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Phase out GP consultation fees for a better Medicare

In the fourth part of our series Health Rationing, Peter Sivey explains why it might be time to abandon Medicare’s fee-for-service model. Teachers aren’t paid a fee for each lesson they teach, nor are…

The current fee-for-service model makes it difficult to contain costs and boost the quality of care. Image from shutterstock.com

In the fourth part of our series Health Rationing, Peter Sivey explains why it might be time to abandon Medicare’s fee-for-service model.


Teachers aren’t paid a fee for each lesson they teach, nor are police officers paid for each arrest they make. Doctors, on the other hand, are paid for each patient they see. This funding model is the basis of Medicare, the main funder of out-of-hospital care across the country.

Medicare is largely a “fee-for-service” system. This has the benefits of simplicity and ease of administration: doctor sees patient, doctor collects fee. But the simplicity can also be a disadvantage for such a complex and multidimensional process as health care.

In 2010–11, Medicare Australia paid benefits of A$16.4 billion (up from A$10.9 billion in 2005-6), but taxation revenue from the Medicare Levy (including the Medicare Levy Surcharge) was only A$8.3 billion. So Medicare is a drain on government finances and there is increasing pressure to contain costs.

Fee-for-service pitfalls

The main issue with a fee-for-service system is defining what constitutes a “service”. For primary care, that usually means a level B consultation, where the GP sees the patient for up to 20 minutes. The GP receives A$36.30 from Medicare and can also charge the patient a co-payment.

This definition of a service automatically gives GPs incentives to see more patients and recommend follow-up appointments rather than provide long consultations to patients with multiple health conditions.

Anybody who’s been to an inner city 100% bulk-billing clinic will probably be familiar with what’s known as “six-minute medicine”. You barely sit down in the consulting room and tell the doctor what’s wrong before being ushered out, script or referral in hand. This phenomenon demonstrates the financial incentives of a fee-for-service system at its worst.

The dominance of fee-for-service medicine also inhibits team work in primary care, or task delegation, particularly between GPs and other health-care professionals such as nurses.

Practice nurses can play an important role in managing health conditions of the most complex and needy patients, such as those with diabetes or cancer. And employing more practice nurses can save expensive GPs from conducting routine vaccinations and cervical screening procedures.

But some GPs are reluctant to hire practice nurses, preferring to instead provide these services and receive the government rebates. As a result, Australia has just one practice nurse for every three GPs, compared with one nurse for every two GPs in the United Kingdom.

The fee-for-service system causes problems for both cost containment and quality of care – it’s certainly ripe for reform.

A better alternative?

The primary alternative to fee-for-service is capitation. This system involves paying doctors an annual fee for each patient they have enrolled in their practice. The payment is in return for the GP “looking after” that patient for the whole year.

So GPs do not receive more money for seeing their patients more often, and indeed will benefit from lower costs themselves if patient health improves and they require less care in the future.

Capitation has been the primary funding method for general practice in the United Kingdom for more than 100 years, and despite recent policy reforms to introduce performance payments, it remains the source of the majority of GPs' revenue.

More recent examples of capitation come from North America. First is the growth of managed care in the United States, where capitation has been widely used, with the primary motivation of constraining costs.

A second example is in Canada, and the province of Ontario in particular, where voluntary adoption of capitation by GPs has become increasingly popular over the past decade. Policymakers there see the main benefits of capitation as increased quality of care through team work and stable, controllable costs.

Sounds great so far? Well, there are some downsides. For capitation to work, patients have to be enrolled in only one practice - say goodbye to the convenience of visiting one doctor near your workplace and one near home.

Also, the annual payments need to be adjusted to meet the needs of enrolled populations (which means more capitation money for enrolling older, sicker patients).

The road to reform

While all health-care financing methods have disadvantages, to me the upsides of capitation outweigh the downsides. Having said that, a new payment system for doctors in Australia cannot be adopted overnight.

A voluntary scheme that gives GPs the option to enrol some patients and receive (initially small) capitation payments alongside their Medicare rebates, would be a good place to start. The fee-for-service system could be slowly phased out by freezing rebate levels so they become less valuable in real terms over time. Concurrently, capitation payments could be gradually increased to make them more attractive.

Capitation also has the advantage of working well alongside pay-for-performance schemes such as the Quality and Outcomes Framework in the UK. Indeed, the current Diabetes Care Project being run as a pilot scheme by the Australian Department of Health and Ageing, uses enrolment and capitation payments alongside performance pay to try and improve care for diabetes patients.

Perhaps the results of the trial will shed some light on the potential benefits of capitation payment for Australian GPs more widely. But we’ll have to wait – the project won’t begin its evaluation phase until early next year.

This is the fourth part of our series Health Rationing. Stay tuned for more articles in the lead up to the May budget or click on the links below:

Part one: Tough choices: how to rein in Australia’s rising health bill
Part two: Explainer: what is health rationing?
Part three: A conversation that promises savings worth dying for
Part five: Focus on prevention to control the growing health budget