Giving Doctors an Incentive

While partisan rancor over health care continues in the U.S., Australia is forging its own health care path. Its government, hoping to encourage doctors to treat diabetics outside the hospital, announced that doctors will be given a cash payment for every diabetic they treat, and an additional payment for patients whose health improves.  Prime Minister Kevin Rudd outlined the strain that diabetics place on Australia’s health care system: “In 2007-08, around 237,000 hospital admissions were related to complications from diabetes that could have been avoided through better management.  This is 32 per cent of all avoidable hospital admissions.” The pay-for-performance nature of this program is evident — but so too is the potential for abuse. How do you think it will play out? (HT: Chris McCracken) [%comments]


As a physician working in the USA, I know that Australia has deficient specialty care compared to USA without the access to newer equipment. For us to be comparing our health care to the rest of the world is a sign of our healthcare system becoming second rate although accessible to all. Obviously Australia is trying free market solutions to its healthcare problems, albeit too late.

Welcome to 2nd world America!


They are just changing where doctors are going to allocate resources. Obivously diabetics are untreated now because they aren't a smart use of time for doctors, maybe the incentive will change that, but that owuld have to be at the expense of another group's healthcare.

What they are really facing is a doctor shortage, and will this small increase in pay help bring more people into the profession? It is unlikely unless the cash payouts are substaintial.

Wonks Anonymous

It might help but this is way too narrow. What about people who are prediabetic or have high blood pressure and so on. Also it is virtually impossible for one doctor to take over the coordinated care of someone with a complex chronic illness.

Why not just pay multispecialty medical groups fixed annual fees to provide comprehensive health care to individuals? The annual payment could be adjusted to account for risk of disease.

That means that we are paying for what we really want and need, health, and not for treatments. Also the doctors's incentives are aligned with our own. They do best when they give us quality, inexpensive care.

I'm just full of ideas:


Have you read Drive? I suspect it depends on how "routine" it is to treat diabetes is.


@xdr - this is slightly unrelated to the original post, but I know several doctors in Canada who explain the difference in specialities and equipement as having more to do with smaller populations than with health care systems. If your countrie has a significantly smaller population than the United States, the it's hard to have enough people in a given geographic area needing a specific specialist, so doctors have to be generalists in order to have a large enough patient pool. I would be curious to know if Austrialian doctors have similar issues.

As far as the original post, I'm all for cash incentives to doctors that perform by keeping their patients healthy, but I'm concerned about the possible unintended consequences - will seriously ill diabetics be able to find a doctor who is not too busy treating those that are capable of staying out of the hospital, and will other, less profitable diseases, be able to get the same treatment as diabetics? I don't know the answer, but I'd be curious to see if others have suggestions.



The UK's NHS has been doing a version of this since 2004. See and

Some Health Actuary

@Wonks Anonymous

"Why not just pay multispecialty medical groups fixed annual fees to provide comprehensive health care to individuals? The annual payment could be adjusted to account for risk of disease."

I worked in the pricing department of one of the biggest insurers in Massachusetts , and have experience with what you are describing. Let me assure you that this has been tried (it was called "capitation payments") and failed because the doctors became incentivized to offer fewer services than needed.

One reason for high cost of medical care is overuse of specialized services and underuse of preventative services. A great way to fix that is paying for performance (something along the lines of what Australia is attempting to do), but it is extremely hard to come up with exact metrics to measure performance against, especially in a diverse, medical environment.


#3 -- It's a myth that "one doctor" cannot coordinate care of someone with a complex chronic illness. That is the role of an internist. 20-30 years ago, the smartest minds in medicine specialized in internal medicine for this very reason. Why not now? The problem is that sort of care is not in the least bit lucrative for one doctor to perform given current compensation models. Instead, what Americans get is the cardiologist (or hypertension specialist) managing blood pressure, the endocrinologist managing diabetes, etc. Less problems to deal with per visit = shorter visit = more patients per hour = happy, rich specialists, but Medicare/private insurance ends up paying for visits to the PCP, cardiologist and endocrinologist instead of just the PCP. As an ER physician, I can't keep track of the number of patients I've seen who present with problems relating to having uncoordinated care -- a good example is the patient whose gastroenterologist stops the patient's Plavix for a low-yield, high-paying endoscopy, causing a heart attack.

