America’s doctors, like Wall Street, need a cultural shift; An ‘eat what you treat’ system can tempt doctors to offer excessive treatments

August 14, 2013 6:39 pm

America’s doctors, like Wall Street, need a cultural shift

By Gillian Tett

An ‘eat what you treat’ system can tempt doctors to offer excessive treatments

How can America cut its healthcare costs? The question is generating political heat in Washington right now. No wonder. Healthcare spending now stands at an eye-popping 17 per cent of US gross domestic product. And next year, President Barack Obama’s divisive “Obamacare” reforms will take effect, extending insurance to a much wider part of the population than ever before. But as politicians trade ideas (and insults) about cutting costs – with proposals ranging from better use of information technology through to insurance exchanges – there is another issue that needs to be discussed: doctors’ pay.In recent years, doctors in America have received relatively high levels of remuneration, running about 60 per cent higher than the industrialised world average, according to data from the Paris-based OECD. But the absolute pay level is not the key issue at stake. What really needs to be debated is the system of incentives.

Most notably, in recent years about two-thirds of US doctors have been paid according to a “fee-for-service” system, meaning that they receive remuneration every time they see a patient or provide a treatment.

This differs from the pattern in much of Europe or places such as Singapore, where doctors tend to receive a base salary (which may then be topped up with private practice). It also differs from a third approach, called capitation, which pays doctors according to the health of the total population.

Until recently, America’s doctors generally assumed that FFS was superior to the other two systems, since it creates tighter relationships between doctors and patients, and incentivises the medical staff to work hard. It also chimes with free-market American entrepreneurial values; or so the argument goes.

But FFS has a big downside, too. It can create an incentive for doctors to make potentially unnecessary, duplicate treatments. It reduces incentives for collaboration or cost-sharing. In a sense, it can create cultural patterns not dissimilar from those seen on parts of Wall Street: just as an “eat what you kill” bonus system has encouraged financiers to do unnecessary deals and trades, an “eat what you treat” medical system can tempt doctors to offer excessive, duplicate treatments.

It is difficult to measure how much this has or has not actually raised healthcare costs, since there has been surprisingly little research. Some doctors deny that it has a significant impact, compared with the bloated costs of, say, administration. “While there are certainly some doctors providing unnecessary procedures due to fee-for-service, it is extremely unlikely that this is the root of our healthcare cost problem,” says Stephen Kemble, a physician. But other doctors disagree. And analysis of international practices conducted 15 years ago concluded that “payment by salaries is associated with the lowest use of tests and referrals compared with FFS and capitation” and appeared to offer much cheaper services.

Another way to look at the issue, though, is to peer at the (few) medical centres in America that have shunned FFS. Take the Cleveland Clinic in Ohio. Doctors there have chosen to work under a salary-based system for some time. This has encouraged much tighter patterns of collaboration; so much so that it has also enabled the centre to reorganise its doctors into more efficient, patient-centred units.

As a result, levels of patient satisfaction have risen and – at the same time – Cleveland has drastically reduced duplicate procedures. Similar tales are found in places such as the Mayo Clinic or Kaiser Permanente group, which also shun the FFS model. Or, as Toby Cosgrove, head of Cleveland Clinic, says: “We have to recognise that people do what you pay them to do – it’s about incentives. If you pay doctors to do more of something, then that’s what they’ll do. If you put the emphasis on looking after patients, they’ll do that.”

Can this idea spread? It has, to some degree. The experience of groups such as Cleveland and Mayo has helped shaped the design of Mr Obama’s healthcare reforms, which encourages doctors to operate more collaboratively. Other hospitals are looking at copying elements of the Cleveland approach. Attitudes are also shifting among medical students.

A survey by Merritt Hawkins found that: “A great majority of final year [student] residents would prefer a straight salary or a salary with production bonus in their first year of practice.” That is partly because debt-laden medical students want stability – and do not want to navigate the opaque complexities of the insurance world.

But getting the mainstream medical establishment to embrace a shift away from FFS will be almost as tough as persuading Wall Street bankers to overcome their addiction to bonuses. It is a timely reminder of why the task of reforming healthcare will require a cultural change as much as any political diktats or grandiose economic plans.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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