The Basics of Healthcare Economics: Number 1 — The Evils of Fee-for-Service Medicine
by Ellis M Knight MD, MBA
Introduction:
So, I’ve been to medical school and I’ve been to business school. I have practiced medicine for over 40 years and also held a number of executive positions within a large healthcare system. Finally, I have worked as a healthcare consultant, oftentimes feeling as if I was tilting at windmills to change a system that is very much in need of serious improvements.
After all these years and because of the various roles I’ve played, I have come to the conclusion that healthcare economics are so unique that few outside of the system, and indeed many within the system, truly understand how this industry operates economically. This article will describe some of the unique ways in which healthcare differs from other businesses and hopefully help consumers, employers, and politicians understand why changing the economic infrastructure of healthcare is fundamental if true healthcare reform is to occur.
The perverse nature of fee-for-service medicine:
The vast majority of healthcare services are paid for on a piecework basis where quality has no bearing on reimbursements. The dominant model of payment in the healthcare industry is what is called the fee-for-service (FFS) or sometimes fee-for-volume model. This means that every time you see the doctor or any other type of healthcare provider (hospital, lab, pharmacy, rehab center, nursing home, imaging center etc. etc.) they submit what is called a current procedural terminology (CPT) code to the payer for the specific services you were provided. Each of these codes has a pre-assigned number of resource value units (RVUs) which ostensibly describe the amount of resources (time, training, knowledge, experience etc.) required to deliver each service in a high quality fashion. Next, each non-governmental payer (Aetna, United Healthcare, Cigna etc.) then contracts with each provider and an amount in dollars is established which that payer will pay the provider for the service or services rendered. Government payers, such as Medicare and Medicaid, do not negotiate rates in this way and have set-pricing which determines the amount they will pay for each CPT code. The government payers usually pay less than the private payers and therefore, healthcare providers subsidize the losses they claim to take caring for Medicare or Medicaid patients with the higher payments they receive for seeing fully insured patients. NOTE: the rates agreed to between individual providers and private payers are extremely opaque to the patient or other providers and this then makes price transparency to consumers almost impossible and also inhibits competition between different providers. It also makes so called high-deductible or consumer directed health plans almost a farce, since few patients / consumers can find or even likely negotiate rates for the services they desire.
Perhaps the most egregious aspect of the FFS model however, is that it perversely incentivizes providers to provide more services, even when those services are not necessary. This is why procedures like angioplasty, coronary artery stent placements, joint replacements, and spine fusion surgeries are done at much higher volumes in this country than others.
At the end of my clinical practice career, I moved from practicing in a large community hospital system, where most of the patients were insured, to a large public hospital, where most of the patients had no insurance or were covered by Medicaid. To my surprise, when I made the switch, specialists, such as orthopedic or neurosurgeons, as well as cardiologists were much less likely to perform the above mentioned procedures on my patients. In my former practice setting I estimate that I would have 1–2 patients a month who would undergo some type of invasive cardiac procedure. In the public hospital, I had 1–2 patients per year undergo such procedures. Why? Did the specialists in the private community hospital deliver better quality of care to my patients than the specialists at the public hospital? The answer is no. Unfortunately, the difference boiled down to financial incentives and while 1–2 procedures per year may have been too few, especially considering the fact that my indigent patients at the public hospital tended to be more acutely ill than those at the community hospital, 1–2 procedures a month was likely way too many, with a lot of these risky interventions being driven by financial incentives.
To use another example, now days more and more primary care physicians and other types of primary care providers (nurse practitioners, physician assistants) are working under employment contracts for large hospitals and healthcare systems. Unfortunately, the rationale for this is not to position these organizations to better serve the primary care and public health needs of their communities, but instead, so that they can build large vertically integrated referral systems that drive more and more volume into the hospital system for high profit procedures. The Covid pandemic has revealed how dependent most healthcare systems are on such lucrative procedures and the financial calamity that is befalling many who have had to close down their elective surgery services in order to devote more resources to Covid patients. Indeed, 41 hospitals, many of which are prestigious organizations, announced this week that they were going to shut down elective surgeries because of the pandemic. One can argue that this is the right thing to do in the wake of one of the most serious public health crises ever seen in this country, but like many aspects of the pandemic, it didn’t have to be this way.
FFS care amplifies the threat from the Covid pandemic:
Prior to Covid, many payers, especially governmental payers, were rolling out fee-for-value (FFVa)reimbursement models, which incentivized and rewarded high quality and cost efficiency from providers. These models came in a variety of forms, from shared savings programs to bundled payments, but the important point is that they began to push back against a payment system that was and continues to be monopolized by FFS. Unfortunately, these FFVa reimbursement models have had trouble gaining traction and there has been a lot of resistance from both large and small providers to make the proverbial move from volume to value. Why?
First of all, most large providers (healthcare systems, hospitals), whether they’re for-profit or not-for-profit from a taxation standpoint, are still very profit driven. The landscape is littered with unemployed hospital executives who paid too much attention to quality and efficiency and not enough attention to profit. To push this metaphor a little further, prior to Covid the landscape (and highways) were also littered with billboards and other types of advertising as one hospital competed with another for the greatest market share of high margin services. Meanwhile, patients requiring services like trauma care, behavioral healthcare, and infectious disease management were shunted from one facility to another like a hot potato, which no one wanted to own. Again, the Covid pandemic has made this ruinous competition even more obvious as even those organizations who previously considered themselves sheltered from large volumes of low margin patients are now overwhelmed and caring for Covid patients who occupy capacity and utilize resources that previously were used in their cardiac, ortho, neurological, or oncological service lines or centers of excellence.
Summary:
The fee-for-service reimbursement model is an insidious force which has slowly eroded the quality and cost efficiency of healthcare in the US. We now rank last among other countries within the Organization for Economic Cooperation and Development (OECD) for the value (defined as quality per unit of cost)we provide to our citizens, many of whom still believe the US healthcare system is the best in the world.
The next article in this series will discuss the macroeconomic effects of our healthcare system and the changes in the economic infrastructure that will be required to slow or reverse the unsustainable trends we are now seeing regarding both quality and cost within the US healthcare industry.