Several of the problems with America's health system would be solved if internists/PCP's were properly compensated for this sort of complex care. You can take the money away from the specialists to pay for it. This would have a bonus effect of decreasing the number of specialists. At my hospital, not one of the recent internal medicine graduates is sticking with primary care -- they are all doing a fellowship. A smart PCP can manage most cases of hypertension, diabetes, hyperlipidemia and various other chronic diseases, even when they are all in the same patient.


Midwest MD

I think physician incentives are an excellent way to improve the quality of health care in the US. Unfortunately, while incentives already do exist today, they are not necessarily in the direction of improving the health of patients. We have already read in the NY Times that doctors are rewarded when patients experience complications. ( Changes do need to be made that incentivize doctors to bring their patients to a heathy state, preferably in a cost effective manner.

Another perverse source of incentives is self-referral. We are finding specialists such as neurologists or orthopedic surgeons investing in high cost imaging equipment. Studies have shown that physician ownership of these facilities end up in more procedures that often do not benefit the patient. Likewise, urologists have invested in radiation therapy equipment and are now referring patients for treatment that may not be necessary or more costly than other alternatives.

The challenge to introducing new and appropriate incentives will be determining when patients are indeed better off. Measuring health states is very difficult and criteria for the diagnosis of disease can be a moving target. Based on the description of the Australian incentives in this article, I expect we may see an increase in the incidence of diabetes.



I feel like I am living in an alternate universe. Rudd announces a policy that is just a continuation of a Howard government one and gets away with saying “for the first time” and none of you call him on it.

The previous government launched the National Integrated Diabetes Program in 2002 to run for 4 years. In 2007 they announced 103 million to run programs over the following 4 years and then they lost government. So how will it go. Reasonably well it seems. The following is a description of one of the programs that had been run from an evaluation of that program.

"It operates under the auspices of an Memorandum of Understanding(MOU) between these key providers and is supported by a program steering committee. The program aims to support GPs to provide a comprehensive service in accordance with Guidelines for Diabetes Management. This involves GP registration of consenting diabetics, periodic recall and review, referral to medical and allied health services and exercise physiology, transfer of patient data to the Division and feedback to the GPs of summary data and recall reminders. The program is estimated to reach around 94 per cent of all diabetics in the area. The program is managed by a Diabetes Educator, located in the Division, who provides diabetes education and is responsible for the coordination, monitoring, evaluation and development of the program. She is supported in her role by a Program Steering Committee and works closely with GPs to support them in their role providing clinical care and referral in accordance with Guidelines for Diabetes Management. Other providers include the endocrinologist, hospital, practice nurses, dieticians, podiatrists and physiotherapists as well as exercise physiology which is provided through a diabetes exercise program at the gym. In the GP practice, practice staff have a key role in data entry, recall, audit and transfer to
the Division of patient information. Practice nurses play an important role in providing patient self care education."

Don't know its fate in the first 3 years of the Rudd government. As standard with Rudd there is no detail available, other than more money. He even has the hide to mention podiatry and reducing hospital admissions. Hard not to conclude that his announcement relies on a compliant media, ill informed public and is merely a "Hollow Man" response to Abbott's promise of more beds.


Wonks Anonymous

Some Health Actuary:

Actually I work as a data monkey for one of the few large successful multispecialty medical groups in the country. We have done well here by eliminating the middleman - Half the firm is the doctors and half is the insurance company. Decisions are made jointly.

Most of the other HMOs that I have seen are simply a contract arrangement developed by and for health insurers. "Select panels" of doctors who will accept the payments offered by insurers are paid low capitation rates usually not adjusted for risk. Consultation over rates is minimal.

Some genius in our insurance arm tried that one in the 1990's. It did not work and we lost money and reputation on it for the reasons that you describe.

Naturally these doctors seek other patients and are drawn to patients with fee for service insurance. Naturally the decline in quality is further promoted by the pressure on capitation rates from insurers.

I would hardly say that my own group is perfect it is, however, one of the best in the business.



Hi all, I'm an Aussie who loves this blog!. I am extremely sceptical of this move to be honest. I live in a state called Queensland and we have had huge problems with doctors in hospitals, particularly those from overseas. Possibly the worst one, Jayant Patel, is currently on trial. The systematic problem triggered an Inquest called the Morris Inquiry and one of the problems that they found was that hospital funding was depenant on the number of surgeries the hospitals performed. As such doctors were pressured into performing more surgeries, and in Patel's case completely unnecessary and harmful ones. The idea of the pay for performance was supposed to address the fact that we have HUGE public hospital waiting lists, but it just created more problems.


