Where 400 Years of Fee for Service Has Led Us

The history of modern medicine in America is said to have begun when the pilgrims arrived here from England.

There were two physicians on the Mayflower. One was Myles Standish, the commander of the Mayflower. Dr. Standish was described as a "little man with a fierce temper." He had no formal medical education; his medical knowledge was achieved by observing and studying with other English physicians. Another physician among the pilgrims was Dr. Samuel Fuller. Although we do not know much about Dr. Fuller’s education or his skills as a physician, we do know that he practiced both as a physician and surgeon. As early America developed, doctors were scarce. Doctors charged a "simple fee" for their services, but treatment by physicians was most often reserved for the wealthiest colonists.

Prior to the 1800s, medicine in the United States was carried out mostly in private homes and occasionally in a private doctor’s office. On the western frontier, doctors traveled by foot or horseback to the patient’s home. The physician was limited to the number of tools and drugs he could fit into a handheld case or saddlebag. Early American physicians were expected to treat everything, including gunshot wounds, toothaches, and sick livestock. Throughout the 19th century, surgery was also performed in the home. As physicians do today, 19th-century doctors usually charged patients for their services; however, they were often paid not by monetary reimbursements, but rather "in kind" with whatever produce, services, or goods were available to the patient. That system was soon to change.

By the end of the 19th and early 20th centuries, the population shifted from rural environments to urban centers. Industrialization in America was associated with changes in the economy and family dynamics. As the Industrial Revolution developed, the household economy depended upon the primary wage earner’s continued health. By the 1920s, hospitals were becoming centers for surgery and more advanced medical care.

However, by the end of the 1920s, families began to demand greater access to medical services, the cost of care increased, and the need arose for a type of reimbursement other than the traditional methods of payment in preindustrial America. But at the same time, money markets tightened, and people started to lose their jobs when Black Tuesday heralded the Great Depression on Oct. 29, 1929.

The concept of prepaid hospital insurance grew out of the Great Depression. Money was scarce in America. In addition to individuals’ suffering the hardships of lost jobs and lost income, hospitals became economically unstable. At the same time, the demand for hospital care increased with a rise in migration to urban areas for work. As the need for hospital services escalated, an alternative payment system for medical services emerged that would ultimately revolutionize the health care industry.

This new payment innovation, which many believe was the beginning of modern day prepaid health insurance, had its origin at Baylor University Hospital (now Baylor University Medical Center at Dallas). In 1929, under the Baylor Plan, school teachers were to pay 50 cents per month in exchange for the guarantee that they could receive medical services for up to 21 days of any 1 year. Similar hospital plans began to emerge nationwide. The Baylor Plan became the precursor for Blue Cross Insurance. The name Blue Cross was adopted in 1934, and by 1935, there were 15 Blue Cross plans in 11 states. Blue Shield emerged in 1939 when the California Medical Association started the California Physician’s Service, which was the first prepayment plan to cover physician fees. These physician-sponsored plans were combined into Blue Shield in 1946. Blue Cross and Blue Shield merged into one company in 1971.

After America entered World War II in 1941, there was a labor shortage, yet companies needed to recruit employees. This demand led to a wage war. The federal government imposed wartime wage and price controls under the 1942 Stabilization Act. With wage controls in place, employers began to compete for employees through health insurance packages. The companies’ health care expenses were exempt from income tax, and the resulting trend was largely responsible for the workplace’s present role as the main supplier of health insurance.

By the 1960s, the private health insurance system was well established. America entered into a prosperous postwar economy. In addition to an increase in physician reimbursements, health care expenses also began to escalate. At the same time, the political atmosphere became favorable toward ensuring medical care for senior Americans who were no longer working and did not have employment-based coverage. President Johnson signed Medicare into law on July 30, 1965, at the Truman Library in Independence, Mo. Former President Harry Truman received the first Medicare card.

