Fee for Service Versus Alternative Payment Models? That’s the Wrong Way to Look at It

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I was reading an interesting article on The Health Care Blog this week, How to Pandemic-Proof Our Health Care Payment System, by Aisha Pittman and Seth Edwards, and it got me thinking about how fee for service has become a scapegoat. And since I’m on an alternative payment model (APM) kick the last few weeks (here and here), I’ll keep it going and save my evaluation of the ACP’s solutions to healthcare for the near future.

First, I need to debunk a myth. Here’s the myth: all fee-for-service (FFS) reimbursement is bad. The corollary to this is that all APMs are better. We need to stop seeing healthcare payments as dichotomous (FFS vs APMs) and start seeing them as sitting on a spectrum. This spectrum is the breadth-of-services-purchased-in-a-bundle spectrum. FFS is closer to the “narrow” end, and APMs are somewhere toward the “broad” end. But no end of the spectrum is inherently good or bad.

If FFS isn’t automatically bad and APMs aren’t automatically good, what determines whether any individual payment to a healthcare provider is good or bad? The answer: How closely it lines up with the principle of having a single payment for a single healthcare need. One payment for one job!

The patient needs a second opinion on a challenging diagnosis? One payment (that would include the doctor’s time). The patient cuts open their finger chopping vegetables? One payment (that would include nurse intake time, the doctor’s time, the lidocaine, the sutures, suture removal, etc.). The patient needs a bad knee replaced? One payment (that would include pre-op, op, and recovery care). The patient wants to have a baby? One payment (that would include all obstetric care from pre-pregnancy planning through delivery). The patient needs a year’s worth of diabetes management? One payment (that would include doctor consultations, podiatry care, lab work, etc.).

Try labeling those examples with the normal lexicon. You’ll see FFS, bundled billing, and capitation. Yet, they’re all “good” because they all require one payment for the job the patient wants the healthcare system to do for them.

How we get to that is a topic for another day, but think what could happen if we always paid one payment for one job (and if the services included in those payments were standardized from provider to provider): There could be prices advertised up front, there could be standardized quality metrics, patients could shop around for the highest value (assuming insurance plan designs don’t get in the way of the shopping incentive), higher-value providers would get more patients and make more money, competition over value would be stimulated, and our healthcare system would start naturally improving the value it is delivering year after year.

So let’s stop making FFS the scapegoat–which obscures the underlying principles–and start focusing on giving patients a single fee for a single job.

Evaluating the ACP’s Vision for Our Healthcare System, Part 2 of 3: Healthcare Delivery and Payment Systems

Read the intro to the series here and Part 1 here.

These posts should start to be more reliably out on Tuesday mornings again soon, but for now I’m excited to get this one out at all.

And in other news, this week marks the blog’s 10th anniversary! It started over at studenthealthpolicy.wordpress.com and then I changed the URL to clearthinkingonhealthcare.com a couple years ago (not something I recommend–it killed my traffic!). My first post was one paragraph long, and I hope I haven’t strayed too far from that original goal to be understandable to the masses as my knowledge has increased. I do know I make more and more assumptions of my readers’ knowledge, which is necessary so I’m not re-explaining everything a million times, but to compensate I try to refer back to the posts that explain those things. I’m interested to see where this blog is and where my knowledge is in another 10 years!

Ok, on to the next ACP paper! I hope you read last week’s post. It’s prerequisite material for everything in this post. Another prerequisite post (linked to in last week’s post as well) explains the spectrum that has fee for service at one end and full capitation at the other end. With the information from those two posts fresh in your mind, everything below will make much more sense.

The overall approach the ACP is taking here is to say that value-based purchasing (VBP) efforts can be great, but the ones we’ve tried to date have not been very effective because they have been fragmented (we’ve been trying lots of different and overlapping ones, all with their own flaws) and because they have been built on a FFS foundation that is often “at odds with goals to reward quality and efficiency.”

So what do they propose instead? They outline 6 “policy positions and recommendations.” I will not talk about each one because, frankly, I don’t know what I would say about some of them. For example, take the first one: “The American College of Physicians recommends that value must always be defined with patients and families at the center, fully empowered to be active partners in all aspects of their care.” That sounds like a great idea that is just ambiguous enough that no one could argue with it! But, to their credit, they do list some ideas in the following paragraphs of how to make that happen.

Their second recommendation is so good that I’m going to put it in the special quotation format:

The American College of Physicians recommends that all patients, families, and caregivers and their clinical care teams be provided with transparent, understandable, actionable, and evidence-based quality, cost, and price information to meaningfully compare medical services, facilities, and products.

