Who pays physicians? This seems like a simple question, and in every other industry, it's the customer. However, for physicians, the patient (in most cases) purchases the service, but a third party usually pays the bill.

During the 1960s, the federal government passed legislation aimed at attracting the physicians and hospitals needed to provide the highest-level healthcare to the general populace. This legislation ushered in Medicare and Medicaid. Under this government program, physicians received payment for any reasonable and necessary costs associated with the care of a patient. They were reimbursed for all direct costs, including capital acquisitions of specialized medical equipment.

Fees for nongovernment patient care kept pace with government reimbursement. An effort to halt rising healthcare costs began in 1973, when the government enacted a law to provide for start-up grants and loans for the development of health maintenance organizations (HMOs). The Medicare payment methodology became a target for reduction. Payments were reduced in an overhaul in 1988, and physician services were limited to the current relative value fee schedule in 1992. Reimbursement per relative value has been reduced, or held flat, in the recent past. This began to control overall spending; however, there were many exceptions, and often the reductions came at the expense of one specialty over another.

For privately insured patients, increasing hospital and physician fees resulted in quickly inflated health insurance premiums. (From 1985 to 2010, the average health insurance went from $95 per month for family coverage to $1148 per month, according to Key Information on Health Care Costs and Their Impact, published by the Henry J. Kaiser Family Foundation). This in turn caused employer pushback, which spurred the increasing acceptance of HMOs and preferred provider organizations (PPOs) as a method of controlling costs.

Where are we today? On the basis of the National Health Expenditures Report published in 2014 by the Centers for Medicare & Medicaid Services (CMS), Office of the Actuary, National Health Statistics Group, we find the following:

Medicaid

On average, this comprises 17% of overall physicians' revenue. This is a state program, with 42% funded by the state and 58% on average funded by the federal government. In general, Medicaid payments are significantly lower than any other reimbursement system, and significantly less than the cost of providing the service.

In the current economy, many states are financially challenged and are not paying their Medicaid claims in a timely manner, even though more than 50% of the money for these claim payments has come from the federal government. The payment of Medicaid claims has become the largest expense in many states' budget, and this is scheduled to increase even more. It is a struggle that each physician must resolve: whether to participate in Medicaid or to exclude their practice from taking Medicaid patients.

One consideration in this decision is medical specialty. Many Medicaid patients are pregnant women and children, and in today's economy, it may not be reasonable for obstetricians to exclude these patients, who may account for many of their potential deliveries. In contrast, some of the more expensive, labor-intensive specialties, such as spine surgery or cardiovascular surgery, may decide not to participate in Medicaid because a higher percentage of their patients would be covered by Medicare rather than Medicaid.

The decision to participate in Medicaid will become even more significant now that the Affordable Care Act (ACA) is fully implemented. For the physicians who participate in this new program, there has been a significant increase in patients with Medicaid coverage (see below). CMS estimates that an additional 15.7 million persons will be enrolled by 2023. Low-margin specialties, such as primary care, may not be able to offset the very low reimbursements for Medicaid patients with revenue from procedures, which are typically more robustly reimbursed. This increase in Medicaid-covered patients will come just as many physicians of the baby-boomer generation will be retiring from practice, leaving the remaining physicians in a position to determine whether they will refuse to treat this growing group of patients.

Medicare

This typically comprises an average of 22% of physicians' income. Payment is based on the relative value scale. This scale is determined by a panel that assigns value ratings to the work a physician performs and provides these ratings to the government. The panel meets three times per year and adjusts the units for changes in the way in which physicians practice medicine. Once these units are provided to the government, Medicare assigns a dollar amount based on an annual increase or decrease adjusted for location, malpractice rates, and presumed office expenses.

This basic payment method can then be increased or decreased by specific "pay for performance" programs (discussed below). Several exceptions and additional payments can be earned by serving economically underprivileged or severely ill patients. Under the new tax legislation, however, the case rates as well as the additional payments are being significantly cut.

Private Insurance

Private insurers comprise approximately 34% of overall physicians' revenue and include various third-party payment plans, including PPOs, point of service, and HMOs. PPO plans have the highest number of enrollments. The principle behind these plans is that physicians would agree to discounted rates and would get access to more patients, who would only go to physicians "in network."

