What is the perfect fee-for-service system?

It is wildly popular to say that the chief culprit in the U.S. health care system is the traditional fee-for-service payment system, which rewards physicians for volume but not quality, leading to high-cost, low-quality health care. It supposedly follows that the fix is a system of “value-based” payments.

Despite the popularity of these arguments, both aspects have been shown to be wrong. Studies show that the rising cost of American health care is due primarily to rising prices, and that value-based payment systems do not reliably lower the costs of care or improve quality. In fact, despite what the “experts” say, there are many positive aspects of a fee-for-service payment system. Further, in a properly designed and functioning fee-for-service system, we could have far lower health care expenditures and improved quality of care.

The reality is that high-volume care can be good for patients. Some very challenging patients benefit from being seen frequently. While there are healthy patients for whom an annual physical would suffice, there are also elderly diabetics or patients with severe congestive heart failure that sometimes need to be seen every week. Fee-for-service payments encourage such high-volume care when it is appropriate.

Similarly, patients benefit when their physicians make same-day appointments available for them when they need them. In a busy practice, where all available appointments can easily get booked, a fee-for-service payment system encourages physicians to make more time available to help those in need.

And many studies have shown that surgeons who perform procedures more frequently tend to do a better job.

So, high-volume health care is not necessarily a bad thing.

The Japanese health care experience proves the point. The average Japanese patient goes to the doctor more than four times as often as the average U.S. patient, and yet health care represents less than 10 percent of the Japanese gross domestic product (18 percent in U.S.) and per capita, spending on health care is far less.

Recent research points to the proper direction for lowering costs in the U.S. health care system. Studies show that administrative costs account for approximately thirty percent of U.S. health care expenditures, which is roughly double the amount spent in other nations. Of that amount, 62 percent relates to billing and insurance-related expenditures.

A study reported in JAMA, Administrative Costs Associated With Physician Billing and Insurance-Related Activities at an Academic Health Care System, sheds important light on the issue. Estimated processing time for a primary care office visit claim was thirteen minutes. So, it takes almost as long to collect payment in our arcane system as it does to see the patient (many primary care office visits with a physician are scheduled for only fifteen minutes)!

A simplified and far less expensive health care billing system would be easy to design and implement. It has been estimated that streamlined billing processes could save $350 billion dollars, or fifteen percent of U.S. health care expenditures.

Recent research also debunks the claim that excessive volume (promoted by fee-for-service payments) is the cause of rising health care expenditures. Another study in JAMA, Factors Associated With Increases in U.S. Health Care Spending, 1996-2013, concluded that “increases in U.S. health care spending from 1996 through 2013 were largely related to increases in health care service price and intensity.” Higher prices and intensity of care (the variety and complexity of the treatments patients receive) accounts for 50 percent of the spending increase, followed by the increase in the size of the U.S. population (23.1 percent), and the aging of the population (11.6 percent). “Changes in service utilization were not associated with a statistically significant change in spending.”

The takeaway from this study is that to lower U.S. health care expenditures, we must combat out-of-control pricing for prescription medications, medical testing, and hospital stays, and, dare I say it, encourage people to take better care of themselves. The approach to health care financing used in another country might hold the key.

I recently attended a lecture by economist, Sean Flynn, PhD (Dr. Flynn also happens to be running for U.S. Congress in California), describing the health care system of Singapore, which he has researched extensively. The Singapore system uses a combination of health savings accounts (contributions come from a 7 percent income tax), $1,500-deductible health insurance policies, and a 10 percent co-pay on all care above the deductible amount. If expenses deplete a person’s HSA (which is a rare occurrence), a community fund takes over. In addition, prices are known throughout the health care system. Hospitals list prices on a marquee like an American fast-food restaurant.

The resulting health care experience in Singapore has been far more competitive pricing and lower costs of care. Patients, because they always have “skin in the game,” know prices throughout the health care system and have freedom of choice throughout the system (and can even pass their HSAs to family when they pass away), are far more likely to take better care of themselves and tend to avoid overly-expensive end-of-life care.

As opposed to increasing the quality of health care in the U.S., an increasing emphasis on value-based payment may contribute to lower quality care. The additional burdens of “quality” data collection associated with value-based pay, as well as the dependence on today’s clunky electronic medical record systems to collect such data, further shifts a doctor’s focus towards compliance and away from patient care. The result is rampant burnout in the medical community, not better care.

The first step towards better care in the U.S. is the removal of the excessive administrative burdens created by the U.S. government (E&M payment coding, HIPAA, MACRA, etc.), and insurance companies (prior authorizations, excessive denials). The next step is to develop usable, affordable EMR systems to replace the unworkable systems used by most physicians today. And finally, to develop supportive, data-driven resources to better identify problem areas in U.S. health care delivery, and to pair that information with clear mechanisms to address the deficiencies.

The fee-for-service payment system is not the problem in U.S. health care, and value-based pay is not the answer. Federal officials need to pay attention to the mounting evidence to this effect, or risk further adding to the dysfunction, and driving more physicians to burn out, or even out of health care altogether.

Matthew Hahn is a family physician who blogs at his self-titled site, Matthew Hahn, MD.  He is the author of Distracted: How Regulations Are Destroying the Practice of Medicine and Preventing True Health-Care ReformThis article is contributed by Physicians Working Together and the National Physicians Week Virtual Conference.

Image credit: Shutterstock.com

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