Under the initial Medicare legislation, physicians were reimbursed according to the "usual, customary and reasonable rates." Physicians billed patients who were then reimbursed by Medicare. In the 1980s, because of the rapid escalation of health care expenditures, Congress passed laws involving Medicare that ultimately restructured the way physician services were reimbursed. In January 1992, new legislation went into effect that established a Medicare fee schedule for physician services replacing the system of paying physicians according to what they billed.

The Resource Based Relative Value Scale (RBRVS) established a standardized payment schedule. The Evaluation and Management (E/M) model was part of the new payment system. RBRVS was developed to produce the following four main outcomes:

• Uniform policies nationwide.

• A national fee schedule.

• New Current Procedural Terminology (CPT) codes.

• Establishment of relative values on the basis of the resources used by physicians to perform a particular service: the physician work and practice expense. (Malpractice expense was added later.)

The intent of the RBRVS was to reduce the inequality between fees for cognitive services and payment for procedures, but there remains much discussion that challenges whether this goal was ever actually achieved. Equally controversial are the differences in allocations of practice expenses across services. As an example, the volume of diagnostic and imaging procedures has increased far more rapidly than the volume of office visits, a situation that benefits specialists who perform those procedures.

Thus, what started 83 years ago as a 50-cent-per-month insurance plan for Dallas teachers grew to the 1992 Medicare Payment Reform program with implementation of the RBRVS. It has been 20 years since the E/M coding system had its initial publication in the 1992 American Medical Association CPT codebook.

The "fee for service" model for physician reimbursement has survived in the United States – in one form or another – for almost 400 years. However, current medical economics define a perception that the present model for health care delivery is unsustainable.

As new legislative regulations become integrated into practice reimbursements, physicians must be aware of emerging complex management tools, which include pay-for-performance formulas, evidence-based medicine guidelines, clinical algorithms, electronic health records, global budgets, shared savings, and a multitude of legislative changes regarding legal structures and antitrust protection.

And as health economics influence health care markets, economic issues also result in changes in how physicians practice medicine. Even before the Affordable Care Act was signed into law by Congress in March 2010, changes have been taking place in physician practice settings. Organizational models appear to be migrating toward physicians’ seeking a more integrated structure with industry and hospital-owned provider networks.

Physician recruitment is also being affected by young doctors who must balance their commitment to meet an average $200,000 education debt while still facing the uncertainties of the various employment markets. An increased proportion of graduating doctors are not accepting the traditional "partner track" positions in private medical groups, but are instead opting to seek economic stability by taking salaried positions in health-sponsored employment provider networks. According to a 2009 survey by the Medical Group Management Association, 65% of established physicians were placed in hospital-owned practices, and 49% of physicians hired out of training joined a hospital-owned practice. This represents a nearly 75% increase in the number of active doctors employed by hospitals since 2000.

The literature and media are filled with editorials about how physician fee for service is the root cause for poor coordination of care and overutilization of expensive, "unnecessary" physician services, and accountable care organizations (ACOs) have emerged as an alternative to the current medical care model.

However, it is important to recognize that the incentive-driven compensation prototype of the future ACO marketplace is not risk free. It remains unclear whether developing organizations that integrate physicians and hospitals offers the promise for better care coordination, fewer complications, and cost savings. It is also unclear whether any changes in value and quality will be passed along to patients and payers in the form of lower prices.

What is certain, however, is that physicians are gravitating toward health care system–sponsored employment with a guaranteed salary, and physician recruitment is being affected by larger health care organizations that are driving higher compensation packages to young, job-seeking physicians, many of whom have specific training in areas of hospital need.

The economics of modern medicine has come a long way. It has been 392 years since the Mayflower sailed from a site near the Mayflower Step in Plymouth, England, and landed in Plymouth, Massachusetts, in 1620. Its 102 passengers and 25-30 crew members, including physicians Myles Standish and Samuel Fuller, would probably be rather surprised at how far medicine has progressed.

This column, "Frontal Matter," regularly appears in Clinical Neurology News, an Elsevier publication. Dr. Black is chief of neurology and codirector of the neuroscience center at Baylor University Medical Center at Dallas, and is on the editorial board of Clinical Neurology News.