It could well be that in Australia we have deficient specialty care compared to the US, however our national expenditure on healthcare is much lower and our life expectancy and other indicators are better. It is insulting and wrong to characterise our health system as second world. There are certainly issues of access in very remote areas as there would be in Canada, but much of the problem in the cities is with the coordination of care as in #8.
As we all have access to free care in public hospitals, and most emergency departments are located in these public hospitals, elderly people with complex problems including diabetes, are often admitted when it may not be the most appropriate way of dealing with their problems. My mother-in-law would call the ambulance when not feeling well, hoping to be admitted to the local hospital for a rest. Since she has been settled in low level geriatric care she does not feel this need, but it was a long process involving family and specialists before she was confident that this was the best option for her welfare.
I can assure you that my friends and I constantly take our elderly parents to specialist appointments, and if Mr Rudd can come up with a way of streamlining their care we would be more than grateful, though I have to say many of the very elderly enjoy these visits which fill their day and are either free or low in cost.



Is this much different than the Bridges To Excellence Diabetes programs? There's a lot of readily available research on the program, comparing the costs of rewarding doctors who do a better job clinically with diabetic patients.


I find it unusual in the healthcare debate that so little ink has been spilled about doctors being part of the problem instead of part of the solution. As statistics have shown, doctor salaries have outpaced general salary growth by 700% over the past 30 years. A local business weekly just published a list of doctor's salaries at hospitals required to file such information; there were dozens making $1+ million per year and I'm guessing for every one we know about, there are hundreds we don't. A family member of mine, who is a physician in the Midwest, makes north of $500,000 for a fairly routine specialty (and gets 10 weeks of vacation, to boot).

I totally get that physicians should earn a premium, although I don't buy the excuse of having to fund their expensive educations (in which case the premium should simply be the cost of schooling, plus interest plus some lost income). Many doctors overtreat and specialize and cost the rest of us hundreds of billions. We could simply right the system by creating the right incentives/disincentives for physicians. Just because bad incentives caused Wall Streeters to bring down the economy doesn't mean that the same thing has to happen in healthcare.


Oliver Townshend

Second world? We have the second longest life span of any country (except Japan), and spend half of what the US does on Health? Measured at the Macro level, we're doing pretty well.

Francis Lamberti

Here's a novel idea ... why not pay the patient's themselves to improve the quality of their own self-care?
The metrics used to monitor this would be related to the levels of glycoslated hemoglobin in their blood (Hb1Ac) which is a time averaged measure of glucose control.
Normal Hb1Ac could be approached by diabetic patients by any combination of weight loss, excercise and closer monitoring of daily glucose levels with better insulin dosing.



I have wondered why small communities don't band together to borrow enough money to build a very nice home and clinic for their local community...then offer the doctor a decent base salary PLUS free use of the house (for as long as he stays).

The construction cost of the house could be paid off over 30 years.

The doctor--along with other staff and equipment that are needed for the largest needs of the community--could be acquired over time. Perhaps living quarters for quite a few people could be added.

Give the doctor, say, $60,000/ everything above expenses that he collects from insurance companies.

If the doctors stays for 20 years, the house is is, free and clear.

From this, the community could create a healthcare plan for all residents. Of course, in exchange for the reduced costs for healthcare, recipients might have to agree to limit punitive damages for any suit to, say, $2 million (which permits the malpractic insurance to be better calculated).

I'm thinking a lot of doctors would consider this a nice opportunity.

For extreme cases that are outside the abilities of the community clinic, hospitals would have to be used, but perhaps with some sort of barter or negotiation from the community.

I know if I lived in some rural vale with only a few other people, that would be one of the only ways to attracting health care that was affordable--give them a nice place to live, no property taxes, etc.



There is already program like this in Massachusetts. Visiting Nurses track patients' health by visiting and calling them regularly. That way they can treat them before they need to be hospitalized.

NPR did a story on this a year ago, I don't see why it hasn't caught on anywhere.

Chris McCracken


This is how many smaller communities have been trying to attract doctors. In fact, it's quite an old way of doing things. Unfortunately, I don't think it's a purely monetary issue.

Further, there exists a bigger problem in larger rural communities where there are doctors but simply not enough of them to service the population - especially in an ageing population such as the one here.


I can confirm that this is also done in our rural communities and can report it is one of the more effective initiatives our public health system has.

Unfortunately, while doctor shortages are often discussed here, the lack of nurses seems secondary - although I think even more important.

Thank you all for your comments. When I asked Freakonomics to post the question, I didn't expect it to be published. Nor did I expect the breadth of response. The answers have certainly given me something to ponder.