American Journal of Law & Medicine

Medicaid physician participation: patients, poverty, and physician self-interest.(Conflicts of Interest in Health Care)

"They might as well say this is Communist Russia."(1) -- Dr. James Kennedy, Franklin, Tennessee.

Medicaid has failed in its mission to care for the poor because doctors refuse to participate in the program. New ways are needed to entice physicians to treat Medicaid patients. TennCare, Tennessee's Medicaid managed care demonstration project, shows that managed care plans can induce physicians to treat the poor by creating substantial collective purchasing power and by conditioning access to middle class patients on treatment of the poor, thus appealing to physicians' financial self-interest. TennCare shows a new and promising approach, no matter how vociferously physicians complain about it.


TennCare, Tennessee's Medicaid experiment, seeks to double Medicaid coverage in Tennessee--from approximately 750,000 people to 1.5 million. TennCare removes limits on Medicaid services, expands the medical services offered, and emphasizes low cost, cost-effective primary care. Perhaps most importantly, TennCare promises to mainstream health care for the poor by providing preventive and primary care in private physicians' offices, moving the site of care away from expensive emergency rooms and hospitals. TennCare sounds like an ideal solution.

But there is a rub: physicians adamantly oppose TennCare. They threatened to boycott the program, and in the initial months of the experiment, about one-third of Tennessee physicians refused to participate.(2) The organized medical community in Tennessee is fighting TennCare in the courts, the state house, and the media.(3) Tennessee physicians damn the program as coercive, as a threat to middle class patients, and as an attempt to force physicians to finance care for the poor.(4)

Physician complaints about TennCare are a refrain in an oft-repeated chorus decrying attempts to provide mainstream health care to the poor as threats to physician autonomy and inappropriate government control over the practice of medicine. Organized physician groups opposed Medicaid and Medicare, reasoning that government funding for physician fees translates directly into government control, coercion, and interference with their practice of medicine.(5) Since the enactment of these programs, physicians have opposed limits on Medicare reimbursement, labeling them coercive.(6) Most recently physician groups opposed national health reform efforts, using the same rhetorical devices, arguing that government was interfering with the physician-patient relationship.(7)

These physician complaints, expressed in terms of the physician's ability to practice good medicine, ignore America's long tradition of dual-track medical care: one track for those with money and another for those without.(8) Medicaid promised to end this dual class delivery system by providing poor people with health insurance they could use to purchase private medical care.(9) However, this promise has never been fulfilled, and the dual system continues.(10) Privately insured patients receive primary care in private physicians' offices. Medicaid enrollees and uninsured people generally receive services in underfunded and understaffed hospital emergency rooms and outpatient clinics where overcrowding effectively rations care.(11)

Medicaid has failed to end dual-track medical care for the poor because it has failed to attract physicians to the program. Twenty-five percent of our nation's physicians simply refuse to treat Medicaid patients.(12) Perhaps more importantly, of those physicians who do treat Medicaid patients, two-thirds limit the number of Medicaid patients they treat.(13)

Nearly all doctors share the same rationale for avoiding Medicaid patients: low Medicaid reimbursement.(14) Put simply, doctors avoid Medicaid patients because they are paid less to treat them. To make matters worse, most doctors can afford to avoid Medicaid patients who comprise only a marginal source of income for most physicians.(15)

But if Medicaid is ever to end the separate and unequal system of medical care it must attract private physicians into the program. Part 11 of this Article outlines briefly the history of Medicaid physician reimbursement and physician participation, and the costs, both financial and human, that result when physicians refuse to participate in Medicaid. This history, read in light of empirical studies, shows that physicians respond to the lure of higher fees. Thus, many have urged Congress and the states to raise Medicaid fees to attract physicians to the program.(16)

Part III explains why higher fees are unlikely to remedy Medicaid's long-standing physician participation problem. Prompted by concerns about low Medicaid reimbursement rates, Congress enacted a statutory amendment in 1989 requiring that Medicaid physicians' fees be "sufficient to enlist enough providers so that care and services are available ... at least to the extent that such care and services are available to the general population in the geographic area."(17) However, state concerns about the increasing cost of the Medicaid program continue to undermine statutory and regulatory efforts to raise Medicaid rates in order to attract more physicians to the program.

Part IV describes TennCare, a radically different approach to encouraging private physician participation in Medicaid. By prescribing nearly universal coverage, TennCare attempts to create collective economic leverage. TennCare employs group purchasing power, in particular economic tie-ins between the middle-class, both privately insured and uninsured, and Medicaid eligible poor, to induce physicians to serve poor Tennesseans.