Envisioning a Better U.S. Health Care System for All: Health Care Delivery and Payment System Reforms

Yes. This is super important. I love that they included it because the only effective way to financially reward higher-value providers and insurers is to get more patients to choose them. I think I do this almost every week, but I’ll link again to my Healthcare Incentives Framework series that explains this in detail.

Their third recommendation is all about what they would propose to replace the VBP efforts our healthcare system has made to date, and it’s the meat of what I am interested in. They envision teams of caregivers (led by physicians) treating patients, and they want those teams to determine for themselves which VBP strategy to employ from a menu of VBP options. The teams get to choose the VBP option that best fits their specialty and patients’ needs.

The three items on their recommended VBP menu are capitation, patient-centered medical homes, and direct primary care.

They specifically call out accountable care organizations (ACOs) as being less desirable because getting the shared savings bonuses is a moving target from year to year, so already-successful providers have a hard time improving sufficiently to continue getting them. They must take issue with Medicare’s specific implementation of ACOs, because then immediately after saying all that they describe the first menu item–capitation–as a shared-savings approach that should also have quality bonuses (ahem, that’s what an ACO is).

I’ve written less about direct primary care, but it’s simply a narrower form of capitation. The “capitated fee” (fixed monthly fee) patients pay covers all their primary care needs and nothing else. This eliminates all issues with insurer billing! Patients just go to or call the doctor when an issue comes up, and the doctor deals with it in whatever way makes the most sense without having to worry about charging for an office visit or phone call or anything.

So here we have three options on the ACP’s menu that they feel will be the new shiny way of doing VBP that gets rid of fee for service. One is actually still primarily relying on fee for service but pays providers bonuses for reorganizing in ways that decrease spending (patient-centered medical homes), and the other two are actually going away from fee for service and instead relying on some degree of capitation. I’ve talked about how important it is to make sure patients are buying the right breadth of services for each situation, and I don’t think the writers were aware of that principle, but they’re on the right track anyway.

Let’s frame the evaluation of these second and third recommendations by remembering that total healthcare expenditures is determined by (1) the number of care episodes and (2) the cost per care episode.

The ACP has done an admirable job addressing the number of care episodes (primarily by recommending shifting risk to providers, which is an appropriate way for an insurer to pass along the incentive to reduce care costs) AND the cost per care episode (by recommending increased transparency to help patients choose higher-value providers). These two recommendations are not perfect. For example, the ACP still seems to overvalue the benefits of quality bonuses. And they say nothing of many other significant details such as the insurance plan design changes that would also be necessary to get patients to choose higher-value providers. But I am still impressed. If you look back at my Healthcare Incentives Framework, you will see that they have essentially followed the main points of it.

The other recommendations talk about increasing pay for complex cognitive care relative to procedures, decreasing administrative burden (such as billing complexity, which is a huge problem that I have written about recently here and here and here), improving quality metrics (which they unfortunately seem to focus on using for quality bonuses rather than for helping patients determine the highest-value options), and health IT improvements (to facilitate all the other changes recommended in the paper). All these recommendations are interesting and I generally agree with them, but they are peripheral to the issues discussed in the second and third recommendations, so I won’t go into them.

There you have it. The ACP did a good job. Hats off to them. In Part 3, we’ll see if their recommendations to improve coverage and cost of care would interfere with what we talked about here.

Context for what “Value-based Purchasing” (VBP) Really Is About

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As I was reading through the ACP’s “Health Care Delivery and Payment System Reforms” paper this week, I was thinking more about the principles underlying this whole “value-based purchasing” (VBP) thing. So, before we delve into the ACP’s opinions on the topic, I thought it would be helpful to give a little context about what VBP really is.

I’ve written about these topics before here and here, and those posts describe somewhat different aspects of VBP and fee for service than what I’m talking about today.

The stated goals of VBP boil down to two things: (1) reward (and thereby improve) value and (2) decrease healthcare spending. If you’re familiar with my Healthcare Incentives Framework, you know I think trying to give providers bonuses for delivering better quality is not a transformational nor a sustainable effort. But what of the goal to decrease spending? Let’s talk about that for just a minute.

Question: Who stands to gain (or, save) the most if healthcare spending goes down? Answer: The person on the hook for paying for it. Paying for healthcare is a shared responsibility between the patient and the insurer, but really the risk for having to cover large healthcare expenditures resides with the insurer. (Yeah, that’s the point of insurance.)

So, if insurers are the ones that stand to benefit the most if healthcare costs go down*, what can they do to make that happen? They don’t directly control what providers do, but can they financially incentivize those providers somehow to find ways to decrease healthcare spending for them?

Yes. That’s what VPB is. And that primarily takes two forms:

First, they can simply pay them extra to reorganize in certain ways that would decrease spending. The insurer hopes the additional investment will result in a lot more savings than they invested. So, an example of this would be when insurers give clinics extra money when they offer expanded services such as after-hours access to doctors, social workers, and care coordinators. Think: patient-centered medical home.

