split that has long been a source of mistrust within medicine. One of its key points of debate is who gets paid how much.

What Hsiao and his colleagues are organizing has its roots in a study the Harvard team published in 1979. What they focused on was what are called “relative value scales,” or systems by which insurers, government agencies and other groups decide how much one service rendered by a doctor is worth, compared financially to other physician services.

The concept originated in California in 1956 when the California Medical Assn. introduced the California Relative Value Scale, which included standard descriptions of hundreds of physician services and advice on how fees for them compared. The weakness in the California Relative Value Scale, however, was that it simply adopted existing fee discrepancies, agreed Roehrig and Dr. James Todd, senior deputy vice president of the American Medical Assn.

The discrepancies, said Roehrig and Dr. Peter Braun, one of the Harvard researchers, are historically based--rooted in the days just after World War II when health insurance was starting to come into its own. Most insurance plans paid only for hospital services.

Doctor office visits were comparatively cheap then and financial calamity for the patient generally could be averted until hospitalization was necessary. What took root, though, agreed Roehrig, Braun and Dr. William Stason, another of the Harvard researchers, was a system in which office-based doctors sometimes deliberately held down the fees they charged for office services--since they were borne personally by patients--and made their money, so to speak, on hospital services that were reimbursed by third-party payers.

Historically Distorted

Insurance plans changed over time and the federal government added the Medicare and Medicaid (Medi-Cal in California) plans, but the foundation of comparison on which fees were based remained the same. The California Relative Value Scale had institutionalized a historically distorted system, the experts agreed.

In 1976, the Federal Trade Commission decided the California Relative Value Scale amounted to illegal price fixing and threatened a formal antitrust complaint against the CMA. In 1978, the CMA signed a consent decree agreeing to halt dissemination of the scale. But though the fee schedule was eliminated, the scale is still highly influential and its comparison of services to one another remains a major part of the fee schedules utilized by insurers of all types. Scale code numbers still appear on most doctor bills.

A further complication is that the initial cost of a service--instituted when an operation or some other technique is first introduced--tends to remain in force long after the service becomes commonplace. That, said Egdahl and other experts, is what happened with coronary artery bypass surgery--an operation that has turned into a more than $1 billion annual practice.

“When I was a young resident in Minnesota and cardiac surgery was just beginning, it was very stressful for the surgeon and you couldn’t do very many cases in a week,” Egdahl said. “But as cases got more easy to do and pumps (the heart-lung machines that maintain circulation while the heart is stopped during surgery) got better and mortality got lower, it became a lot less stressful a situation.

“But that initial (money premium) value judgment was in the system and has gotten inflated.”

By 1979, when the Hsiao team published its first study of the rationality of fees in a journal called Health Care Financing Review, discrepancies of all types were deeply entrenched and had created a unique economic system for medicine.

In that first study, the Harvard researchers drew up a set of objective criteria to assign relative worths among medical services. The system took into account the time a service took, differences in the relative cost of training among specialties (and, hence, a doctor’s legitimate need to recover the costs of his training over several years of practice), differences in malpractice insurance premiums, the comparative complexity of services and differing overhead expenses.

Relative values were then assigned to a variety of different services to rank cognitive and procedural activities consistently. Then the results were compared with the fees actually paid to physicians in Massachusetts. The differences were astonishing. In general, office visits to a general practitioner or specialist for the purpose of making a diagnosis or some other so-called cognitive service were paid at a rate of $40 and $68 an hour, respectively. Surgeons, on the other hand, received the equivalent of $310 an hour for hernia repair, $193 an hour for a hemorrhoid operation and $679 an hour to operate on cataracts.

Expanding Original Study

Late last year, the Harvard team was retained by the Massachusetts Rate Setting Commission (which supervises that state’s Medicaid program) to expand on the original study. A more sophisticated evaluation was done but the basic result was the same: Surgical and technical procedures were being compensated, on the average, at rates two or three times those of cognitive services, even after many variables were taken into account.

Comparing payment for a routine office visit with that for appendectomy, the Harvard team calculated that appendix surgery should be relatively worth nine times the amount paid for an office visit. But the Blue Shield insurance plan was actually paying $22 for an office visit and $525 for appendectomy, a difference in magnitude of 24 times.

