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.

Why Fee-for-service Reimbursement Is Bad. Wait . . .

When someone is arguing that the health system needs an overhaul, one of the most common reasons they cite is that “our health system is built on a flawed foundation of fee for service.” Arguments like this always sound so bulletproof when they rely on vague yet widely accepted assumptions, but let’s think clearly about this, just for a moment.

First, let’s go back to Econ 101 to recall that association does not imply causation. So, when you see a health system based on fee for service that is delivering surprisingly low value, you are seeing an association. It starts to look a lot more like causation when you compare this health system to other health systems in the world that are not built on fee for service but are all delivering much higher value. But it starts to look a lot less like causation when you compare this health system to any other industry and see that nearly all of them are based on fee for service yet somehow delivering excellent value. (I’ll come back to this later.)

So what is fee-for-service reimbursement, really? It is simply one extreme end of a spectrum, and at the other end sits capitation:

1This spectrum is not well understood. People always think of it in terms of incentives (“bad” incentives at the fee-for-service end, “good” incentives at the capitation end), but what is actually being varied as you move from one end to the other? I’ve never heard anyone talk about that. So let’s talk about it; the conclusion will be surprising.

I will say that fee for service is the purchase of a narrowly defined service (e.g., a single doctor visit, a single operation, a single medication), whereas capitation is the purchase of a broadly defined service (e.g., all health care you need for a year). So, breadth of service purchased at one time is really what varies on this spectrum. But in addition to the breadth of the service being purchased, there is another important difference: risk. When you pay for narrowly defined services one at a time, you have all the risk (meaning, if you get sick or break your arm, you’re the one who is financially accountable). And when you pay for a broadly defined service, the party you’ve paid has all the risk (meaning, if you get sick or break your arm, they’re the one that is financially accountable). Note that this is primarily where the “accountable” comes from in accountable care organizations–they have the financial risk, not the patient.

This is a spectrum because a service could sit at any point along it. For example, Qliance offers flat-rate, no-limit primary care; they are financially accountable for anything that could be considered primary care. Another example is episode-based billing, where the patient pays a single lump sum in exchange for a guarantee that the provider will do everything necessary to treat the specified medical condition. An interesting side note is that even a typical fee-for-service doctor visit is not truly fee for service in the sense that the patient has all the risk; at least, last time I checked doctors don’t make patient pay larger copays any time appointments run longer than the allotted 15 minutes.

2So what can we conclude from this discussion? Is fee for service actually bad?

Being too far at the fee-for-service end of the spectrum can definitely be bad if it means patients are expected to coordinate complex care by themselves. But being too far at the capitation end of the spectrum can also be bad if it means patients are not at all financially responsible for the services they choose to consume and are also stuck having to get all their care from one source that will inevitably provide less-than-exceptional quality for some services.

This means we need to find the perfect point somewhere in between the extreme ends of the spectrum where our health system will deliver optimal value. This point obviously depends on the service and the individual involved, as well as who can bear risk most effectively, but the way to think about it is using the “jobs” principle as taught by Clay Christensen. When a person enters the health system, it’s because they have a “job” they want to get done. That job generally isn’t something as narrow as to get an x-ray; more likely, their job would be to fix a suspected broken arm, so they’re looking to purchase all the services together that can fulfill that job. The job could also be broader, like to have the peace of mind that they have little to no healthcare-related financial risk and can just go and get care from one source no matter what comes up, or also to have help to keep healthy and thereby reduce care-requiring episodes (think: Kaiser Permanente and similar integrated delivery systems).

If we want to successfully redesign our healthcare delivery system (isn’t that all the talk these days?), we need to understand that fee-for-service isn’t intrinsically bad; the only bad thing is missing the sweet spots on that spectrum.

One final, crucial point: Yes, overhaulists* properly attribute many of the problems in our system to it sitting too far at the fee-for-service end of the spectrum (e.g., overtesting, overtreating, fragmentation), but they have overlooked what has caused the system to fail to adjust itself to a more optimal, jobs-focused point on the spectrum, as other industries do. This has everything to do with value not being financially rewarded in our system, and it is the topic of the publication I’ve been working on, as well as many future blog posts that will start to lay out the solutions more cohesively (after my publication comes out). More to come!

* My term for someone who believes the entire health system needs to be overhauled

UPDATE: Added a paragraph or two for clarity.