What would happen if patients paid doctors whatever they thought a office visit was worth?

A handful of physicians decided, for one day only, to offer patients the option to pay only as much as they could as an experiment to see how people really value primary care. Physicians chose their own dates for a pay-what-you-can day and got the word out. On the day of the events, no insurance was accepted. Care was provided only to the uninsured, who were asked to pay what they could afford. Laboratory tests were provided at cost, and patients who needed additional services were referred to various public resources. Practices also handed out lists of generic medications available for reduced prices at large, discount pharmacies.

Overall, participating physicians said they learned that although patients valued the physician visit enough to pay something, the payments were below actual cost. Still, most valued it enough to pay something. Some patients were unemployed and paid nothing; some paid $100. Visits were as short as 10 minutes or as long as an hour. Some people scraped up $20, some paid $60 to $80. One patient, a waitress and college student, paid $80, mostly in singles. The doctor gave her $20 back.

None of the participating physicians collected enough money to make the concept financially viable over the long term, mainly because payments didn't match a typical day's collections from insurance and co-pays. Yet most say they want to do it again and enjoyed having one day free from insurance paperwork. Doctors found it was satisfying to be of service to people who have a need, even just for one day.

Physicians discovered an unanticipated and unintended benefit: Pay-what-you-can days can help build a practice. Local media coverage may increase a practice's profile, and patients from pay-what-you-can days might return when they do have insurance.
Pay-what-you-can days also brought an unexpected amount of goodwill to medical practices and produced public recognition within their communities, physicians said. Participating physicians say they have been stopped on the streets and in grocery stores by people thanking them for their efforts.

When a local newspaper ran a story about Will Conner, MD, a family physician in Matthews, N.C., holding a pay-what-you-can day at his Conner Family Health Clinic, one of his patients who was a nurse volunteered to help. Someone else dropped off a flower with a card that said Dr. Conner was "receiving this because you have done something nice. "The pay-what-you-can day "definitely got recognized. We know we did the right thing," Dr. Conner said. "It's not very practical to do every day, but it is good for the community, and good for patient care."

When your doctor bills your insurance company, she begins a complex, expensive, and inefficient process during which she will spend an average of 12% of her patient revenue as well as wasting a considerable amount her own time. A recent study, Saving Billions of Dollars--and Physicians' Time--by Streamlining Billing Practices published on April 29, 2010 in the Journal: Health Affairs, estimates that on a national scale that translates to $7 billion wasted.

The study points out that billions of dollars could be saved each year by a uniform system of provider payments - uniform to all insurance companies. Medicare already has such a system of transparent payment requirements in place. Perhaps not ideal, but using them insures fair and accurate payment of providers. We've all heard the horror stories of fraud and waste in the Medicare system. But the FBI estimates that the the fraud and abuse in Medicare compares to private insurance companies - 3-10 percent.

The Patient Protection and Affordable Care Act includes broad requirements to streamline medical billing, but like many aspects of the law, many details are left to be worked out in the next few years. Given the amount of money that could be listed under the "money saved" side of the equation, perhaps we'll see a uniform, transparent payment system take shape.

The great mystery surrounding the Affordable Care Act is how the corporations that provide group health plans for most Americans -- coverage they know and prize -- will react to the new law's radically different regime of subsidies, penalties, and taxes. Now, we're getting a remarkable inside look at the options AT&T, Deere, and other big companies are weighing to deal with the new legislation.

Internal documents recently reviewed by Fortune, originally requested by Congress, show what the bill's critics predicted, and what its champions dreaded: many large companies are examining a course that was heretofore unthinkable, dumping the health care coverage they provide to their workers in exchange for paying penalty fees to the government.

That would dismantle the employer-based system that has reigned since World War II. It would also seem to contradict President Obama's statements that Americans who like their current plans could keep them. And as we'll see, it would hugely magnify the projected costs for the bill, which controls deficits only by assuming that America's employers would remain the backbone of the nation's health care system.

