The term “doctor” or “physician” refers to an individual who provides medical advice; logically in exchange for a reward. The way that doctors are paid for their services has stirred debates as to how altering the form of payment may enhance the efficiency and equity of medical services.

The different forms of doctors’ payments target the fundamental “principle-agent” problem within health economics. The problem arises as a physician acts both as a supplier and as a demander. This is because as the patient addresses the doctor for advice, the doctor will provide the advice (what to demand) and the supply. The problem though is based upon the lack of information that characterises the patient, as the knowledge of possible treatments is only possessed by the physician, thus is up to his/her judgement what he/she will provide.

This form of moral hazard1 indicates the efficiency and equity issues encountered within the medical profession and it appears that the only counteract is via altering the form of doctors’ payments.

The different ways of payment as suggested by Donaldson and Gerard (1993), are as follows:

* Fee-for-service, referring to remuneration according to the “amount of work carried out” (Donalson and Gerard, 1993).

* Salaries, the most common way of payment via fixed wages.

* Capitation, “where doctors receive an annual payment in advance for care for each individual who elects to join their list” (Donalson and Gerard, 1993).

* Special payments for good practice, allowances to GP’s and merit awards to hospital awards on top of their usual remuneration or via combining capitation and FFS.

* Private practice – Market forces; even though this is not an evident way of payment, market forces will reward those (doctors) who will meet demand (patients).

The fee-for-service type of remuneration offers a fee for providing services, and it is only logical to assume that a doctor will attempt to maximise welfare via maximising profit. This stresses the Supplier-induced demand (SID) issue, which refers to doctor behaviour that maximises payments via encouraging demand which would not exist given a fully informed patient. According to Donalson and Gerard (1993) FFS may contribute to higher rates of common surgical procedures but appear to have little effect on outcome, outcome obviously being the quality of service provided. Also, it is noted that as doctor-to-population rates increase (based on FFS remuneration) “…doctors may encourage their patients to use more services” (Donalson and Gerard, 1993). The neo-classical approach to the matter is that the increased supply of doctors will lead to increased demand not necessarily over-demand but maybe address missing-markets. Fees-for-service inhibit universal provision of health but it is ambiguous whether the quality of service provided is affected.

Providing salaries is the most common of doctors’ payments. Salaries refer to a fixed wage/hour rate offered to doctors providing information to patients on costs and reducing the phenomenon of consumer moral hazard2. But fixed wages provide no incentive to compete for patients (that is via improving service) and given wage assurance physicians might abandon specific locations restricting access to health services. Also a fixed wage could result in a lack of motivation for improvement, especially to doctors whose fixed reward is at its highest, again hindering efficiency.

The form of remuneration specified as special payments for good practice aims at improving efficiency via providing additional payments to physicians. Defining a good practice is complicated, but the means to this end introduce standards within the medical profession. Standards that “…improve outcome, and may result in a more efficient, if more costly, health service” (Donalson and Gerard, 1993). The debate here is whether the patient is aware of alternative methods of cure (referring to resilience to use drugs to cure common diseases) and is wiling to try them.

Capitation refers to a form of remuneration that provides doctors an annual payment in advance according to how many patients join their list. This procedure will provide the motivation to physicians to provide such a service that attracts patients to seek to join their list. According to (Donalson and Gerard, 1993) this might provoke doctors to prefer low-cost patients as the remuneration is the same but operational costs would be lower.

Another form of payment is that the burden of the visit to the doctor lies solely on the patient. This means that the patient has the choice on where to go, and the physician the incentive to provide the best possible service as to attract. This interaction of patient and physician could provide the most efficient resource allocation and technical efficiency in health care. But, market forces tend to bring about any markets as long as there is demand. Thus specializations could be demanded (plastic surgeons) that may not contribute to social welfare but sprang out only because there is demand for them.

According to Donalson and Gerard (1993), there is little evidence on the effect of different payment methods on doctors’ performance. What is apparent is that if doctors are remunerated according to an FFS basis then there is an increase in the services provided. This is supported by the Copenhagen study, which shows that according to the experiment where doctors in Copenhagen changed from a capitation to a FFS charging method, doctors’ services provided increased, but only over the short run. This implies that doctors have a target income which they will attempt to maintain thus it is implied that demand could be induced. There is though no change in patient contact, but as expected a substantial increase to those services which are paid (FFS services).

According to Donalson and Gerard (1993): “…salaried payments probably lead to less utilization relative to FFS” and “the effect of receiving a fixed per-capita payment in advance, such as HMOs in the USA, result in less hospital-intensive style of care.” What is though the point of promoting efficiency when the main providers of the service and those agents promoting allocation of resources will have no incentive to achieve it?

It is important to refer to the reforms as implemented for the UK’s NHS in 1991. Several reforms that mainly aimed to contain costs, promote equity; improve allocative efficiency, and lead to a budget-bewaring but universally accessed health system3. The reforms aimed to create an internal market for the NHS, where providers would compete to attract patients. The reforms claimed to have achieved improved efficiency but the real problem for health authorities is poor data.

As supported by another study (Maynard, 1991), it is one of the characteristics of the health care market, that of poor data. Also due to variations and ignorance it is often the case that costs are miscalculated leading to further uncertainty and allocative inefficiency.

What the studies above highlight is that reforms to bring market characteristics to the health care system can be accepted as actions of “good-will” but given the information distortions it is difficult to distinguish whether true improvement has been made. It remains debatable whether the way of a doctor’s payment affects its performance, as physicians work in the far corners of the earth (doctors without borders) without payment and in sophisticated private clinics and still provide the same service. According to the notion of the market, a doctor who would be paid more would treat a patient more preferentially.

Could it be the case that in countries where consumers with a high real purchasing power lead to higher investment in health thus improved health provision (via modern machinery and medicines)? It is evident that doctors react as normal individuals, aiming to maximize utility, but whether such behaviour will affect the outcomes of their service is yet to be proven.