The history of modern medicine in America is said to have begun when the pilgrims arrived here from England.

There were two physicians on the Mayflower. One was Myles Standish, the commander of the Mayflower. Dr. Standish was described as a "little man with a fierce temper." He had no formal medical education; his medical knowledge was achieved by observing and studying with other English physicians. Another physician among the pilgrims was Dr. Samuel Fuller. Although we do not know much about Dr. Fuller’s education or his skills as a physician, we do know that he practiced both as a physician and surgeon. As early America developed, doctors were scarce. Doctors charged a "simple fee" for their services, but treatment by physicians was most often reserved for the wealthiest colonists.

Prior to the 1800s, medicine in the United States was carried out mostly in private homes and occasionally in a private doctor’s office. On the western frontier, doctors traveled by foot or horseback to the patient’s home. The physician was limited to the number of tools and drugs he could fit into a handheld case or saddlebag. Early American physicians were expected to treat everything, including gunshot wounds, toothaches, and sick livestock. Throughout the 19th century, surgery was also performed in the home. As physicians do today, 19th-century doctors usually charged patients for their services; however, they were often paid not by monetary reimbursements, but rather "in kind" with whatever produce, services, or goods were available to the patient. That system was soon to change.

By the end of the 19th and early 20th centuries, the population shifted from rural environments to urban centers. Industrialization in America was associated with changes in the economy and family dynamics. As the Industrial Revolution developed, the household economy depended upon the primary wage earner’s continued health. By the 1920s, hospitals were becoming centers for surgery and more advanced medical care.

However, by the end of the 1920s, families began to demand greater access to medical services, the cost of care increased, and the need arose for a type of reimbursement other than the traditional methods of payment in preindustrial America. But at the same time, money markets tightened, and people started to lose their jobs when Black Tuesday heralded the Great Depression on Oct. 29, 1929.

The concept of prepaid hospital insurance grew out of the Great Depression. Money was scarce in America. In addition to individuals’ suffering the hardships of lost jobs and lost income, hospitals became economically unstable. At the same time, the demand for hospital care increased with a rise in migration to urban areas for work. As the need for hospital services escalated, an alternative payment system for medical services emerged that would ultimately revolutionize the health care industry.

This new payment innovation, which many believe was the beginning of modern day prepaid health insurance, had its origin at Baylor University Hospital (now Baylor University Medical Center at Dallas). In 1929, under the Baylor Plan, school teachers were to pay 50 cents per month in exchange for the guarantee that they could receive medical services for up to 21 days of any 1 year. Similar hospital plans began to emerge nationwide. The Baylor Plan became the precursor for Blue Cross Insurance. The name Blue Cross was adopted in 1934, and by 1935, there were 15 Blue Cross plans in 11 states. Blue Shield emerged in 1939 when the California Medical Association started the California Physician’s Service, which was the first prepayment plan to cover physician fees. These physician-sponsored plans were combined into Blue Shield in 1946. Blue Cross and Blue Shield merged into one company in 1971.

After America entered World War II in 1941, there was a labor shortage, yet companies needed to recruit employees. This demand led to a wage war. The federal government imposed wartime wage and price controls under the 1942 Stabilization Act. With wage controls in place, employers began to compete for employees through health insurance packages. The companies’ health care expenses were exempt from income tax, and the resulting trend was largely responsible for the workplace’s present role as the main supplier of health insurance.

By the 1960s, the private health insurance system was well established. America entered into a prosperous postwar economy. In addition to an increase in physician reimbursements, health care expenses also began to escalate. At the same time, the political atmosphere became favorable toward ensuring medical care for senior Americans who were no longer working and did not have employment-based coverage. President Johnson signed Medicare into law on July 30, 1965, at the Truman Library in Independence, Mo. Former President Harry Truman received the first Medicare card.