Hence, health-care reform risks becoming a victim of unintended consequences. Amazingly, the corporate documents that prove this point became public because of a different set of unintended consequences: they told a story far different than the one the politicians who demanded them expected.

Why the write-downs happened but the hearings didn't

In the days after President Obama signed the bill on March 24, a number of companies announced big write downs due to some fiscal changes it ushered in. The legislation eliminated a company's right to deduct the federal retiree drug-benefit subsidy from their corporate taxes. That reduced projected revenue. As a result, AT&T (T, Fortune 500) and Verizon (VZ, Fortune 500) took well-publicized charges of around $1 billion.

The announcements greatly annoyed Representative Henry Waxman, who accused the companies of using the big numbers to exaggerate health care reform's burden on employers. Waxman, chairman of the House Energy and Commerce Committee, demanded that they turn over their confidential memos, and summoned their top executives for hearings.

But Waxman didn't simply request documents related to the write down issue. He wanted every document the companies created that discussed what the bill would do to their most uncontrollable expense: healthcare costs.

The request yielded 1,100 pages of documents from four major employers: AT&T, Verizon, Caterpillar and Deere (DE, Fortune 500). No sooner did the Democrats on the Energy Committee read them than they abruptly cancelled the hearings. On April 14, the Committee's majority staff issued a memo stating that the write downs were "proper and in accordance with SEC rules." The committee also stated that the memos took a generally sunny view of the new legislation. The documents, said the Democrats' memo, show that "the overall impact of health reform on large employers could be beneficial."

Nowhere in the five-page report did the majority staff mention that not one, but all four companies, were weighing the costs and benefits of dropping their coverage

AT&T produced a PowerPoint slide entitled "Medical Cost Versus No Coverage Penalty." A document prepared for Verizon by consulting firm Hewitt Resources stated, "Even though the proposed assessments [on companies that do not provide health care] are material, they are modest when compared to the average cost of health care," and that to avoid costs and regulations, "employers may consider exiting the health care market and send employees to the Exchanges." (Under the new bill, employees who lose their coverage will purchase health care through state-run exchanges.)

Kenneth Huhn, vice president of labor relations at Deere, said in an internal email that his company should look at the alternatives to providing health benefits, which "would amount to denying coverage and just paying the penalty," and that he felt he already had the ability to make this change under his company's labor agreement. Caterpillar felt it would have to give "serious consideration" to the penalty option.

It's these analyses -- which show it's a lot cheaper to "pay" than to "play" -- that threaten to overthrow the traditional architecture of health care.

The cost side

Indeed, companies are far more likely to cease providing coverage if they predict the bill will lift rather than flatten the cost curve. Deere, for example said, "We do expect double digit health care increases as most Americans will now have insurance and providers try to absorb the 15% uninsured into a practice."

Both Caterpillar (CAT, Fortune 500) and Verizon believe the requirement to allow dependents to remain on their parents' policies until age 26 will prove costly. Caterpillar puts the added expense at $20 million a year.

How two new taxes and the employer penalty change the health care calculus

First, there is the "Cadillac Tax" on expensive plans. This is a 40% excise tax on policies that cost over $8,500 for an individual or $23,000 for a family. Verizon's document predicts the tax will cost its employees $255 million a year when it starts in 2018, and rise sharply from there. Hewitt also isn't sure that Verizon can pass on the full tax to its employees; so it could impose a heavy weight on the company as well. "Many [have] characterized this tax as a pass-through to the consumer," says the Verizon document. "However, there will be significant legal and bargaining risks to overcome for this to be the case for Verizon."

In a statement to Fortune, Verizon said it is not, "considering or even contemplating" the plans laid out in the report, though records show the company did send the report to its board shortly after the reform plan was passed by Congress.

Second, the bill imposes new taxes on drug manufacturers, medical device-makers, and health insurance providers. Hewitt leaves little doubt Verizon will be paying for them: "These provisions are fees or excise taxes that will be shifted to employers through increased fees and rates."

