Hospital Salaries Could Cut Care Costs

This article is part of a series on Health Policy. See also:

  1. Ground Control to Major Reform
  2. Hospital Salaries Could Cut Care Costs
  3. The Appropriate Practice Scope of Chiropractic May Be a Political Question, Not a Scientific One

When doctors are rewarded for throughput, the result is hasty care, and we all pay the price. Let’s reward our doctors for performance instead.


CT scanner overuse can tell us a lot about what’s wrong with the healthcare industry.

TIME article Bitter Pill tells of a 64-year-old woman named Janice S., who, upon feeling chest pains, was rushed to the hospital for diagnosis. After a few tests, she was told that she had indigestion; her pains resulted from mere heartburn. But her local Stamford Hospital in Connecticut slapped her with $21,000 worth of bills.

Janice’s case is just one example of an all too common phenomenon: Americans paying far too much for simple procedures. The ACA makes headway by requiring insurance for everyone, but even after its passing, inefficiencies still abound. Let’s take a look at what’s really driving up costs in American healthcare.

One of the greatest expenses on Janice’s bill was her CT scan, which uses radioactive dye to monitor blood flow throughout the body. This is one of the priciest procedures listed on the hospital’s 7000-item chargemaster.  Medicare, and, to a lesser extent, private insurers, negotiate deep discounts off the chargemaster.  Uninsured patients, however, have to pay chargemaster prices by default.

For a CT scan with radioactive dye,

  • Medicare pays: $554
  • Private insurers pay: $4000—$5000, depending on the size of insurer
  • but the chargemaster price is: $7,997.54

Since Janice was uninsured and a year shy of the minimum age for Medicare, she had to pay the full chargemaster price. 

The Patient Protection and Affordable Care Act (ACA from here on out) makes great progress by requiring everyone to have insurance via the individual mandate. Further, for the insured, annual and lifetime maximums are now disallowed. Thus patients are shielded from the harsh reality of the chargemaster. Huge medical bills like Janice’s will become a thing of the past, and wasteful medical spending should decrease significantly.

Are we in the clear? Well, private insurance premiums are rising under ObamaCare (since insurance companies have greater responsibility) and Medicare costs taxpayers more than ever. Chargemaster or not, we’re still overpaying for healthcare. Why are the underlying costs still so expensive? I think it all comes back to the wasteful billing method that dominates healthcare: the fee-for-service model.

Fee-for-service means (FFS) means that providers bill beneficiaries per procedure performed, and thus make money by carrying out more and pricier procedures. This creates the obvious temptation to over-test. It’s likely that Janice didn’t even need at CT scan; an EKG would have sufficed. But by running the scan anyway and billing Janice $8000, her cardiologist ensured himself a healthy paycheck.

Now, he’ll only be able to bill $4000, or $500 once Janice turns 65. Still, even at the Medicare rate, there remains potential for abuse.

Though $500 seems small, it’s still enough for the doctor to profit; in fact, it’s four times greater than the price of CT scans in Germany. [1] The greatest driver of high costs, though, isn’t the price itself, but the ability of doctors to run a scan, or even two or three, that may not have been necessary in the first place. Federal law prohibits Medicare or private insurers from paying less for second and third scans than they pay for the first. And groups like the American College of Radiology (ACR) have lobbied heavily to insure that it stays this way. As it stands, insurers are forced to pay for any and all CT scans, regardless of their necessity. It should come as no surprise that we run 71% more CT scans than does Germany, where incentives to over-test are controlled. [1]

Note that, in this essay, I’m just using CT scans as a specific example of a general problem. Governmental barriers to insurance cost control are all too common. Chemotherapy drugs, for example, are kept expensive by similar statutes. Medicare is prohibited from negotiating prices directly with drugmakers. Instead, they must pay doctors at least 6% above what those doctors paid the drugmaker, regardless of what those doctors paid. The same is true for private insurers in most states. [1] Two drugs may be equally effective, but one may cost $3000, while the other costs $300. Given that doctors would rather make $180 than $18, they might choose to prescribe the former, sticking the insurer with the bill. This is what has been called the comparative effectiveness issue. Many were disappointed to see that ObamaCare includes no provisions allowing insurers like Medicare to make reimbursement decisions based on comparative effectiveness of treatments.

What’s the solution? I’d suggest that we force congress to deregulate insurance, allowing it to negotiate reimbursements based on the effectiveness of procedures. However, congress doesn’t seem likely to budge on this issue. Alternatively, I propose a solution that would greatly lower costs and improve quality of care, and might even indirectly lessen lobbyist influence in health policy.

Pay all hospital employees salary instead of reimbursing them for each service. Thus the incentive to over-test disappears. The incentive to charge excessively for CT scans and other procedures, at least on the part of the doctors and bodies like the ACR, would also disappear. Insurers and hospitals would still negotiate prices, and hospitals might lobby to gain an edge. But the physicians themselves would have no stake in the number of procedures performed or the cost of each procedure. Hospitals could even offer bonuses for good outcomes. Thus the physician would be truly motivated to provide care that embodies quality, not quantity.