Massachusetts Medicaid was paying $3,543 for coronary bypass surgery but just $52 for emergency treatment by an internist for a major heart attack. By the newly computed relative values, bypass surgery should only have been slightly more than three times as expensive as heart-attack treatment. The actual discrepancy was 68 times.

A political controversy erupted here when the Rate Setting Commission ignored the study’s findings and actually raised fees paid for some surgical procedures. The debate continues.

The new federally financed inquiry will be an enhanced version of the first two. The AMA is working with the nation’s 23 major medical specialty societies to provide panels of leading physicians to help resolve disputes about comparative values. Todd, who is himself a surgeon, admitted to a bias in favor of the view that surgery has special demands that make what surgeons do worth a premium payment. But he also conceded that change is probably inevitable--if only because large private employers and insurance companies are beginning to join state and federal government agencies in applying pressure.

Todd said that the AMA has not committed itself to accepting whatever conclusions the Harvard team ultimately reaches. But Todd said that he thinks the situation could lead to better, more informed decisions by patients. Todd said, however, that the AMA regards as “non-negotiable” the right of doctors to charge patients, under a system called “balance billing,” for any difference between their regular fees and what insurers pay.

Rand Corp. health-care economist Paul Ginsburg said that, while the potential exists for patients to be caught in the middle in such a market shakeout, that would not necessarily be the result. For Medicare patients, at least, said Ginsburg, “I’m somewhat optimistic that reforms can be pursued without the beneficiaries suffering for them.”

There have already been a few attempts at reform--at least two of them originating in California. In Orange County, a doctor group called CaPP CARE has begun to temper fee schedules by instituting modest increases in fees paid for cognitive services but holding the line for surgery.

Credit to Fee Adjustment

CaPP CARE’s top officer, Dr. Edward Zalta, credited the fee adjustments with being partially responsible for the program having both lower rates of hospital admission and shorter hospital stays than programs elsewhere in the state and across the country. CaPP CARE patients were hospitalized at a rate of from 54 to 61 admissions per 1,000 total patients versus 122 statewide and 149 nationally. The program’s hospital stays averaged 5.1 days each, versus 6.3 days statewide and 7.3 days nationally in 1985.

In San Diego, a consumer-run group called the Community Care Network, which contracts with 1,000 local doctors, has added different weighting to its fee schedules so cognitive services are paid at a higher rate per unit of relative value than technical procedures. The disparity of relative values remains but the change in reimbursement has cut the difference in actual payments, said Sandra Foote, the program’s director of provider affairs.

In many quarters in the medical profession, there is a growing sense that something must be done and that, if doctors won’t do it themselves, then regulators, private employers and insurance companies will impose it on them. Many physicians believe that the AMA is cooperating in the Harvard study because its leadership recognized this inevitability. The association even proposed late last year that it conduct such a relative value study itself. However, the AMA withdrew its application after the Federal Trade Commission said it would object on price-fixing grounds to such an effort.

The federal government has made no commitment to accepting the product of the new research, however, and many observers believe federal agencies would prefer--at least for Medicare and Medicaid patients--to institute a system in which doctors are paid on a per capita basis for their services, receiving a certain annual amount no matter what treatment the patient requires. Such a capitation system would eliminate the need for fee schedules.

Dr. Benson Roe, professor of surgery and former chief of cardiothoracic surgery at UC San Francisco Medical School, said greed has played a role in evolution of the system as it exists today. Twice, Roe has published warnings about excessive fee structures in the New England Journal of Medicine.

“In any enterprise--and medicine is no exception--there are unprincipled or marginally behaving individuals who oversell their product,” Roe said in a telephone interview. “A good salesman can sell refrigerators to Eskimos.

“What has happened is that remuneration per unit of time and effort is enormously out of line and widely discrepant between the cognitive and the technical. Medicine is not practiced efficiently because there has, up until now, been no incentive to do so.

“If we (doctors) don’t straighten out these abuses and inequities, we’re going to end up as civil service employees and we are going to be really sorry.”