Caterpillar and AT&T actually spell out the cost differences: Caterpillar did its estimate in November, when the most likely legislation would have imposed an 8% payroll tax on companies that do not provide coverage. Even with that immense penalty, Caterpillar stated that it could shave $25 million a year, or almost 10% from its bill. Now, because the $2,000 is far lower than 8%, it could reduce its bill by over 70%, by Fortune's estimate. Caterpillar did not respond to a request for comment.

AT&T revealed that it spends $2.4 billion a year on coverage for its almost 300,000 active employees, a number that would fall to $600 million if AT&T stopped providing health care coverage and paid the penalty option instead. AT&T declined comment.

So what happens to the employees who get dropped?

And why didn't these big employers drop employee coverage a long time ago? The Congressional Budget Office, in its crucial cost estimates of the bill, projected that company plans will cover more employees ten years from now than today. The reason the bill doesn't add to the deficit, the CBO states, is that fewer than 25 million Americans will be collecting the subsidies the bill mandates in 2020.

Those subsidies are indeed big: families of four earning between $22,000 and $88,000 would pay between 2% and 9.5% of their incomes on premiums; the federal government would pay the rest. So policies for a family making $66,000 would cost them just $5,300 a year with the government picking up the difference: more than $10,000 by most estimates.

As bean counters know, that's not a bad deal for a company's rank-and-file, and it's a great deal for the companies themselves. In a competitive labor market, the employers that shed their plans will need to give their employees a big raise, and those raises could be higher, even after taxes, than the premiums the employees will pay in the exchanges.

What does it mean for health care reform if the employer-sponsored regime collapses? By Fortune's reckoning, each person who's dropped would cost the government an average of around $2,100 after deducting the extra taxes collected on their additional pay. So if 50% of people covered by company plans get dumped, federal health care costs will rise by $160 billion a year in 2016, in addition to the $93 billion in subsidies already forecast by the CBO. Of course, as we've seen throughout the health care reform process, it's impossible to know for certain what the unintended consequences of these actions will be.

For years, private Medicare Advantage plans have enjoyed generous payments from the government, currently averaging 9 percent more than the cost of care in traditional Medicare. The government's benevolence enabled Medicare Advantage plans to offer lower out-of-pocket costs and extra insurance benefits compared with traditional Medicare - like dental, vision, and prescription drug coverage. About 11 million seniors are signed up, nearly one-fourth of Medicare recipients.

That's about to change under the health care overhaul. Payments are being trimmed back starting next year for all plans, to correct what Obama says is wasteful overspending. However, beginning in 2012, the law directs Medicare to award bonuses to high performing plans - plans that score four stars or better on a 5-star rating system. The payment shift means that high-quality plans will find it a lot easier to keep offering extra benefits, while others will struggle. Indeed, Medicare's own analysts predict an exodus from Medicare Advantage back to the traditional program after the cutbacks begin.

The government's rating system evaluates health plans according to several measures, including customer service, prevention and medical care for people with chronic health problems. The ratings, already available on medicare.gov, assign one to five stars for quality, with one signifying poor performance and five excellent.

How the private plans score on the quality rating system set up by the government is about to have a direct impact on insurers' finances -- not to mention seniors' benefits and premiums. President Barack Obama's health care law ties what the plans get paid by the government to the quality they provide, for the first time. These ratings are about to become much more important. When you start linking quality to payment, you can bet the plans are going to be very motivated to bring the scores up.

Millions of seniors signed up for popular Medicare Advantage insurance plans don't get the best quality, an independent study found. There seems to be plenty of room for improvement. The study being released in April 2010 by looked at the health plans that seniors pick, according to the plans' scores on a government rating system designed for consumers. Overall, senior have proven to be poor shoppers of Medicare Advantage plans. The analysis found that 47 percent of Medicare beneficiaries are in plans that rate three stars or two -- medium to fair quality. Just 23 percent were signed up in plans that rate four or five stars -- very good to excellent quality. Many of the rest were in plans not yet rated.

If the new system of rewarding the best plans and culling out the poor performers works, seniors will be more likely to be gravitate to the better plans.