Basset Healthcare, a small hospital in rural New York, is one of a small number of hospitals today that pays all its physicians a salary. The result is astounding: medical costs are lower than those in 90% of New York hospitals. At the same time, quality of care ranks in the top 10% in the nation. [2] The benefits of a salaried system are clear. Unfortunately, the ACA makes little attempt to move away from the standard FFS model.

Indeed, the question of how we might approach this sort of healthcare reform is a difficult one. Forcing all hospitals to pay salaries and bonuses for good outcomes would amount to authoritarianism, and could cause too great a shock to an already-complex system. With this in mind, DreyzenCare might offer a federal “Quality Care” subsidy for all hospitals that switch to the salary model. Under the salary system, healthcare costs would fall due to decreased waste. Thus Medicare costs would fall, as would private insurance premiums (and note that ObamaCare helps pay private insurance premiums for the poor). Therefore, it’s certainly not hard to imagine that the Quality Care subsidy could soon come full circle and pay for itself.

Physicians might reject this change and choose to work only for hospitals that maintain the status quo.  Fee-for-service is profitable and doctors would probably be paid less under the salary system. On the other hand, as a (hopeful) future physician, I certainly wouldn’t mind taking a pay-cut if that meant that I could care for my patients with their wellness, not my pocketbook, at the forefront of my mind.

Say that DiamondCare passes in 2015. Janice, now covered by Medicare, returns to the hospital with chest pains. This time, though, she makes sure to choose one receiving a Quality Care subsidy for salaried physicians. She knows Medicare holds her responsible for a 20% copay, and therefore desires not to be overcharged. Note that this trend of patient selection incentivizes more hospitals to make the switch to salary. At the hospital, her cardiologist first gives her an EKG, as is appropriate in these situations. He observes some irregularity in her heartbeat, and so then orders one (and only one) CT scan. By this time, the radiologists of the ACR have lessened their lobbying efforts, since many of them are now salaried. So, the CT scan only costs Medicare $250. Janice pays just $50.  The hospital still makes some profit from the $250 reimbursement, especially since it’s subsidized. Janice goes home healthy (and solvent), and her doctor receives a bonus. The end!


  1. Bitter Pill
  2. Hospital Saving: Salaries for Doctors, Not Fees

2 comments on “Hospital Salaries Could Cut Care Costs

  1. Richard says:

    I agree with Josh here for the most part. Though, before I go signing myself into the nearest Joshpital (sorry), I have some questions. What will determine the size of the salaries paid in hospitals? Aside from how many patients they see, and the success-based bonuses, one thing which could affect how much the annual, fixed salary of a physician amounts to are the specific pharmaceutical groups with which the hospital does business. The comparative effectiveness issue reemerges in a different form. Instead of there being incentives for over-testing, there will remain incentives for buying needlessly expensive drugs, allowing greater profits for the hospital when the insurance pays out the 6% minimum. Hospitals will want good physicians, so they’ll incentivize working at their hospitals by having large salaries and physicians may want large salaries. They’ll probably end up buying the most expensive drugs out there to maximize profits. Instead of buying normal cost drugs and then over-testing, they might insist on buying over-priced drugs. This may still be better than the current situation though. But Josh’s model relies on the ‘milk of human kindness’; it might be too morally respectable to be a genuine possibility in the world of private medicine. Is congress really more likely to budge on the issue of fixed hospital salaries than insurance deregulation?

    • Josh says:

      I don’t think my model relies much on human kindness.

      You argue that insurance payouts will affect salaries. In other words, doctor orders expensive drug –> insurance pays hospital more –> hospital pays doctor more. So, the doctor is incentivized to keep ordering that expensive drug.

      This may be true, but the problem is greatly lessened in my system. This is because the reward of ordering expensive drugs is distributed, not individualized. One doctor orders expensive drug –> entire hospital receives more money –> entire hospital staff receives higher salary –> individual doctor only receives a very slightly higher salary. Contrast this to the last system, where the doctor receives the entire payout for the expensive drug.

      Add to this the fact that, as an insurance user, you’re still responsible for a copay or deductible. So, if you find that, for some reason, your copays are much higher under Doctor A, even though Doctor B gives you drugs that work just as well, you’ll pretty quickly switch to Doctor B. So, Doctor A’s slightly-higher salary is negated by his loss of patients, and he’s disincentivized from ordering expensive drugs.

      The scene changes if hospitals are choosing which drugs are available, instead of individual doctors. In this case, the perverse incentive you mention becomes much more real. Still, if an entire hospital tends to be expensive, patients might opt for other hospitals. On the other hand, though, that same argument could apply at the level of the doctor, under the current system. And apparently enough people choose “expensive” doctors to render those doctors’ choice in pharmaceuticals financially sound.

      A huge issue, of course, is that information is poorly balanced: most patients have no idea how much they’re being charged for their drugs–at least not until the bill comes back.

      And, yes, insurance regulation would be a good place to start. On that note, I wouldn’t be entirely opposed to a single payer system.

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