How much physicians are paid for the work they perform is a perennial problem for Maryland doctors and policymakers. While groups representing doctors claim low reimbursement rates contribute to doctor shortages in the state and jeopardize Marylanders' health care, there is no consensus on just how much doctors should be paid. In fact, there is no real way to tell how much a doctor should be paid, since there is no real market for health care service. With the state government and federal government paying for most health care services in the state and little competition in the private insurance market, physician services are not paid a market price. The lack of a real market for doctors' services is at the heart of this problem. Until market forces are brought to bear on this situation, doctors and legislators in Maryland will continue grappling with this issue.

The goal of any policy changes by state policymakers should not be merely to increase payment for doctors' services. While doctors may desire to be paid higher rates, if higher rates do not lead to better service to the taxpayers, health insurance companies, and consumers who are paying them, then any rate hike would be undeserved. Instead, policymakers should try and reform the health care marketplace in the state to allow doctors and those who pay them to determine a fair price for doctors' services.

The Current System

The consensus among Maryland policymakers and doctors is summed up in a Baltimore Business Journal news story: "Maryland's doctors are grappling with dwindling reimbursement rates, forcing some physicians to close shop or move elsewhere."1 Dr. Martin Wasserman, then-president of the state doctors' association, MedCHI, said in 2008 that "Maryland doctors are reimbursed less than the national average for reimbursement and need a 20 percent increase in reimbursement levels to achieve the parity with national level."2  Increasing reimbursement rates is a top priority of doctors in the state.3

There are two aspect of the reimbursement rate issue. One is how much doctors are paid by government health care programs such as Medicare and Medicaid. The other is how much doctors are paid by insurance companies. The state has no effect on how much Medicare pays doctors but it does have a direct say on how much doctors are paid by Medicaid, as it sets reimbursement rates. The state also has some say in how much doctors are paid by insurance companies, and some legislators are pushing for a direct role in setting reimbursement rates by private companies.

Before discussing the issues with reimbursement rates by both Medicaid and insurance companies, it is necessary to explore why this needs government attention. After all, most other areas in our economy do not see complaints about reimbursement rates. Book sellers, for instance, aren't lobbying the government to intervene and raise the prices for their goods and services. This is because the marketplace for doctors' services is far different from the marketplace for other goods and services. When you go into a bookstore you see the price of the book and you decide whether or not you want to pay it. If it costs too much, you may look at other bookstores in the area or search for the title at an online retailer. Some bookstore owners may even let you bargain with them. The price is something you see clearly and you can compare the price across stores and decide if it is something you desire to pay. While bookstore owners may wish to charge higher prices, they are limited to charging the price as determined by the market.

A doctor's fee is much different. It is highly unlikely that the patient will end up paying the full fee. If the patient has insurance or is on Medicaid or Medicare, he or she may pay a co-payment and then someone else pays the rest of the fee. In many cases no co-payments at all are charged. Generally, patients do not shop around nor do they bargain with the doctor to reduce the fee. Since they are not the one paying the fee, what the doctor receives in payment means very little to them. Fixed dollar co-payments which were instituted in the managed care plans popular in the 1990's further compounded the problem. Additionally under the current system, consumers are shielded from the true cost of the service.

In Maryland, for every health care dollar spent, the consumer directly pays, on average, only 16 cents. Government programs pay for most of the health care spending in the state: Medicare pays 22 percent, Medicaid pays 17 percent, and other government programs pay 5 percent. Private insurers pay the rest, around 40 percent of all health care spending.4

While consumers are largely insulated from what doctors charge for their services, the insurance company or government entity that provides a patient's health care coverage, does have an interest in the doctor's price. The government tells the doctor what it will pay him or her. The insurance company, likewise, sets fees for doctors who participate in their network. Doctors are free to decline participation in Medicaid, Medicare, and even private insurance. Many, in fact, do not accept Medicaid or Medicare patients, but almost all doctors accept private insurance.