Currently, PPO plans do not provide the physician with a full list of the rates that they must agree to accept when they join these groups. They will often provide the physician with fees for 5-10 billing codes and then tell the doctors that the other fees paid will be similar. Physician/hospital organizations (PHOs) now pay at a percentage of Medicare rates, so the Medicare rates each year set the entire revenue stream for a physician who is paid principally by Medicare and private insurance companies. If the physician is out of network, a greater percentage of the fee is the patients' responsibility.

Discounted fees are also the principle behind how physicians get paid as independent physician groups that "take risk." These types of groups are often sponsored by a local hospital. They can be identified as independent practice associations or PHOs, or by other initials, but their key characteristic is that they take a flat fee per month for each enrolled patient. For that fee, this group has to provide all of the identified physician services. This is classified as "taking risk." This group then pays the physicians who provide the services at a discounted rate that is usually pegged to the current Medicare rate.

This payment source will also be in flux during the next few years. The RAND Corporation was the first to examine insurance transitions since the end of the second open enrollment period under the ACA. In this study, published in February 2015, 22.8 million Americans were newly enrolled in insurance plans from September 2013 to February 2015. Of these individuals with new coverage, 9.6 million enrolled in employer-sponsored health plans, 6.5 million enrolled in Medicaid, 4.1 million enrolled in individual marketplaces, 1.2 million enrolled in nonmarketplace individual plans, and 1.5 million were insured by other sources.

Under this new law, patients who don't qualify for Medicaid will receive tax credits if their income is below a certain level, to help them pay for their health insurance. In addition, companies will be assessed a penalty if they don't provide health insurance coverage to their employees. This could result in more people buying insurance and more employers offering insurance as a benefit. However, the penalties are not as costly as the insurance. Many predict that patients and employers will pay the penalty rather than obtain the insurance. This could result in a significant shift as physicians' patients become more and more covered by Medicaid and less and less covered by private insurance. In addition, as of March 2015, about 4.0 million working people did not meet the minimum standards for coverage; these people, referred to as being in the "coverage gap," will need to buy health insurance that may be out of their price range.

Self-pay

This comprises 12% of physician revenue on average. In this arrangement, the patient pays some reduced amount of the normal fee. These payments are hard to collect and often are subject to long payment terms. The exception is when the patient pays as part of an accident settlement or worker's compensation case or when the practice is on a completely cash basis.

It should be noted that these statistics don't include the various new payment models that have been active in the past year, such as ACOs.

Some physicians have cash-only or "concierge" practices, in which self-payment by patients forms 100% of the practice receipts. Many physicians have determined that the insurer payments discussed above are not worth the effort. Physicians feel that if they provide expanded quality services, a certain number of patients will agree to pay their bill in full and seek reimbursement from their insurance coverage on their own. These physicians have dropped participation in all insurance plans, including Medicare and Medicaid. They charge a fee for their services and their ancillary testing services; the fee is reasonable and is based on their business model. The patient pays all charges at the time of service and takes the paid bill home to send into their insurance company for reimbursement. If a patient is referred to another provider or admitted to the hospital, the insurance is billed on the basis of the participation of the specialty physician or hospital.

A growing number of physicians also use a hybrid method of payment, having some cash-only patients and some insured patients.

As the demand for physician services increases—owing to increasing numbers of patients covered by insurance plans and individuals older than 65 years—it will be increasingly difficult to find a physician with open appointments. Economic theory tells us that when demand exceeds supply, prices rise until demand is reduced. This economic theory is the basis for the prediction that in the next few years, the number of cash-only practices will grow, although the number of such practices is still under 10%.

In addition, it is possible that many physicians will drop out of Medicaid and Medicare, and that the federal government could require participation at some level for physicians to be licensed. Some states already require participation in government programs to be licensed as a physician. Although other information shows that the majority of physicians are planning to continue to take Medicare, many are rethinking their participation.

Other Third-party Payers and Programs and Public Health Activity

This comprises about 11% of physician revenue and consists of worker's compensation payments, auto insurance settlements, legal liability settlements, and other healthcare expenditures not otherwise categorized. These payments are largely billed a full fee and negotiated with each payer on a case-by-case basis. In some states, however, workman's compensation payments are subject to legislative limits.

Overall, the predominant method for payment for physicians in this country is currently fee-for-service, in which physicians get paid on the basis of each service or procedure they perform. There has always been the debate in the industry that fee-for-service encourages higher healthcare costs, and consequently, several initiatives are under way to find alternative payment methods.