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OBJECTIVE: To determine the extent of variation in physicians' charges for health care encounters with unannounced standardized patients and factors associated with the variation. DESIGN: Cross-sectional study. SETTING: Family practices open to new patients within 1 hour's drive of Hamilton, Ont. PARTICIPANTS: A stratified random sample of 125 physicians who had responded to an earlier survey regarding preventive care were invited to participate. Of the 125, 44 (35.2%) declined to participate, and an additional 19 (15.2%) initially consented but later withdrew because they closed their practices to new patients. Sixty-two physicians thus participated in the study. INTERVENTION: Unannounced standardized patients posing as new patients to the practice visited study physicians' practices between September 1994 and August 1995, portraying 4 scenarios: 28-year-old woman, 52-year-old woman, 48-year-old man and 70-year-old man. OUTCOME MEASURES: Physician characteristics, encounter characteristics and charges made for services. RESULTS: The 62 physicians had 246 encounters with the standardized patients. Charges were made to the health insurance plan for services by 59 physicians for up to 4 encounters (215 encounters in all). Charges varied considerably both within and across patient scenarios. Time spent with the patient was an important factor predicting charges made (p < 0.01), although the effect of time spent on charges varied across scenarios (p < 0.01). Fee-for-service physicians charged more for their services than physicians who usually had alternative billing arrangements (p < 0.01). Female physicians charged more for their services than their male colleagues (p = 0.03). No relation was found between quality of preventive care and charges made (p = 0.15). CONCLUSIONS: Physician-related factors are better able to account for the variability in charges for their services than patient-related factors. Physicians seeing comparable patients may earn much more or less than their colleagues because of differences in the services they provide and the way they apply the fee schedule. Quality-assurance techniques are likely needed to reduce the variability in charges seen and increase value for money spent in health care.