Home > Medical/Health Commentary > Are there financial conflicts of interest with salary-based physician payment?

Are there financial conflicts of interest with salary-based physician payment?

I would argue that there are, just not the “usual suspects” that come up when talking about conflicts of interest in various physician payment models.

Anyone who’s been paying remote attention to health policy conversations at any time in the last twenty years or so would probably be able to explain the conflicts of interest inherent to fee-for-service physician payment, which is by far the predominant method by which physicians bill for their services and one of the most common ways of paying physicians (at least in part).[1]

People of wonkish tastes who followed these matters in the America of the 1990s (or those who read about them in the 2000s) may also have heard the term “capitation.”  While this can come in many flavours, it generally involves a physician billing (and/or being paid) a set amount per patient on their panel (that “they saw on a regular basis,” who “belonged to the doctor,” etc.).  Sometimes these payments would be adjusted for how sick an individual patient or the larger patient population was beforehand.  This is risk-adjusted capitation.

Ideally, a physician will act in the best interest of his/her patients when making clinical decisions.  It would also be nice if the financial incentives facing the physician point in the same direction as the interests of the patient.  Otherwise, the only thing that prevents inappropriately motivated decision-making from occurring is the physician’s own sense of altruism and professionalism, something that most in the policy sphere generally assume doesn’t exist despite the fact that they entrust their health to these same people.[2]

Fee-for-service payment incentivizes doing more of the services for which there exist fees.  This can create incentives for unnecessary tests and procedures, but also incentives against providing services for which there are no fees to be had (such as telephone consultations, e-mail communications, etc).

Capitated payment incentivizes doing less of anything; once a patient is on your panel, the marginal revenue from actually doing anything for the patient is zero, and the marginal cost in terms of your time + materials/supplies/etc. is positive.  This method of payment had its heyday in the 1990s along with other managed care means of cost control, and seems to have been swept away as part of the backlash against those same managed care cost control methods.

Salaried payment is somewhere in the middle.  It’s the model of payment that many people know and love (at least enough to get up for work each morning).  The physician gets paid a certain amount each year/month to do whatever it is they do.  Seems straightforward and conflict-free, right?

Sure, but there’s a catch.

The catch is that for salaried payment to work, the physician has to be working for someone else.  It could be the government, a hospital, a charity, an independent medical group, a cruise line… it doesn’t matter.  In order for FFS/capitated[3] billings to be converted into salaried payments, there needs to be some intermediary between the billings and the payments to make that conversion.  The salaried payment model requires that the physician be someone else’s employee.

And that can create conflicts.

In an otherwise bland guest post at KevinMD today, Danielle Ofri asserts (among other things), that salaried physicians “have absolutely no financial conflict of interest with regard to [their] patients’ care.”  I assert that this is decidedly untrue.

In the interest of letting people smarter than me do the talking, I will first offer these two blog posts by Michael Kirsch at MD Whistleblower that draw on his experiences being paid on a salary, then FFS.  Salary is not immune from conflicts of its own.

Or, to quote liberally from the comment I left at KevinMD:

As a salaried employee, you may be legally or ethically accountable to your patient, but for all practical purposes your job depends on the happiness of your boss (i.e. the practice owner), who could be another physician or [even] a hospital administrator depending on who owns the practice. This could mean restrictions on your ability to refer outside a certain network of specialists, to perform certain treatments that you think are better suited for your patients, or to spend more time with individual patients at the expense of practice revenue (this last decision is one that isn’t currently incentivized, but in private practice it’s the physician’s decision to make). Your ability to do what you think is in your individual patient’s best interest is subject to yet another layer of second-guessing and restriction that may or may not be useful.

As a salaried employee, your incentive to “go the extra mile” in terms of availability, hours, taking vs. turfing tough/late-night calls or cases, and similar ‘customer service’-type things comes solely from your boss’s policies (and the rigour of their enforcement), and from your own professionalism or altruism. These can be, and I would imagine often are, sufficient enough to motivate most physicians to do “the right thing” in those circumstances (whatever the right thing may be). However, much of the debate around physician payment, including Dr. Ofri’s assertion that salaried payment frees her from conflicts of interest, inherently assumes that these other motivating factors are insufficient to overcome the mis-directed incentives of FFS payment. If the argument [is that] policy and professionalism [are] outweigh these financial incentives in the case of salaried payment, I would imagine that it applies equally well to FFS payment.

The second MD Whistleblower post above provides a dramatic illustration of the sorts of conflicts that can arise between the interests of a physician’s patients and his/her employer.  These aren’t just hypothetical scenarios.  And even if an individual physician doesn’t see extra money for doing more/less, the practice does, and that pressure is sure to work its way down the food chain.

I make no representation here about the best way for physicians to bill or to be paid for their services.  Hopefully it’s clear that all three methods of physician payment present their own conflicts and challenges.  Salary is not the conflict-free panacea it’s made out to be.


[1] – Billing and payment are related, but in most cases are distinct.  I use “payment” in this context to refer to the money that flows to the physician; I use “billing” to describe the process by which money flows from the payor (such as an insurance plan, a program like Medicare/Medicaid, or the individual patient but excluding insurance premiums).  In the case of a solo independent practice, the billing and payment are virtually the same:  the physician directly receives the money remitted by payors (and then pays overhead and whatnot to end up with a slightly smaller amount of money for him/herself).  “Billing” may not even exist per se in the case of an insurer that directly employs its physicians, though such an insurer that chose to use FFS/capitation as an element of its physicians’ payment would require some of the same billing-esque documentation to be made. Back to text.

[2] – This is snark.  While I believe that physicians get an unfairly bad rap in policy discussions and economic models, I’m not so naïve as to believe that physicians are perfectly selfless, immune to financial or other incentives, or free from bad apples within their ranks, either. Back to text.

[3] – Whenever you have billing (i.e. whenever the administrator of the pool of money being used to pay physicians is not the direct employer of physicians), it will be either FFS or capitation of some flavour.  Fundamentally, you can either pay a physician for doing certain “stuff” to Patient X, or for taking care of Patient X and doing whatever “stuff” is necessary along the way.  Things like bundled payments or all the other payment innovations I’ve seen proposed are simply FFS or capitation schemes with the definition of “stuff” revised/expanded/contracted, etc.  Even productivity bonuses for physicians primarily on salary will tend to skew in the FFS or capitation direction. Back to text.


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