US Approaches to Physician Payment: The Deconstruction of Primary Care

The purpose of this paper is to address why the three dominant alternatives to compensating physicians (fee-for-service, capitation, and salary) fall short of what is needed to support enhanced primary care in the patient-centered medical home, and the relevance of such payment reforms as pay-for-performance and episodes/bundling. The review illustrates why prevalent physician payment mechanisms in the US have failed to adequately support primary care and why innovative approaches to primary care payment play such a prominent role in the PCMH discussion. FFS payment for office visits has never effectively rewarded all the activities that comprise prototypical primary care and may contribute to the “hamster on a treadmill” problems in current medical practice. Capitation payments are associated with risk adjustment challenges and, perhaps, public perceptions of conflict with patients’ best interests. Most payers don’t employ and therefore cannot generally place physicians on salary; while in theory such salary payments might neutralize incentives, operationally, “time is money;” extra effort devoted to meeting the needs of a more complex patient will likely reduce the services available to others. Fee-for-service, the predominant physician payment scheme, has contributed to both the continuing decline in the primary care workforce and the capability to serve patients well. Yet, the conceptual alternative payment approaches, modified fee-for-service (including fee bundles), capitation, and salary, each have their own problems. Accordingly, new payment models will likely be required to support restoration of primary care to its proper role in the US health care system, and to promote and sustain the development of patient-centered medical homes.