In Maryland, the health insurance market is highly concentrated. Overall, two companies control over 70% of the marketplace. In the market for small businesses or individuals who purchase their own health insurance, two companies that control around 90% of the market.5 Doctors who want to do business in the state will generally find it to their advantage to accept patients covered by these insurance companies. The lack of competition in the state, however, puts doctors in a tough position. Like individuals looking for health insurance, they are left with little choice but to accept what these large companies dictate. If doctors do not like the rates these companies pay, they would have little business if they rejected them.

The system which separates the consumers of a service from the payment for that service makes it difficult to find the true market price for those services. Only the consumer knows the price he or she is willing to pay in order to obtain a certain service from a doctor. The health care system we have today does not act like a true marketplace and thus it is almost impossible to say if doctors are being paid a fair price. If payment for doctors' services were a true market, a doctor could complain about the prices paid by his or her patients, just as a bookseller may complain about the prices paid by his or her customers. But if the market price for his services was lower than the doctor thought justified, it is an indication that the problem may be with the doctor and not with the price itself.

It is true to a certain extent that doctors are unlike booksellers. There are differences among every provider of goods and services in our economy. The power to order tests and other procedures that may affect the doctor's bottom line, the knowledge difference between doctor and patient, the urgent need for some medical services, and other factors complicate the comparison. However, the same basic principles apply. Moving toward a more market-based system for physician reimbursement would alleviate many of the problems we have in the
system today.

For instance, one of the primary ways doctors are reimbursed both by private insurance and government programs is based on the time spent on certain services. The more time a doctor spends on something, the more the doctor is paid. Time is a poor indicator of value, however. The problem of paying this way is made even worse since the payment is actually made based on estimated time spent providing a service. There is evidence that these estimates are inaccurate.6

Medicaid. Since policymakers have a direct role in setting reimbursement rates for Medicaid services, the problems in this area deserve closer scrutiny. Doctors have long complained that the state Medicaid and MCHP programs pay them too little for the work they do. Again, though, there are problems determining if this complaint is valid. With no real market for these services, one cannot determine if the state is paying doctors below the market rate.

One way doctors have criticized Medicaid's rates is to compare them to what the federal Medicare program pays for the same services. Maryland's rates are below Medicare and there has been a goal by the state legislature since 2005 to raise state Medicaid rates to the level of Medicare rates. Medicare becomes the benchmark for the majority of physician payments.

While this proposal is not necessarily bad, there is a potential problem: what if Medicare rates are too low? In fact, many doctors do perceive Medicare rates as being insufficient payment. One result of this perception is that they charge higher rates to private insurance to make up for the low rates Medicare as paying. This is called cost-shifting.

The extent of this cost-shifting is difficult to quantify as there are different ways of measuring it. A recent study by the consulting firm Milliman found that "the difference between the actual payment and the payment amount that would have resulted in an equal margin by payer" was that, compared to commercial insurers, Medicare resulted in physicians cost-shifting $14.1 billion in 2007.7

The same Milliman report also found that, nationally, Medicaid resulted in physicians cost-shifting $23.7 billion in 2007 and concluded that without this cost-shifting, commercial physician rates would be 15% lower.8 So while raising Medicaid rates in Maryland up to the level of Medicare rates may result in less cost-shifting, this practice will still occur.

If this happens, that will be a strong indication that physicians view Medicare rates as too low. Even if Maryland policymakers achieve their goals, physicians will continue to lobby them to raise Medicaid reimbursement rates.

Past Reform Efforts. As mentioned above, the debate about how much doctors should be paid is an old one in Maryland. There have been efforts in the past to alleviate these concerns but a government rate-setting proposal proved to be unworkable. Any efforts to do something similar will likely end in failure once again.

In 1993, Maryland passed a law giving the Health Care Access and Cost Commission authority to develop a system to set payment rates for all heath care practitioners in the state. This plan fell apart, though, after the commission concluded that it was not a viable plan and the 1993 legislation was repealed in 2000.

