Most doctors in the United States get paid through one of three basic models: a fee for each service they perform, a flat salary from a hospital or health system, or a set monthly payment for each patient they manage. The specifics vary widely depending on whether a doctor owns a private practice, works as a hospital employee, or participates in newer value-based arrangements. Here’s how each model works and what actually determines how much money ends up in a physician’s paycheck.
The Three Core Payment Models
Fee-for-service is the most traditional model. A practice receives a flat fee for every visit, test, and procedure performed. Revenue goes up when doctors see more patients and do more procedures. This is still how the majority of medical care in the U.S. is billed, particularly for specialist visits and surgical care.
Capitation works differently. A health plan pays the practice a fixed amount per patient per month to manage that patient’s care, regardless of how many times the patient comes in. If the patient needs very little care, the practice keeps the difference. If the patient needs expensive treatment, the practice absorbs that cost. The health plan decides which patients are attributed to which practice.
Bundled payments (also called episode-based payments) cover a defined stretch of care, like a knee replacement from pre-surgery through rehabilitation. A single payment covers the hospital stay, surgeon’s fees, and follow-up care. In some versions, the hospital receives the lump sum and pays the physicians out of it. In others, doctors still bill separately while the total spending is compared to a target at the end.
How a Doctor’s Visit Becomes a Dollar Amount
Under fee-for-service, every medical service has a billing code. After you see a doctor, the visit is translated into codes describing what was done (procedure codes) and why (diagnosis codes). A claim is then assembled with your demographics, insurance details, the provider’s identification number, and the dates and codes for every service rendered. That claim gets submitted electronically to your insurance company.
The insurer then runs it through a process called adjudication: checking whether you’re eligible, whether the service is covered under your plan, whether it was medically necessary, and how much to pay. This is where many claims hit snags. If something doesn’t match up, the claim may be denied or adjusted downward, and the practice has to appeal or write off the difference.
For Medicare specifically, payment amounts are calculated using a formula built on Relative Value Units (RVUs). Every procedure code is assigned three RVU components: one reflecting the physician’s work and skill, one for practice expenses like staff and equipment, and one for malpractice insurance costs. Those values are then adjusted for geographic cost differences (a cardiologist in Manhattan has higher overhead than one in rural Kansas) and multiplied by a national conversion factor. For 2025, that conversion factor is $32.35 per RVU, down about 3% from the year before. Private insurers often use Medicare’s RVU system as a baseline, then negotiate their own rates, which are typically higher.
Salaried Doctors vs. Practice Owners
Hospital-employed physicians receive a steady paycheck that isn’t directly tied to how many patients they see on a given day. The hospital’s administration sets the salary based on specialty, experience, and the institution’s overall revenue. Hospitals also have more leverage to negotiate better reimbursement rates from insurance companies, which means employed doctors can focus more on patient care and less on billing.
Doctors in private practice, by contrast, eat what they kill. Their income is whatever revenue the practice brings in minus overhead costs like staff salaries, rent, medical supplies, equipment, and malpractice insurance. Overhead typically runs between 25% and 50% or more of gross revenue, depending on the specialty and practice size. A practice bringing in $1.5 million with $500,000 in overhead has a 33% overhead rate. A less efficient one might hit 63%.
The financial difference can be significant. One widely cited comparison found that private practice physicians averaged about $301,000 annually, compared to $278,000 for those in inpatient hospitals and roughly $228,000 for doctors at nonprofit hospitals. But those numbers vary enormously by specialty, location, patient volume, and payer mix. A private practice surgeon in a wealthy suburb with mostly commercially insured patients will out-earn most salaried positions. A solo family doctor in a rural area with a heavy Medicaid population may struggle to clear $200,000 after overhead.
Bonuses and Performance Incentives
On top of base compensation, most physician contracts include some form of bonus structure. The criteria fall into a few common categories:
- Productivity: Measured by RVUs generated, number of patients seen per day, total charges billed, or panel size. This is the most straightforward incentive and the one that most directly rewards volume.
- Quality of care: Based on metrics like screening rates (mammograms, immunizations, cancer screenings), management of chronic conditions, and adherence to clinical guidelines.
- Patient satisfaction: Drawn from survey scores covering wait times, communication, accessibility, and overall experience.
- Cost efficiency: Tracks things like unnecessary emergency department visits, referral costs, and whether prescriptions stay within the insurer’s preferred drug list.
The weight given to each category varies by employer. Some contracts are almost entirely productivity-based, while health systems moving toward value-based care put more emphasis on quality and cost metrics.
How Value-Based Programs Shift the Math
The federal government has been pushing doctors away from pure fee-for-service through programs created under a 2015 law known as MACRA. Most Medicare physicians now participate in one of two tracks.
The first is the Merit-based Incentive Payment System (MIPS), which scores doctors on a 0 to 100 scale across four categories: quality, cost, improvement activities, and use of electronic health records. Depending on where a doctor lands relative to a national threshold, their Medicare payments get adjusted upward or downward. The maximum adjustment is 9% in either direction, which on a busy practice’s Medicare revenue can mean hundreds of thousands of dollars.
The second track involves Alternative Payment Models (APMs), like shared savings programs. Doctors in these arrangements still receive fee-for-service payments throughout the year, but at year’s end, the total cost of caring for their patient population is compared to a spending target. If costs came in below the target, the practice receives a lump-sum bonus. If costs exceeded it, the practice may owe money back. Doctors who participate meaningfully in APMs also receive a slightly higher annual payment update (0.75%) compared to those who don’t (0.25%).
Concierge and Direct Primary Care
A small but growing number of doctors have stepped outside the insurance system entirely. In concierge medicine, patients pay the practice directly, usually as a monthly or annual membership fee, in exchange for enhanced access: longer appointments, same-day availability, and direct communication with the doctor. Some concierge practices still bill insurance for individual services on top of the membership fee. Direct primary care practices typically do not bill insurance at all, covering all primary care services under the membership alone.
These models eliminate the overhead of insurance billing and claims processing, which can consume a significant share of a traditional practice’s administrative budget. The tradeoff is a smaller patient panel, since each patient is paying enough to support more personalized care. A typical primary care doctor might manage 2,000 or more patients. A concierge or direct primary care doctor often caps their panel at 400 to 600.