Under the initial Medicare legislation, physicians were reimbursed according to the "usual, customary and reasonable rates." Physicians billed patients who were then reimbursed by Medicare. In the 1980s, because of the rapid escalation of health care expenditures, Congress passed laws involving Medicare that ultimately restructured the way physician services were reimbursed. In January 1992, new legislation went into effect that established a Medicare fee schedule for physician services replacing the system of paying physicians according to what they billed.

The Resource Based Relative Value Scale (RBRVS) established a standardized payment schedule. The Evaluation and Management (E/M) model was part of the new payment system. RBRVS was developed to produce the following four main outcomes:

• Uniform policies nationwide.

• A national fee schedule.

• New Current Procedural Terminology (CPT) codes.

• Establishment of relative values on the basis of the resources used by physicians to perform a particular service: the physician work and practice expense. (Malpractice expense was added later.)

The intent of the RBRVS was to reduce the inequality between fees for cognitive services and payment for procedures, but there remains much discussion that challenges whether this goal was ever actually achieved. Equally controversial are the differences in allocations of practice expenses across services. As an example, the volume of diagnostic and imaging procedures has increased far more rapidly than the volume of office visits, a situation that benefits specialists who perform those procedures.

Thus, what started 83 years ago as a 50-cent-per-month insurance plan for Dallas teachers grew to the 1992 Medicare Payment Reform program with implementation of the RBRVS. It has been 20 years since the E/M coding system had its initial publication in the 1992 American Medical Association CPT codebook.

The "fee for service" model for physician reimbursement has survived in the United States – in one form or another – for almost 400 years. However, current medical economics define a perception that the present model for health care delivery is unsustainable.

As new legislative regulations become integrated into practice reimbursements, physicians must be aware of emerging complex management tools, which include pay-for-performance formulas, evidence-based medicine guidelines, clinical algorithms, electronic health records, global budgets, shared savings, and a multitude of legislative changes regarding legal structures and antitrust protection.

And as health economics influence health care markets, economic issues also result in changes in how physicians practice medicine. Even before the Affordable Care Act was signed into law by Congress in March 2010, changes have been taking place in physician practice settings. Organizational models appear to be migrating toward physicians’ seeking a more integrated structure with industry and hospital-owned provider networks.

Physician recruitment is also being affected by young doctors who must balance their commitment to meet an average $200,000 education debt while still facing the uncertainties of the various employment markets. An increased proportion of graduating doctors are not accepting the traditional "partner track" positions in private medical groups, but are instead opting to seek economic stability by taking salaried positions in health-sponsored employment provider networks. According to a 2009 survey by the Medical Group Management Association, 65% of established physicians were placed in hospital-owned practices, and 49% of physicians hired out of training joined a hospital-owned practice. This represents a nearly 75% increase in the number of active doctors employed by hospitals since 2000.

The literature and media are filled with editorials about how physician fee for service is the root cause for poor coordination of care and overutilization of expensive, "unnecessary" physician services, and accountable care organizations (ACOs) have emerged as an alternative to the current medical care model.

However, it is important to recognize that the incentive-driven compensation prototype of the future ACO marketplace is not risk free. It remains unclear whether developing organizations that integrate physicians and hospitals offers the promise for better care coordination, fewer complications, and cost savings. It is also unclear whether any changes in value and quality will be passed along to patients and payers in the form of lower prices.

What is certain, however, is that physicians are gravitating toward health care system–sponsored employment with a guaranteed salary, and physician recruitment is being affected by larger health care organizations that are driving higher compensation packages to young, job-seeking physicians, many of whom have specific training in areas of hospital need.

The economics of modern medicine has come a long way. It has been 392 years since the Mayflower sailed from a site near the Mayflower Step in Plymouth, England, and landed in Plymouth, Massachusetts, in 1620. Its 102 passengers and 25-30 crew members, including physicians Myles Standish and Samuel Fuller, would probably be rather surprised at how far medicine has progressed.

This column, "Frontal Matter," regularly appears in Clinical Neurology News, an Elsevier publication. Dr. Black is chief of neurology and codirector of the neuroscience center at Baylor University Medical Center at Dallas, and is on the editorial board of Clinical Neurology News.