Part of the reason for the repeal was the complicated system of determining payment rates. As the Maryland Health Care Commission describes it:

Reimbursement under the payment system was to be comprised of three numeric factors: a practitioner's resources to provide services relative to other practitioners; the value of a service relative to other health care services; and a conversion modifier to arrive at a dollar value. The statute envisioned that HCACC would establish the factors for practitioners' resources and the relative value of health care services. Payers and practitioners' would negotiate the conversion modifier.9

In the end, this "pricing" system could not adequately determine a fair way to pay doctors.

While efforts to have the state set private reimbursement rates bogged down in the past, some policymakers want the state to reconsider the idea. Any efforts to do so would result in the same problems experienced previously. Furthermore, if the state were to begin setting these rates, it would open the door to an even further politicization of health care in Maryland.

With politicians regulating many aspects of health care so closely, it is inevitable that political considerations plays too large a role in the state's health care marketplace. The services that legislators and the governor mandate health insurance cover, for instance, are usually promoted by a coalition of patient advocates who desire to see their particular disease covered and doctors who desire to see insurance forced to pay them for treating that disease. The decisions to mandate coverage is not solely made on the medical merits of the procedure but also, in part, on the political pressure brought to bear on legislators.

Any government-mandated payment system will have similar problems. We already see this with the lobbying over Medicaid reimbursement rates. At the national level, Medicare reimbursement rate decisions are drenched in special interest politics. As health care analyst Michael Cannon notes:

Politicians can use the perennial threat of payment cuts to shake down wealthy physicians for political contributions. Organizations that lobby on behalf of physicians-like the AMA and the AAFP-rake in membership fees as well. It is little wonder that, according to the watchdog group Political Money Line, the health-care industry spends more on political contributions and lobbying than any other.10

Recommendation for Reforms

The focus of reform in Annapolis generally centers on how to involve the government even further in physician reimbursement rate setting. Whether raising Medicaid rates, providing a floor for how much health insurers can pay doctors, or setting a complete payment regime, legislators want to insert state government even further into this issue. That would result in even more jockeying between lobbyists trying to ensure the services of doctors they represent were paid higher rates and would further politicize health care decisions in the state. While this situation would benefit lobbyists and politicians, it would not be good for doctors or consumer.

Instead of more government regulation of health care payments, legislators should consider steps that will help move towards a real market for health care services. Only in a market can the true price of doctors' services be determined. Removing legislative and regulatory barriers that currently impede a free market in health care services is something that must be undertaken primarily by federal legislators, but state policymakers can enact some laws to help alleviate the current concerns doctors have with their reimbursement rates.

It is unlikely there will ever be anything approaching a truly free market for health care services. The situation we have today, where health insurance companies pay much of the cost of private health care, is ingrained in our system and is likely to remain the cornerstone of private health care payments into the future. As long as third-parties like health insurance companies pay most of non-governmental health care costs, the market will work imperfectly. However, if these third-parties are allowed to act as proxies for consumers and make choices in line with consumer wishes, a market can be approximated. Reform efforts should be focused on making this situation a reality.

Medicaid Reform. As long as politicians set reimbursement rates for Medicaid services, these rates will always be determined, at least in part, by political considerations. Doctors will lobby for higher payments and when there are budget crises, reimbursement rates will be prime targets for cost-savings. Reforming Medicaid can take these decisions out of the political realm, though. If Maryland's Medicaid program were restructured along the lines of Florida's Medicaid system, it would eliminate the need for politicians to set reimbursement rates and allow more of a market price to be paid to physicians.

