Doctors are a significant portion of the costs for the health care system. In 2009, almost a quarter of Ontario’s health care budget was spent on paying doctors.

Most doctors who work in hospitals are not paid by the hospital directly, but by the Ontario Health Insurance Plan, which pays doctors for each procedure and clinical service. This system is known as “fee-for-service”.

There is a growing debate about whether doctors who work in hospitals should instead be paid by salary, instead of fee-for-service.

The history of paying doctors in Ontario

Prior to the advent of Medicare in the late 1960s, many doctors charged patients directly. The Ontario Health Insurance Plan (OHIP), created after the passage of federal legislation in 1966, allowed patients to receive medically necessary services in hospitals and doctors’ offices without having to pay directly. Instead of sending their bills to patients or private insurers, doctors began to bill OHIP, which gets its funding from the Ontario Ministry of Health and Long-Term Care. Doctors went from being able to set their fees independently to having to negotiate with the government. Every few years, the Ontario Medical Association, which represents doctors, and the Ministry of Health and Long-Term Care enter into negotiations to determine how much doctors are paid for each visit, diagnostic test and procedure. The current Schedule of Benefits for doctors is 812 pages long, and contains thousands of different fees associated with different consultations and procedures.

Hospitals are not directly represented in these negotiations, even though for many doctors, hospitals are where they deliver health care to patients. Hospitals provide doctors with the tools and equipment to practice as well as clinical space, a team of health care providers to work with, and, in some cases, administrative support for booking appointments and operating room times. Hospitals also incur the costs of all the procedures, tests and surgeries that doctors perform. For example, for hip replacement surgery, hospitals pay for the artificial hip joints, operating room staff and the equipment needed to do the surgery, while the surgeon bills OHIP for performing the surgery and providing post-operative care.

Fee-for-service vs. salary: incentives for care

Most Ontario doctors receive a substantial proportion of their income from fee-for-service, meaning a payment for each service that is provided, according to the fees listed in the Schedule of Benefits. The incentive is clear – see more patients or do more procedures, and you will get paid more.

Many health care policy analysts argue that these incentives can lead to unintended outcomes. Fee-for-service may encourage doctors to do unnecessary tests and procedures and neglect the time-consuming, financially unrewarding work of care coordination and chronic disease management. Carolyn Baker, CEO of St. Joseph’s Health Centre says that fee-for-service “rewards volume, not complexity.”

Many doctors, however, do not agree. Dr. Kenneth Pace, a urologist at St. Michael’s Hospital, says that fee-for-service encourages doctors to be as productive as possible. Pace says “in our system we’re constrained by resource availability” and that a shortage of doctors, plus increasing demand for health care services from the population means that “over-utilizing, and doing more procedures would just add to an already overbooked waiting list.” Indeed, unlike the USA, there are long waiting lists for some tests and operations in Canada, raising concerns that we are not providing enough care. If this is true, fee-for-service might be what we need. And in fact, governments have reduced wait times recently by remunerating hospitals on a fee-for-service basis for priority procedures such as cataract operations.

Doctors also value their independence. Many believe that fee-for-service ensures they are practicing medicine with only the best interests of each patient in mind. Other doctors argue that the modern practice of hospital medicine requires doctors to consider the financial constraints faced by hospitals and their funders. After all, a dollar spent on one patient is a dollar not spent on another. This perspective suggests that if doctors were paid by hospitals, they might better balance their patients’ needs with the need to control costs.

Opponents of the fee-for-service system also argue that the logic behind fee-for-service is becoming less appropriate as hospitals today are increasingly faced with complex, older patients who not only require procedures, but also care coordination and continuous disease management and surveillance. Under the current system, a hospital-based physician is paid each time a patient is readmitted. Successfully coordinating care and keeping a patient out of hospital paradoxically results in less remuneration for the physician.

Other payment methods, such as salary and capitation—paying doctors a fixed amount for each patient each year—have been proposed as a way to focus attention on complex care and quality.

Although these models have made significant inroads into primary care in Ontario, hospital doctors have seen relatively little change. One exception is that most doctors who work in Ontario’s cancer centres are paid with a combination of salary and fee-for-service.

Like fee-for-service, capitation and salary models have their own problems. Because the salary model provides doctors with the same salary no matter how many hours they work or how many patients they see, there can be an incentive for doctors to work fewer hours and see less patients. A study using data from the Canadian National Physician Survey in 2004 found that salaried doctors see about half the number of patients as doctors paid fee-for-service, although patient complexity was not considered in this study. Another study found that salaried doctors have different models of practice, and in general order less diagnostic tests and procedures but spend more time with each patient and provide more preventive care.

Models to align incentives

Carolyn Baker says that there are lessons we can learn on how to balance incentives for doctors from health care systems outside Canada. Kaiser Permanente, in California, pays doctors a salary and then provides them with the opportunity to earn additional bonuses based on performance incentives. The highly lauded Veterans Affairs system in the United States does the same. Even many for-profit health care organizations are moving towards models where doctors are hospital employees, with a recent study showing that more than half of American doctors are employed by a hospital or integrated health system.

“There is no one size fits all model for paying doctors” says Tom Closson, President and CEO of the Ontario Hospital Association. Closson notes the implications of the fact that “different doctors do different kinds of work” and that effective payment systems are reflective of the type of work each type of doctor does, as well as “what the organization they work for is accountable to achieve in terms of clinical service volumes, access and quality as well as academics.” Closson also notes the implications of the diversity of settings in which Ontario’s doctors work. He says ” a doctor in a small community will have a different role to play in practicing medicine than doctors in large communities and this needs to be reflected in the design of their compensation scheme to ensure that they have the appropriate financial support and incentives to best serve the patients in their community.”

Carolyn Baker agrees, saying “I don’t think that there is any one right solution.” She suggests that “there needs to be more experimentation, which is challenging because the current ‘union’ mentality of the Ontario Medical Association is focused on classic collective bargaining, to benefit the many, and doesn’t encourage experimentation.” Erik Hellsten, who works in the Negotiations and Accountability Management Division of the Ontario Ministry of Health and Long-Term Care agrees, saying “there is no perfect set of provider incentives. Each funding mechanism has its own strengths and weaknesses, and ultimately we make decisions around the policy consequences we can live with.”

Which funding model do you think best aligns efficiency and quality of care?

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