The history of modern medicine in America is said to have begun when the pilgrims arrived here from England.

There were two physicians on the Mayflower. One was Myles Standish, the commander of the Mayflower. Dr. Standish was described as a "little man with a fierce temper." He had no formal medical education; his medical knowledge was achieved by observing and studying with other English physicians. Another physician among the pilgrims was Dr. Samuel Fuller. Although we do not know much about Dr. Fuller’s education or his skills as a physician, we do know that he practiced both as a physician and surgeon. As early America developed, doctors were scarce. Doctors charged a "simple fee" for their services, but treatment by physicians was most often reserved for the wealthiest colonists.

Prior to the 1800s, medicine in the United States was carried out mostly in private homes and occasionally in a private doctor’s office. On the western frontier, doctors traveled by foot or horseback to the patient’s home. The physician was limited to the number of tools and drugs he could fit into a handheld case or saddlebag. Early American physicians were expected to treat everything, including gunshot wounds, toothaches, and sick livestock. Throughout the 19th century, surgery was also performed in the home. As physicians do today, 19th-century doctors usually charged patients for their services; however, they were often paid not by monetary reimbursements, but rather "in kind" with whatever produce, services, or goods were available to the patient. That system was soon to change.

By the end of the 19th and early 20th centuries, the population shifted from rural environments to urban centers. Industrialization in America was associated with changes in the economy and family dynamics. As the Industrial Revolution developed, the household economy depended upon the primary wage earner’s continued health. By the 1920s, hospitals were becoming centers for surgery and more advanced medical care.

However, by the end of the 1920s, families began to demand greater access to medical services, the cost of care increased, and the need arose for a type of reimbursement other than the traditional methods of payment in preindustrial America. But at the same time, money markets tightened, and people started to lose their jobs when Black Tuesday heralded the Great Depression on Oct. 29, 1929.

The concept of prepaid hospital insurance grew out of the Great Depression. Money was scarce in America. In addition to individuals’ suffering the hardships of lost jobs and lost income, hospitals became economically unstable. At the same time, the demand for hospital care increased with a rise in migration to urban areas for work. As the need for hospital services escalated, an alternative payment system for medical services emerged that would ultimately revolutionize the health care industry.

This new payment innovation, which many believe was the beginning of modern day prepaid health insurance, had its origin at Baylor University Hospital (now Baylor University Medical Center at Dallas). In 1929, under the Baylor Plan, school teachers were to pay 50 cents per month in exchange for the guarantee that they could receive medical services for up to 21 days of any 1 year. Similar hospital plans began to emerge nationwide. The Baylor Plan became the precursor for Blue Cross Insurance. The name Blue Cross was adopted in 1934, and by 1935, there were 15 Blue Cross plans in 11 states. Blue Shield emerged in 1939 when the California Medical Association started the California Physician’s Service, which was the first prepayment plan to cover physician fees. These physician-sponsored plans were combined into Blue Shield in 1946. Blue Cross and Blue Shield merged into one company in 1971.

After America entered World War II in 1941, there was a labor shortage, yet companies needed to recruit employees. This demand led to a wage war. The federal government imposed wartime wage and price controls under the 1942 Stabilization Act. With wage controls in place, employers began to compete for employees through health insurance packages. The companies’ health care expenses were exempt from income tax, and the resulting trend was largely responsible for the workplace’s present role as the main supplier of health insurance.

By the 1960s, the private health insurance system was well established. America entered into a prosperous postwar economy. In addition to an increase in physician reimbursements, health care expenses also began to escalate. At the same time, the political atmosphere became favorable toward ensuring medical care for senior Americans who were no longer working and did not have employment-based coverage. President Johnson signed Medicare into law on July 30, 1965, at the Truman Library in Independence, Mo. Former President Harry Truman received the first Medicare card.

