Patients all over the country in recent years have been communicating with their doctors by means of a communications platform called MyChart. The system is connecting an estimated 15,000 doctors and their assistants to patients as part of 150 health systems. At the hospital level, it’s ubiquitous.

MyChart is easy to use. I’ve used it myself. You type in a question and in no time at all your doctor replies. If you have several doctors, they can all see your communications with any one of them, keeping everyone up to speed on what is going on.

So, imagine my surprise when I read in the New York Times that a lot of MyChart responses are not actually coming from a real doctor. Some are composed by an AI program called “Art.”

Although most (more than two-thirds) of Art’s messages are edited by doctors before they are sent, a good many are not. That matters because Art makes mistakes. Worrisomely, the unedited versions “pose a risk of severe harm about 7 percent of the time,”says the Times.

So, why are doctors relying on an AI program to do what you might expect them to be doing on their own? Because doctors generally don’t get paid for answering questions from their patients. That means they are often answering patient questions at night or on their lunch hour—giving rise to doctor “burnout” and the feeling that they are overworked and underpaid.

That raises an important question: How are doctors paid?

Fee-for-service payment

Doctors are the only professionals in our society who cannot repackage and reprice the services they offer to the market when technology and economic conditions change. Fifty years ago, the only way a lawyer could communicate with his clients was in-person, by a landline phone, or by U.S. mail. But then we got email. And Zoom. And cell phones. And same-day delivery.

All the other professions adapted. But not the medical profession. In fact, prior to the covid pandemic, doctors could only be paid for in-person, face-to-face visits. The only change in the 50 years leading up to covid has been adding to the number of tasks doctors are paid to do. At last count it was roughly 10,000.

Other professionals bill by time or by a fixed fee for a bundle of services. No lawyer, no accountant, no architect, and no engineer is going to offer clients a 10,000-line price list. You have to be a government bureaucrat to think of something like that.

The biggest problem with a fee schedule is not that the prices are likely to be all wrong, even though they surely are. The biggest problem is that inevitably important services are not on the list. For example, prior to covid, the phone was not on the list. Nor was email, or Zoom, or Skype. Remarkably, a doctor didn’t even get paid for answering a patient’s questions unless the patient was in the doctor’s office, face to face.

11 billion prices

Right now, there are 1,109,460 active physicians in the United States. Of the 10,000 tasks, there is not a uniform fee schedule for the country as whole. Each doctor may be paid a different fee for the same task, depending on location and other factors. Also, not every doctor is a candidate for every task. Even so, Medicare is setting as many as 11 billion prices on any given day.

Private insurers tend to pay the same way Medicare pays, typically covering all the same tasks and piggy-backing on Medicare’s fees by a percentage markup (say, 150%). Medicaid and other government programs tend to pay the same way. That means that on any given day, Medicare is effectively setting 11 billion prices for more than one million physicians and 333 million potential patients.

Is there any chance that Medicare is going to get these prices right? Unlikely. What happens when the prices are wrong? As any freshman economics textbook will tell you, when the price is too high, we will get surpluses—with the profession offering more than the market is willing to bear, and therefore with some personnel and equipment being idle. When the price is too low, we get shortages and rationing by waiting.

Perverse incentives

Suppose you were accused of a crime and your lawyer was paid by fee-for-service. Just to make up an example, suppose the lawyer was paid $50 an hour for jury selection and $200 an hour to prepare a final summation of your case to the jury. What would you expect to happen? You would get a brilliant summation that might elicit a “not guilty” verdict, if only you had not skimped and paid so little for jury selection.

That is why you want to pay a lawyer the same hourly rate regardless of the services rendered. That way, the lawyer has an incentive to allocate his hours so that he gets the same return (marginal probability of winning the case) across all uses of his time.

The same is true in medicine.

Patients at risk

George Halvorson, former CEO of Kaiser Permanente, is particularly good at explaining why doctors operating off of a fee schedule in traditional Medicare perform so poorly in comparison to doctors in Medicare Advantage, who are paid to keep patients healthy:

“In fee-for-service Medicare, 20 percent of diabetic patients will develop foot ulcers, and 20 percent of those ulcers turn into amputations. In contrast, even the less successful [MA] programs end up with half as many ulcers and less than a third of the amputations compared to fee for service. Some best-care settings get the amputation rate down to two percent.”

When an MA plan avoids an amputation, the plan makes money because it avoids a $100,000 cost. When the condition worsens for a patient of a fee-for-service Medicare doctor, the doctor makes money because he must do more billable things.

Halvorson also says we can reduce blindness in older diabetics by more than 60 percent by managing blood sugar levels. Yet among low-income patients in traditional fee-for-service Medicare, “we currently have less than 30 percent of those patients with controlled blood sugar and they have high levels of blindness.” Fee-for-service Medicare doctors “often make more money when they treat patients with blindness multiple times rather than prevent the blindness,” he says.

Clearly, our current method of paying doctors leaves a lot to be desired. Reforming that practice should be high on the list of anyone interested in reforming the health care system.