Second, they can shift some of the risk to providers, so providers will make more money if they successfully decrease spending but will also make less money if spending increases. Think: Any “shared savings” plan, such as an ACO.

Now when we talk more about VBP, you will see these two tactics at work. Really, these are the only two tactics insurers can use, so every VBP model is some variation of one or both of them.

*There are some complicating factors in that statement. One is that with the ACA’s medical loss ratio restrictions, they actually don’t stand to gain much if they find a way to decrease medical spending, because they’re required to turn around and send a lof of that extra money they saved back to their enrollees in the form of rebates. It messes with insurers’ incentives to lower the cost of care, and this is one of the many reasons I despise those regulations. Another complicating factor is that insurers make a large amount of their profits (if anyone knows a specific number, I’m all ears) off the stock market by investing the premium money until they need to pull that money back out of those investments and pay for care. So, the more they get paid in premiums, the more they have available to invest in the interim. If all insurers could collude and find a way to keep healthcare super expensive, they would be tempted to do that, especially if they could keep premiums high AND decrease spending at the same time (and keep 100% of the difference). However, that is not a Nash equilibrium–there’s an incentive for someone to cheat the others and make more money than their competitors by lowering premiums and winning all the market share–so I don’t expect it to be a lasting thing even if it is happening informally in certain markets at certain times.

Evaluating the ACP’s Vision for Our Healthcare System, Part 1 of 3: Barriers to Care and Social Determinants

I am back from my blogging hiatus, and I’m excited to write about the three papers the ACP released earlier this year about how they think healthcare should be fixed!

I gave an intro to this series here, which basically gives the caveats about whose opinions these papers–written by the second largest physician organization in the U.S.–do and do not represent. Now, let’s get into it.

This is the paper where the ACP lays out their recommended solutions to issues related to non-financial barriers to care and social determinants of health. And in case you didn’t already know, I say “non-financial barriers to care” because even people with good insurance coverage that has affordable out-of-pocket requirements can still have many barriers to care. That’s what we call “coverage without access.”

This paper first reviews some of the evidence on a number of public health issues (nutrition, tobacco use, substance use, maternal mortality, firearm injuries and deaths, environmental health and climate change), and then it reviews the main non-financial barriers to care (race and ethnicity, LGBTQIA identity, gender, physical and intellectual disability, location, age, language and citizenship status, incarceration status, religion and beliefs, health literacy, intersectional barriers).

Next, it gives policy position statements and each one is followed by some policy recommendations, so let’s look at each one in turn:

  1. This one says that all people should have equitable access to high-quality care and that none of those non-financial barriers to care should impact that. Then they recommend that policies be put in place to focus on minimizing those non-financial barriers to care. They don’t actually give a set of specific policy recommendations on which ones to prioritize or how to do it, but they do reference a few other ACP papers that give more specifics in certain areas. So, this first one is a nice safe policy statement without any real substance on how to make a difference.
  2. This one says that we need to do a better job ensuring there are enough physicians and hospitals overall and in underserved areas. And it actually gives a few specifics. Notably, the ACP thinks there should be more internists! They want residency spots increased, and they want more programs that support medical trainees to choose primary care and to serve in underserved areas. They also make a general statement about wanting there to be more effort put into ensuring rural and critical access hospitals are available. And they again reference a number of different existing ACP papers that go into detail in a number of those areas.
  3. This one says that they want more public health research and more policy interventions that address social determinants of health. Then, again they simply reference other ACP papers for specifics.
  4. This one says that we need to devote more resources to environmental health and climate change. And, again, without any specifics here, they reference other ACP papers.
  5. This one lists the most “critical” public health objectives that the ACP thinks we should focus our time and money on the most, which are tobacco use, substance use, maternal mortality, firearm-related injuries and deaths, and access to high-quality food. It references APC papers on the subjects that already have papers, and it recommends more research in the other areas.

Well, I admit I am underwhelmed at the substance here. And yet, even though I expected this paper to offer more specifics that I could evaluate, it does do a good job of organizing the issues and putting the other existing ACP papers into context. My only comment, then, will be that all of these policies fit into the “equitable access” category of my Healthcare Incentives Framework. (Sure, some will take issue with my “equitable access” terminology not being broad enough, and I will let them.) Policy responses to these issues should be pursued in each country to the extent that each society deems appropriate, and when the designers of the policies understand the rest of the Healthcare Incentives Framework, they will be empowered to implement those policies in ways that do not interfere with the long-term value improvement of their healthcare system.

We will see what the other two papers (Part 2 here, Part 3 here) have to offer in the coming weeks.