Under the initial Medicare legislation, physicians were reimbursed according to the "usual, customary and reasonable rates." Physicians billed patients who were then reimbursed by Medicare. In the 1980s, because of the rapid escalation of health care expenditures, Congress passed laws involving Medicare that ultimately restructured the way physician services were reimbursed. In January 1992, new legislation went into effect that established a Medicare fee schedule for physician services replacing the system of paying physicians according to what they billed.

The Resource Based Relative Value Scale (RBRVS) established a standardized payment schedule. The Evaluation and Management (E/M) model was part of the new payment system. RBRVS was developed to produce the following four main outcomes:

• Uniform policies nationwide.

• A national fee schedule.

• New Current Procedural Terminology (CPT) codes.

• Establishment of relative values on the basis of the resources used by physicians to perform a particular service: the physician work and practice expense. (Malpractice expense was added later.)

The intent of the RBRVS was to reduce the inequality between fees for cognitive services and payment for procedures, but there remains much discussion that challenges whether this goal was ever actually achieved. Equally controversial are the differences in allocations of practice expenses across services. As an example, the volume of diagnostic and imaging procedures has increased far more rapidly than the volume of office visits, a situation that benefits specialists who perform those procedures.

Thus, what started 83 years ago as a 50-cent-per-month insurance plan for Dallas teachers grew to the 1992 Medicare Payment Reform program with implementation of the RBRVS. It has been 20 years since the E/M coding system had its initial publication in the 1992 American Medical Association CPT codebook.

The "fee for service" model for physician reimbursement has survived in the United States – in one form or another – for almost 400 years. However, current medical economics define a perception that the present model for health care delivery is unsustainable.

As new legislative regulations become integrated into practice reimbursements, physicians must be aware of emerging complex management tools, which include pay-for-performance formulas, evidence-based medicine guidelines, clinical algorithms, electronic health records, global budgets, shared savings, and a multitude of legislative changes regarding legal structures and antitrust protection.

And as health economics influence health care markets, economic issues also result in changes in how physicians practice medicine. Even before the Affordable Care Act was signed into law by Congress in March 2010, changes have been taking place in physician practice settings. Organizational models appear to be migrating toward physicians’ seeking a more integrated structure with industry and hospital-owned provider networks.

Physician recruitment is also being affected by young doctors who must balance their commitment to meet an average $200,000 education debt while still facing the uncertainties of the various employment markets. An increased proportion of graduating doctors are not accepting the traditional "partner track" positions in private medical groups, but are instead opting to seek economic stability by taking salaried positions in health-sponsored employment provider networks. According to a 2009 survey by the Medical Group Management Association, 65% of established physicians were placed in hospital-owned practices, and 49% of physicians hired out of training joined a hospital-owned practice. This represents a nearly 75% increase in the number of active doctors employed by hospitals since 2000.

The literature and media are filled with editorials about how physician fee for service is the root cause for poor coordination of care and overutilization of expensive, "unnecessary" physician services, and accountable care organizations (ACOs) have emerged as an alternative to the current medical care model.

However, it is important to recognize that the incentive-driven compensation prototype of the future ACO marketplace is not risk free. It remains unclear whether developing organizations that integrate physicians and hospitals offers the promise for better care coordination, fewer complications, and cost savings. It is also unclear whether any changes in value and quality will be passed along to patients and payers in the form of lower prices.

What is certain, however, is that physicians are gravitating toward health care system–sponsored employment with a guaranteed salary, and physician recruitment is being affected by larger health care organizations that are driving higher compensation packages to young, job-seeking physicians, many of whom have specific training in areas of hospital need.

The economics of modern medicine has come a long way. It has been 392 years since the Mayflower sailed from a site near the Mayflower Step in Plymouth, England, and landed in Plymouth, Massachusetts, in 1620. Its 102 passengers and 25-30 crew members, including physicians Myles Standish and Samuel Fuller, would probably be rather surprised at how far medicine has progressed.

This column, "Frontal Matter," regularly appears in Clinical Neurology News, an Elsevier publication. Dr. Black is chief of neurology and codirector of the neuroscience center at Baylor University Medical Center at Dallas, and is on the editorial board of Clinical Neurology News.