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Chapter 2 described the different modes of financing health care: out-of-pocket payments, individual health insurance, employment-based health insurance, and government financing. Each of these mechanisms attempted to solve the problem of unaffordable care for certain groups, but each “solution” in turn created new problems by stimulating rapid rises in health care costs. One of the factors contributing to this inflation was the payment of physicians and hospitals by insurance companies and government programs. Currently, new methods of payment are being tried to lower the growth rate in health care costs.

Dr. Mary Young has recently finished her family medicine residency and joined a small group practice, PrimaryCare. On her first day, she has the following experiences with health care financing: her first patient is insured by Blue Shield; PrimaryCare is paid a fee for the physical examination and for the electrocardiogram (ECG) performed. Dr. Young’s second patient requires the same services, for which PrimaryCare receives no payment but is forwarded $15 for each month that the patient is enrolled in the practice. In the afternoon, a hospital utilization review physician calls Dr. Young, explains the diagnosis-related group (DRG) payment system, and suggests that she send home a patient hospitalized with pneumonia. In the evening, she goes to the emergency department, where she has agreed to work two shifts per week for $100 per hour. She was also delighted to open her mail and find a small check rewarding her for providing high-quality care for her PrimaryCare patients.

During the course of a typical day, some physicians will be involved with four or five distinct types of payment. This chapter will describe the different ways in which physicians and hospitals are paid. Although payment has many facets, from the setting of prices to the processing of claims, this discussion will focus on one of its most basic elements: establishing the unit of payment. This basic principle must be grasped before one can understand the key concept of physician-borne risk.


Methods of payment can be placed along a continuum that extends from the least to the most aggregated unit. The methods range from the simplest (one fee for one service rendered) to the most complex (one payment for many types of services rendered), with many variations in between (Table 4-1).

Table 4-1Units of payment

Definitions of Methods of Payment

Fee-for-Service Payment

The unit of payment is the visit or procedure. The physician or hospital is paid a fee for each ...

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