Maryland policymakers should enact legislation to set up an exchange for insurance providers wishing to compete for Medicaid patients. The state would attract providers by paying a risk-adjusted, capitated fee for each Medicaid patient's health care coverage. The recipient would enroll with a provider of his or her choice and that company would pay for that recipient's services. Companies would have an incentive to provide a proper level of coverage since it would receive a higher payment for those with more health issues. Under this system, the state would not pay a fee for service. The rates of payment for such an approach would introduce the concept of payment based upon "value". Physicians' services would be determined by the insurance company covering the
Medicaid patient.11

The key to this plan working is to have a robust market in health insurers participating. With few insurers participating, we would only see a repeat of the current problems in Maryland, with big companies essentially forcing doctors to accept their fees. With more health insurers in the market, doctors can refuse to participate in the system of those health insurers who offer prices they do not like.

In order to ensure there are sufficient health insurers participating in the Medicaid system, the risk-adjusted fees paid for each Medicaid patient must be sufficiently high to attract interest. In areas of the state that are more rural, there may be a scarcity of companies that wish to participate. Florida has solved this problem by offering a reinsurance policy for insurers that enroll patients in these areas. This limits the medical losses insurance companies can suffer.

While the Florida system is not perfect, it is superior in many ways to the Medicaid system Maryland has today. In terms of setting physician reimbursement rates, if Maryland were to adopt the reforms described above it would allow rates to be set in a manner much closer to a market than currently exists.

Open up the Health Insurance Marketplace. The health insurance market in Maryland is dysfunctional. As noted above, two health insurance companies comprise over 70% of the total market. In the small group market, two companies control around 90% of the market. This situation leaves doctors largely at the whim of these insurance companies' rate setting decisions. In order for doctors to be reimbursed at something resembling a market rate for their services, state policymakers should try and foster more competition in the health
insurance marketplace.

Since state policymakers only have authority over the small group market and the individual market, their reform efforts must necessarily be in those areas. The government imposes a variety of stringent regulations on insurance policies sold in the state, from how high they can set deductibles to what sort of services must be covered. These rules limit the number of that want to offer policies in the state. Loosening up some restrictions and eliminating others will give companies more incentive to enter the market.

Reducing restrictions on insurance policies is often promoted as a way to help lower insurance prices for consumers. This is one of the effects, certainly, but if it also gives new insurance companies an incentive to enter the market - or gives current insurance companies that only have a small portion of the market an incentive to expand - it will also help doctors by giving them more options. The more freedom doctors have to choose from a variety of insurance companies, the greater chance they have of being able to command fees they see as reasonable.

Open up the Health Care Marketplace. Another way to move towards more of a market system for health care in the state is to remove some of the regulatory burdens put in place by the state government. The government has a number of laws, rules, and regulations that distort the market, lessen competition for health care services, and harm both consumers and providers. Eliminating some of these barriers to competition and reducing others would likely lead, at least indirectly, to higher payments to doctors.

For instance, the state's Certificate of Need law, though not applicable to physician services, is designed to help impede new health care institutions from competing with institutions that are already established. Not only is this anti-consumer, but it also hurts new doctors who would work at these new facilities. Repealing the Certificate of Need law will make it easier for doctors to open up new facilities, allowing them another way to offer their services. While this will not increase reimbursement rates, it will open another avenue for doctors to
earn money.

The state should also refrain from enacting laws or regulations that will further hamper the health care market in the state. Because state laws and regulations often come between patients and doctors, some are making an effort to opt out of the system and deal directly with one another. While state bureaucrats and some politicians dislike these attempts, these efforts are merely a response to the broken system they put in place. Far from being discouraged, more direct relationships between patients and doctors should be left alone.

The desire of state regulators to frustrate a burgeoning market in health care was evident in the recent attempt by the Maryland Insurance Commission to regulate physicians who practice what is called "boutique" or "concierge" medicine. There are a few different practices that go under this name, but essentially this involves patients paying a yearly fee for the right to obtain certain services from a doctor if needed. The physician does not submit insurance claims for the services he or she provides. The Maryland Insurance Commission claims that, in some cases, this arrangement could be considered insurance and physicians who practice it would be subject to the numerous state regulations on insurance companies.12

It is difficult to see how a patient paying a fee for expected services could be considered "insurance," but even if state regulators are correct that it is, legislators should exempt this practice from state regulation. Patients who wish to pay these fees should be free to do so. Doctors who wish to see patients under this model should also be free from the onerous state insurance regulations. Both parties benefit from this arrangement and, in the case of doctors, there can be no complaint about the amount of payment.

