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Alternative Methods of Payment of MDs and Hospitals:  Impact on Patterns of Practice   Return to Health Care Theme page

2. Nice to Know:

Some Figures:  In 2002, the Ontario government budget was $83.9 billion; it spent $39.8 B on health. The largest portion of this was for hospitals ($14.8 B, or 45% of the health budget); physician salaries cost $7 B (21.3% of the health budget).  Since the development of public funding for medical services in Canada, choosing the best way to fund physician services has been a central debating point.


Primary medical care in Canada has traditionally been funded via fee-for-service payments (FFS). The unit remunerated is the service (a physical exam, immunization, prescription, etc.) - rather like paying for each item you order in a restaurant.
FFS has been recommended on the argument that it ensures doctors work hard and provide high quality care: they are financially motivated to provide services. It also rewards good doctor-patient relations, so that patients will return.
However, FFS may encourage doctors to attempt to provide many services (especially if the service fees are set low) and to see large numbers of patients: a prescription may be written when not strictly necessary. There could also be a disincentive to preventing illness and physicians will tend not to waste time taking detailed histories, etc.

A common alternative is through a capitation system in which the physician is paid a salary to provide care to a defined group of patients under his or her care. The remuneration unit is the individual patient (or their caput, or head).
As some patients require more attention than others, capitation systems usually do not pay the same for every patient but take account of the patient's health needs, or else doctors might not accept elderly and sick patients into their practice.
In theory, a capitation system should encourage the doctor to keep patients healthy, so encourages prevention since the physician receives no additional income when patients are sick. A downside may be that the fixed payment may offer too little incentive to provide services and the doctor may tend to limit his or her hours of practice.

Blended capitation payment schemes are used in Family Health Networks, Family Health Teams and Family Health Organizations (link to these). These systems have a roster of registered patients and the main payment is via capitation: the physician receives a base payment for each enrolled patient; this payment is adjusted for age and sex. They get fee-for-service payments for treating non-enrolled patients, and also receive incentives and special payments for selected evidence-based health care services (diabetes care, smoking cessation counselling, etc).

A final alternative is a salaried position, in which the unit is time. This is common in hospital settings and in some primary care settings, such as Community Health Centres, where accountability can be ensured. In private practice, salaries may encourage low commitment to providing comprehensive services.

Average MD payment levels in each Canadian province


Health Service Organizations (HSOs).  In Ontario, the capitation system used to be represented mainly by HSOs, but these have been phased out.  These function on a pre-payment or capitation model, similar to the Health Maintenance Organizations in the USA. HSOs are generally primary care operations, run by the doctors, that have an enrolled, defined and voluntary population of patients who have contracted with the HSO to receive services. Payments to the HSO are structured to motivate them to try and keep the patient healthy, and to avoid hospital visits. There are about 30 of them in Ontario. HSOs are being phased out and turned into Family Health Networks.

Community Health Centres (CHCs).   The Ontario health care system also includes Community Health Centres. These are primary care facilities with a lay board of directors, and funded with a line budget system whereby the Ministry of Health approves each component of expenditure, including physician salaries. They commonly offer health promotion and other preventive services; the community input meets the community-orientation criterion of primary care.

You may also hear of DRGs: Diagnostic Related Groups. These are intended to simplify payments to hospitals by making a set payment for each patient according to their diagnosis, calculated on the basis of the average cost of treating that diagnosis.  This is intended to avoid the need for detailed and varied accounting for every case. It is the system commonly used in paying for your car maintenance: there is a fixed fee for servicing the front brakes, whether or not the nuts had rusted on and had therefore took the mechanic longer to dismantle.

Centres Locaux de Services Communautaires (CLSCs). Widespread in Quebec, these provide a range of medical, public health and social services. They have global budgets and a salaried staff.

Out-of-pocket co-payments for services . These are patient fees used to supplement the main salary or fee for service payments to physicians.

There are three main types:
1) a sum is paid by the patient before the insurance company steps in, called a deductible (as with house insurance, to discourage you from making trivial claims). Higher deductibles mean the patient pays a lower premium, but leaves them at higher risk in case of illness.
2) The insurer only pays part of the costs and the patient pays for the rest.
3) The patient makes direct out-of-pocket payments for certain services (such as prescription medications, hospital stays, alternative medicine, physiotherapy or home nursing) that are not covered by the insurance policy.
All three forms of co-payments imply unequal financial burdens for patients of different income levels, as they are charged equally for services, rather than proportionately to their income.

3. Additional Information:

Related topicsPhysician Stress;    the Meaning of "Physician"       Professions
            PPT slides on health care costs in Ontario
            There are various "Mythbusters" reports on physician payment methods:
               Medicare covers all necessary services;
               Most physicians prefer fee-for-service payments;
               Myth: doctors do it for the money

Updated August 7, 2015