But TennCare, a potentially hopeful response to the Medicaid physician participation problem has outraged the Tennessee Medical Association (TMA). Part V tells of the debate and legal battle between Tennessee's organized physicians and the state over TennCare. Reminiscent of the original debates over Medicaid, Tennessee's physicians have responded in horror to TennCare decrying it as "coereive," as "blackmail," as a threat to middle-class patients, and worse still, as an illegitimate demand that physicians finance health care for the poor.(18) In fact, TennCare's attractive economic incentives work to "encourage" physicians to treat Medicaid patients.

Part VI concludes that policy makers should reject raising physician fees (the historic approach) to induce physicians into Medicaid. Instead, Medicaid policy should focus on facilitating economic tie-ins among Medicaid patients and private patients. Such broad economic incentives would, in one sense, "force" doctors to treat Medicaid patients. The economic incentives would be too great for most physicians to reject. This form of "coercion," however, is not a threat to patient care or physicians' medical judgments. We need to understand that when organized medicine cries "coercion" what it really fears is a loss of autonomy--to pick and choose among patients.


The United States has a long tradition of dual-track medical care. From colonial times through the nineteenth century, patients with money received care in their own homes from private physicians and family members.(19) The poor, in contrast, entered underfunded and often dangerous hospitals, which provided a kind of "substitute household."(20) Some cities developed dispensaries, sometimes described as "medical soup kitchens," staffed through the charitable work of physicians.(21)

Historically, charity care was an integral part of most physicians' practices. Until 1929, patients paid doctors completely out-of-pocket and many patients could thus afford only modest fees.(22) Sometimes physicians engaged in cost shifting by setting lower fees for the poor.(23) Others did not charge at all, and often physicians could not collect what they were owed.(24) In other cases, physicians simply refused to treat those who could not pay.(25)

Charity care and cross-subsidization through sliding-scale fees were possible when medical care costs were relatively low. Doctoring prior to World War II generally involved the labor and advice of the practitioner: tools were carried in the familiar "little black bag" and medical training was minimal.(26) In the second half of the twentieth century changes in technology, combined with more rigorous and longer medical education, resulted in more expensive medical care. Medicine developed an array of powerful, expensive tools and equipment, more effective medical procedures, diagnostic tests, and pharmaceutical products. The cost of medical care came to include not only this new technology, but also the doctor's investment in a more lengthy medical education.(27)

As medicine grew in mid-century, a system of private, employment-based, voluntary health insurance developed that paid physicians and hospitals through third-party payers, such as Blue Cross and Blue Shield and commercial health insurers.(28) This private insurance not only paid for the costs attributable to the physician's expensive investment in education, but also for the expensive diagnostic procedures, drugs, and equipment that became a routine part of medical practice.(29)

As medical practice evolved so did America's long-standing, dual-track medical delivery system. Privately insured patients received primary care from office-based physicians and inpatient hospital care in private, technologically modern hospitals.(30) Meanwhile, the poor received outpatient care in overcrowded hospital emergency rooms and publicly funded clinics, and obtained hospital care in poorly financed and equally poorly equipped public hospitals.(31) Rather than being treated by private physicians, most of the poor were treated by interns and residents who rotated through these institutions as part of their medical training.(32)

In 1966, the federal government enacted the Medicare and Medicaid statutes which were designed to finance medical care for the aged and the very poor.(33) Rather than providing direct funds to improve and expand public clinics and hospitals, Medicaid and Medicare provided the poor and elderly with a source of payment for private medical care. The programs promised that the publicly insured poor would have freedom to choose providers.(34) In theory, Medicaid and Medicare together would end dual-track medicine by giving poor people access to private practitioners and private hospitals.(35) Moreover, the infusion of new Medicaid and Medicare dollars would enable public hospitals to improve the care provided the poor and to compete for privately insured patients.(36)

Organized physicians, who might have been expected to benefit from these new statutes, instead opposed Medicaid and Medicare, as they had opposed earlier efforts to provide government funding for physician services for the poor.(37) Physician groups reasoned that government funding for physicians constituted government control, coercion, and interference with the practice of medicine.(38) Physicians also feared government control over physician fees might limit their income.(39) Further, they argued, physicians were meeting the needs of the poor through training programs and charity care. According to physicians, the dual-track medical delivery system was adequate.(40)

Fearful that physicians would boycott and undermine the new programs, Congress adopted a Medicare reimbursement system intended to quell physicians' fears and encourage physician participation.(41) Congress required Medicare to pay physicians at private insurance rates.(42) Although the original Medicaid statute was silent on the method of payment for Medicaid physician services, the Department of Health, Education and Welfare (HEW) quickly adopted Medicaid regulations requiring that physicians be paid their "usual and customary" fees.(43)

