06/24/2012 11:25 EDT | Updated 08/24/2012 05:12 EDT

What Would Happen if We Froze Doctors' Pay?

The Ontario government has promised to reduce its $16-billion deficit substantially over the next few years, and tackling health-care cost growth has to be part of the solution. When the Minister of Health ended discussions with the Ontario Medical Association and imposed fee cuts and freezes for Ontario physicians, she signalled just where reducing Ontario's health-care costs needs to begin.

Premier Dalton McGuinty has asked other provinces to consider following Ontario's lead, and they are watching Ontario to see whether reducing health care costs in this way is politically possible. In response, the Canadian Medical Association has speculated that doctors may move to jurisdictions where physician earnings are on the rise, and that wait times in Ontario may increase as a result of the cuts.

While there has been considerable discussion of a cap on spending on physician remuneration, the government has not actually implemented a cap on the OHIP budget and is not looking to reduce the number of services provided. It has simply reduced, or in most cases, not increased the fees paid for those services. The $338-million of targeted cuts (which the province notes is likely to be reinvested in primary care in the next few years) is based on a reduction in fees and little change in the quantity of physician services supplied. The government targeted large cuts on a small number of medical specialists, with smaller changes to the fees charged by most doctors.

The health economics literature offers some insight into what we can expect from such a change. How does anyone respond to a decline in his or her wage? There are competing effects of a wage cut.

On the one hand, it has become less costly in terms of lost income to see one less patient. Reducing the number of hours worked results in a smaller hit on the doctor's income. However, the fixed costs for most doctors (rent, salaried employees, equipment) haven't changed, so the cost of not working has not dropped by as much as it might if all these costs didn't need to be paid. On the other hand, there is an income loss associated with a fee cut (or even a fee freeze when the cost of everything else rises) so doctors also have an incentive to work more hours, not fewer, in order to recover this income.

So overall, with a relatively small change in remuneration for most physicians, it seems unlikely that we will see a big decline in the number of hours worked by our family doctors.

There are some economic models that predict that when the price for each service a doctor performs falls, doctors might respond by increasing marginal treatments, such as follow-up visits or more tests, to make up this income. However, four factors make such a response unlikely to happen among primary care physicians.

First, one can safely assume that doctors don't really want to do this. Doctors have little interest (other than a monetary one) in having their patients go through care they don't really need. Second, there is no shortage of patients looking to see a family doctor and lots of important work for doctors to do without increasing the number of follow-up visits. Third, an increasing number of doctors are moving away from fee-for-service payment, where they are paid for each service provided, and toward group practices, where they are either on salary or receive a per-capita payment for each patient. In this case, there is little incentive for doctors to increase unnecessary treatments. Those with a per-patient funding arrangement may even have an incentive to take more patients into their roster if they can manage it, as more patients increase the dollars coming in, whereas more follow-up treatments do not.

Finally, should we expect to see doctors leave Ontario for another jurisdiction? Pay is certainly one factor that helps determine where physicians work, but it isn't the only one. Hospital privileges, professional networks and a number of non-work-related factors also contribute. It is costly to relocate, and small changes in relative pay make this unlikely. Larger changes may tip the balance, but Canada's physicians remain very well paid, and those in Ontario are not an exception.

Recent reviews of physician salaries across the OECD place Canada among the top. Depending on how physician incomes are measured (converting currencies so that a dollar basically buys the same amount of goods in each country or comparing doctors' salaries to the average wage earned in that country), Canada's physicians do fairly well.

When comparing incomes using purchasing power, they are paid less than their U.S. counterparts and slightly less than those in Britain or Germany but above most other OECD countries. When comparing incomes using the ratio of their salaries to the average in the population they are exceeded only the United States. Our specialists fare even better, although still behind their U.S. counterparts.

Finally, while Ontario may have been one of the first movers in Canada to try to contain physician costs (and deserves credit for taking concrete steps to do so), concern over health care spending is a national issue, and it is likely that other provinces will wish to follow Ontario's lead in substance, if not style.