Assessing Strategies to Address Rising Physician Costs

Physician Services Spending Was Climbing, and Payers Were Searching for Workable Responses

Physician and clinical services accounted for roughly 22 percent of all U.S. health care spending during the mid-2000s, making it the second-largest category behind hospital care. Year-over-year increases in physician spending consistently ran in the 6 to 8 percent range, driven by a combination of higher fees, greater volume of services, shifts toward more expensive specialty care, and the growing use of ancillary services like imaging and lab tests performed in physician offices. Research from the Center for Studying Health System Change (HSC) and other organizations examined the strategies available to purchasers, payers, and policy makers attempting to slow this spending growth without undermining care quality or physician supply.

What Was Pushing Physician Costs Higher

Several forces were converging. First, fee increases played a role, though their contribution varied by payer. Medicare physician fees were constrained by the Sustainable Growth Rate (SGR) formula, which Congress repeatedly overrode to prevent scheduled cuts -- effectively freezing or modestly increasing Medicare physician payments year to year. Private insurer fees, however, grew faster, and the gap between private and public payment rates widened during this period. Specialists in high-demand fields were able to negotiate particularly favorable private-payer rates.

Second, the volume and intensity of physician services increased steadily. HSC's Health Tracking Physician Survey and other data sources documented a pattern of physicians ordering more tests, performing more procedures, and referring patients for more imaging studies. Some of this reflected genuine medical need -- an aging population with more chronic conditions required more physician attention. But some reflected economic incentives. Physicians who owned imaging equipment or lab facilities had a financial stake in ordering those services, and research consistently showed that physician self-referral to owned ancillary services generated higher utilization rates compared with referrals to independent facilities.

Third, the specialty mix of physician care was shifting. Spending on specialty services grew faster than spending on primary care, reflecting both higher per-visit fees for specialists and an increase in the proportion of care delivered by specialists rather than generalists. This shift had downstream effects: specialty-heavy care patterns tended to generate more procedures, more imaging, and more hospital admissions than primary-care-oriented models.

Payment Reform as a Cost Strategy

The dominant payment model for physician services -- fee-for-service -- was widely recognized as part of the problem. It rewarded doing more rather than doing what was appropriate or effective. Each additional test, visit, or procedure generated additional revenue, creating an inherent incentive to increase volume. HSC research on provider payment incentives and delivery system reform explored alternatives that might realign financial incentives with better outcomes.

Pay-for-performance (P4P) programs, which tied a portion of physician reimbursement to meeting quality benchmarks, were gaining traction among both public and private payers during this period. The concept was appealing: reward doctors for delivering measurably better care, and the resulting quality improvements might also reduce costly complications and unnecessary services. In practice, however, early P4P programs faced significant limitations. Bonus amounts were generally too small to change physician behavior. Quality measures were limited and often focused on process (did the doctor order the right test?) rather than outcomes (did the patient actually get better?). And the administrative burden of tracking and reporting performance metrics added costs to practices that were already under financial strain.

Bundled payment approaches, which provided a single payment covering all services related to a defined episode of care (such as a hip replacement from surgery through rehabilitation), were discussed as another potential strategy. By putting physicians and hospitals at shared financial risk for the total cost of an episode, bundled payments created incentives to eliminate waste and avoid complications. But designing workable bundles required resolving difficult questions about which providers were responsible for which costs, how to adjust for sicker patients, and how to handle complications that arose from factors outside a physician's control.

The Primary Care Foundation

A growing body of research during this period pointed to the relationship between a strong primary care infrastructure and lower overall health spending. Countries and regions with higher ratios of primary care physicians to specialists tended to have lower per-capita health spending and equivalent or better health outcomes. Within the United States, geographic areas with more primary care physicians had lower Medicare spending per beneficiary.

This evidence supported a strategy of investing more in primary care as a way to manage overall physician costs. Primary care physicians could serve as coordinators who reduced duplicative testing, prevented avoidable specialist referrals, and managed chronic conditions in ways that avoided expensive emergency and hospital care. The patient-centered medical home model, which HSC researchers examined in related work, offered a framework for reorganizing primary care around team-based care, expanded access, care coordination, and quality measurement.

But this strategy bumped against a practical problem: primary care was struggling to attract new physicians. Medical school graduates, facing heavy student debt, were disproportionately choosing specialty careers that offered significantly higher earning potential. Reversing that trend required addressing the payment gap between primary care and specialty medicine -- which itself added costs, at least in the near term.

Network Strategies and Performance Measurement

Health plans pursued their own strategies for managing physician costs. High-performance or tiered networks, which HSC studied in earlier research, sorted physicians into cost and quality categories and steered patients toward those deemed more efficient, sometimes through lower copayments. The goal was to shift patient volume toward physicians who delivered equivalent care at lower cost. But these programs faced physician pushback over methodology -- how quality and efficiency were measured, whether the data were accurate, and whether plans were simply using "quality" as a label for "cheap."

Price transparency initiatives were another area of activity. The theory was that giving patients information about what different physicians charged for comparable services would introduce competitive pressure on prices. In practice, most patients had limited interest in or ability to comparison-shop for physician services, especially when facing acute health problems. And the complexity of physician pricing -- with different rates for different insurers, separate professional and facility fees, and opaque billing codes -- made meaningful comparison difficult even for motivated consumers.

Consumer Cost Sharing as a Demand-Side Tool

Employers and insurers increasingly relied on higher patient cost sharing to dampen physician service utilization. Higher deductibles, larger copayments for specialist visits, and the growth of consumer-directed health plans with health savings accounts all worked in this direction. Research showed that increased cost sharing did reduce utilization, but it was a blunt instrument. Patients often cut back on necessary care along with unnecessary care, and the burden fell disproportionately on sicker and lower-income individuals who needed physician services most.

Some plans experimented with value-based insurance design, which set cost sharing based on the clinical value of a service rather than its cost. Under this approach, a patient might pay nothing for a high-value preventive visit or a proven medication for a chronic condition, while paying more for a low-value service. The concept was promising but technically complex to implement and limited in its reach during the period under study.

No Single Solution

The research consensus from HSC and related organizations during this period was that no single strategy would be sufficient to address rising physician costs. Payment reform, primary care investment, performance measurement, network design, and demand-side tools each had potential but also carried significant limitations and unintended consequences. The most promising path appeared to lie in combining multiple approaches -- restructuring payment incentives while simultaneously building the primary care infrastructure, measuring and rewarding performance improvement, and giving patients both the information and the financial motivation to seek high-value care.

Underlying all of these strategies was a tension that proved difficult to resolve: the need to control physician spending growth while maintaining an adequate supply of physicians and preserving the doctor-patient relationship. Strategies that squeezed physician income too aggressively risked driving doctors out of practice or into specialties and geographic areas where cost pressures were less intense, potentially worsening the access problems that were already mounting for many Americans.

Sources and Further Reading

CMS -- National Health Expenditure Data -- Official data on U.S. health spending trends, including physician services.

Kaiser Family Foundation -- Health Costs -- Analysis of health care costs and spending.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and programs.

Commonwealth Fund -- Research on health care costs and system performance.