The competitive rates had the desired effect: physicians who had sought to defeat Medicaid quickly signed up to participate. Offered rates comparable to those paid by private insurers, physicians had a strong financial incentive to serve the poor with Medicaid coverage.(44) But the combination of competitive fees and consumer demands produced spectacular inflation in Medicaid physician fees and throughout the Medicaid program.(45) Total Medicaid program costs nearly doubled between 1968 and 1971, growing from $3.7 billion to $6.8 billion.(46) Total payments to physicians increased more than fourfold between 1965 and 1969, increasing from $121.6 million to $523.3 million.(47) At the same time, the press began running sensational stories about physicians making huge sums from both Medicaid and Medicare.(48) Regrettably, but not surprisingly, some doctors abused the new system by milking both patients and taxpayers.(49)

Increased costs and abuses led to a series of statutory amendments in 1967, 1969, and 1972, all aimed at slowing the growth in Medicaid and curbing real and perceived abuses.(50) Following suit, HEW changed its regulations to allow states to lower reimbursement rates to physicians and other providers.(51) As Medicaid rates fell, physicians quickly decided that treating Medicaid patients was not in their financial interest.(52) By 1975, as two authors noted, "in some areas of the nation, an orthopedist or periodontist willing to accept Medicaid patients was as rare as a tropical bird in Alaska."(53)

Throughout the 1980s, Medicaid rates lagged behind private insurance and Medicare rates,(54) and Medicaid participating physicians became increasingly harder to find.(55) By 1984, the average Medicaid physician payment was less than two-thirds of the Medicare payment level; in some states, average Medicaid payments were less than one fourth those of Medicare.(56)

Thus, it is not surprising that physicians cite low reimbursement rates as the primary reason for their refusal to treat Medicaid patients or for restricting the number of Medicaid patients they treat.(57) Doctors avoid Medicaid patients because they are less profitable to treat.(58) Empirical studies confirm that doctors avoid treating Medicaid patients when Medicaid rates are lower than Medicare and private insurance rates.(59) Studies also confirm that raising Medicaid fees to a level closer to other payers' rates entices more physicians to treat Medicaid patients and encourages participating physicians to expand their Medicaid caseloads.(60) Doctors can afford to avoid Medicaid patients and limit the number of Medicaid patients they treat because for most physicians Medicaid patients represent only a marginal source of income.(61)

Furthermore, low Medicaid rates discourage young doctors from setting up practices in areas with large concentrations of poor people.(62) Inner cities and rural areas have historically suffered from a shortage of primary care physicians.(63) In the nearly thirty years since Medicaid's enactment, the number of doctors in poor inner city and rural areas has dwindled.(64) The few doctors who remain struggle to provide care to a clientele composed primarily of Medicaid and uninsured patients.(65)

As a result, Medicaid has not ended America's two-tiered health care system. Rather, low Medicaid physician reimbursement forces Medicaid enrollees to turn to public hospitals and public clinics, hospital emergency rooms, and outpatient departments for medical care.(66) This phenomenon greatly increases the cost of the Medicaid program because providing primary care in hospital outpatient facilities and emergency rooms is more expensive than providing the same care in a physician's office.(67) The problem is exacerbated by overcrowding and long waits at public facilities which cause patients to delay seeking treatment until their conditions become so serious that they require even more expensive treatment and more frequent hospitalization.(68)

Another negative consequence of relatively low Medicaid payment is that it undermines the ability of providers of last resort to compete with the private sector. Medicaid reimbursement is simply not generous enough to enable most public hospitals and clinics to improve services to the poor or compete with private sector providers.(69) As a result, many public hospitals have privatized, and closed their doors to the poor.(70) Those that remain struggle with inadequate funding, inadequate personnel, inadequate physical plants and equipment, and inadequate political support.(71) Not surprisingly, the care they provide is often inadequate as well.(72)

It is apparent that to attract physicians into the Medicaid program, Medicaid physician payments must be competitive with private physician payments. Increased reimbursement levels would not only attract more private physicians to the program, but also would increase the number of Medicaid patients they treat.(73) In 1989, Congress codified this hypothesis to increase physician participation in Medicaid.


In 1989, Congress amended Section 1396a(30)(A) of the Medicaid Act to require that states:

provide such methods and procedures relating to ... the payment for care and

services ... as may be necessary ... to assure that payments ... are sufficient

to enlist enough providers so that care and services are available under the

plan at least to the extent that such care and services are available to the general

population in the geographic area. …

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