Conclusion

Efforts to raise doctors' reimbursement rates by increasing Medicaid payments or mandating higher rates by private insurance companies will not address the true problem of how we pay doctors. There is no objectively right rate for doctors' payments. Doctors, just like anyone who provides services in exchange for payment, should be subject to the market price for their services. Policymakers would be better served in reforming the laws and regulations of the state's health care marketplace to encourage more of a free market in health care services rather than simply trying to force taxpayers or health insurance companies to pay more for doctors' services.

Marc Kilmer is a Senior Fellow at the Maryland Public Policy Institute.

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1    Schultz, Sue, "Doctors' Pay at Center of Health Industry Debate," Baltimore Business Journal, July 18, 2009. Accessed at http://baltimore.bizjournals.com/baltimore/stories/2008/07/21/story9.html.

2    Schultz, Sue, "Maryland Could See Physician Shortage, Study Finds" Washington Business Journal, January 8, 2008. Accessed at http://baltimore.bizjournals.com/washington/stories/2008/01/07/daily9.html.

3    This issue is wider than just how much doctors are paid, however. If doctors are indeed "closing up shop" or leaving the state because they are not making enough money, the issue of rising costs must also be considered. If the difference between their costs and their payments does not leave what doctors perceive as a sufficient amount of money for them, then even if reimbursement rates rise there is no guarantee that ballooning costs will not consume that increase. However, as this paper is concerned specifically about reimbursement rates, the issue of rising costs for physicians must be considered elsewhere.

4    Department of Legislative Services, Fiscal Policy Note for SB 881, p. 4. Accessed at http://mlis.state.md.us/2009rs/fnotes/bil_0001/sb0881.pdf.

5    See "Competition in Health Insurance: A Comprehensive Study of U.S. Markets" by the American Medical Association, page 10 (available at http://www.ama-assn.org/ama1/pub/upload/mm/368/compstudy_52006.pdf) and the Maryland Health Care Commissions "Health Policy Briefing Regarding Work in Progress," page 5 (available at http://www.ama-assn.org/ama1/pub/upload/mm/368/compstudy_52006.pdf). These reports are from 2007 and 2006, respectively, but there is no indication that there has been any deconsolidation of the health insurance marketplace in the state since they were issued.

6    Task Force on Health Care Access and Reimbursement (HCAR), Final Report and Recommendations, December 2008, p. 15. Accessed at http://www.dhmh.state.md.us/hcar/pdf/jan09/HCAR_Final_Report.pdf

7    "Hospital and Physician Cost Shift: Payment Level Comparison of Medicare, Medicaid, and Commercial Payers," Milliman, December 2008, p. 2. Accessed at http://www.ahip.org/content/default.aspx?docid=25216.

8    Ibid, p. 3.

9    "The Feasibility and Desirability of Developing a Provider Rate Setting System that Establishes Minimum and Maximum Reimbursement for Health Care Services," Maryland Health Care Commission. Accessed at http://mhcc.maryland.gov/legislative/hb805/ch2.pdf

10  "Fix Medicare - Not its Prices," New York Post, October 10, 2006. Accessed at http://www.cato.org/pub_display.php?pub_id=6722

11  Dr. Michael Bond, an economist at Case Western Reserve University, helped develop Florida's Medicaid program and has written extensively on it. His analysis of its implementation, published by the James Madison Institute, can be found here: http://www.jamesmadison.org/pdf/materials/587.pdf.

12  The January 2009 report by the Commission can be found here: http://www.mdinsurance.state.md.us/sa/documents/2009RetainerMedicineReport-final.pdf