Is our system built upon a flawed foundation of fee for service?

When someone is arguing that our health system needs an overhaul, one of the most common reasons they cite is because it is “built on a flawed foundation of fee for service.” Of course we blame fee-for-service reimbursement for the rampant overtesting, overtreating, and fragmentation (among other things) in our health system, but this doesn’t mean that it is inherently bad, and here’s why.

First, a little contextualization will help. Fee for service is generally placed at one end of a spectrum (the “bad” end) with capitation at the other end (the “good” end).

Is our system built upon a flawed foundation of fee for service?

But other than subjective likability, have you ever considered what varies when you move from one end of the spectrum to the other? Consider this: Fee for service involves the purchase of a narrowly defined service (e.g., a single doctor visit, a single surgery), whereas capitation involves the purchase of a broadly defined service (e.g., all health care you need for a year). The spectrum could be called a breadth-of-services-purchased-all-at-once spectrum.

Importantly, as a direct result of varying the breadth of service, risk also varies. For instance, when a person pays for narrowly defined services one at a time, he has all the risk (meaning, if he gets sick or breaks his arm, he’s the one who is financially accountable). But when that same person pays for a broadly defined service like all the health care he could possibly need for a year, the party he’s paid has all the risk (meaning they’re financially accountable if he breaks his arm or gets sick).

So now that we’ve properly defined the spectrum, let’s revisit the assertion that fee for service (i.e., buying narrowly defined services one at a time) is intrinsically bad. Sure, the extreme fee-for-service end of the spectrum is obviously bad when it means patients are forced to be the ones coordinating complex care and trying to avoid unnecessary services. Yet, 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 directly or indirectly choose to consume. In other words, this is yet another situation in life where the Goldilocks principle applies.

That “just right” point on the spectrum will obviously change depending on the service and the individual involved, but Clayton Christensen’s “jobs” principle can guide us in finding it for each situation. He explains that 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 something (a bundle of services) that will 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.

Some providers are starting to experiment with offering services at different points along this spectrum. Examples include episode-based billing; flat-rate, no-limit primary care; and accountable care organizations.

Is our system built upon a flawed foundation of fee for service?

So, is our system built upon a flawed foundation of fee for service? Not exactly—it just isn’t allowing people to purchase the optimal breadth of services for most situations. Figuring out where those points are on the spectrum will be crucial to the success of any attempt to redesign health care delivery.

Taylor J. Christensen is an MD/PhD student in health policy who blogs at Clear Thinking on Health Care.

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  • http://onhealthtech.blogspot.com Margalit Gur-Arie

    Nicely put. It really is all about the locus of risk taking.
    What I find perplexing is that within an insurance environment, people are already paying the insurer more than the actual value of services to account for the value of risk assumption. Capitation is an effort by insurers to offload the risk (for which they were already paid) to providers, for a much lower dollar amount than they collected from customers. It’s a nice business arrangement, but I don’t quite see how this benefits anybody but insurers.

    • Taylor J. Christensen

      Yes, it mostly benefits insurers in our current dysfunctional insurance market. (In well-functioning markets, unnecessary middle men don’t last long.) But, even in a scenario like what you’ve described where the insurer ends up being a mostly unnecessary middle man, patients could actually benefit as well if providers successfully respond to capitation’s incentives by helping them avoid the ED, hospital admissions, etc.

  • http://www.mightycasey.com/ MightyCasey

    Assumption of risk requires the one assuming the risk to be able to know the level of exposure. Perhaps one of the appeals of capitation is the ability to know to some degree what one’s financial exposure is for healthcare.

    To put it in very simple terms, in the current iteration of fee-for-service that is the US healthcare system, asking “How much is that?” will almost always get you the following answer: “I don’t know.” Or worse, “That depends. How are you paying for it?”

    Capitation would seem to answer that question, at least in broad strokes. However, I believe that if healthcare would simply make its prices more visible, we – all of us – could start having more effective discussions about how to manage costs.

    Currently, getting healthcare is like going to the supermarket, and seeing price tags on *nothing*. Wanna know how much those chicken breasts are? Depends – how you payin’ for ‘em? You could pay $150/lb while the guy in line next to you is paying $2.29/lb. You’ll never know.

    That’s got to end.

  • John Lewis

    Good analysis of the continuum of free for service to capitation. It may not be fee for services that is the flawed component of the health care system but the heavy reliance on third party payors which has lead to significant oral hazard in the system.

  • John Lewis

    Good analysis of the continuum of free for service to capitation. It
    may not be fee for services that is the flawed component of the health
    care system but the heavy reliance on third party payors which has lead
    to significant moral hazard in the system.

  • http://twitter.com/bedsall Bob Edsall

    You say “when a person pays for narrowly defined services one at a time, he has
    all the risk (meaning, if he gets sick or breaks his arm, he’s the one who is financially accountable).” But in current American health care, the patient doesn’t typically carry much risk or incur much direct cost. Someone else pays. How good is that fee for service?

    • Taylor J. Christensen

      Yes yes, very good point. Most of the comments seem to be related to this same issue. For the sake of simplicity and brevity, I ignored the issue you have brought up, which is the fact that when patients are purchasing at the fee-for-service end of the spectrum, they have enough risk that they’ll have to buy insurance.

      How does this change things? Having insurance will not affect the health care jobs patients have (they still just want their broken arm fixed), so it will not change the optimal points on the spectrum, but it often distorts their purchasing habits, thus causing a multitude of other issues, which, in aggregate, keep providers from shifting along the spectrum to offer more optimal service bundles in response to the jobs patients have. Maybe that will have to be the topic of a future post!

  • Bhavin Jani

    Health Insurance should be on the same principle as carinsurance. Small things to be paid for by the patient and big bad problems covered by insurance. That will bring patient responsibility and price competition amongst providers. Also physicians pay is 8% of the 2.3 trillion dollars spent in 2010 and 92% went to non physician services. So we need to concentrate on the 92% to help bring down cost. There is a lot of wastage and fraud in that 92%

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