The Real Problems With Fee-for-Service

Fee-for-service payment has been widely criticized because it “rewards volume instead of value,” but a much more precise definition of the problems with fee-for-service payment is needed in order to ensure that an alternative approach to payment would actually be better, not just different.

One major problem with fee-for-service payment is that there are large gaps in the types and amounts of fees Medicare and health insurance plans pay:

  • There are no fees at all for many important healthcare services, particularly services needed for proactive care. Traditionally, fees have only been paid for face-to-face office visits with physicians and for procedures or tests; there has been little or no payment for phone calls and emails with patients, for education and proactive care management by nurses, community health workers, and pharmacists, for palliative care services, and for non-medical services such as transportation. If payments are not available for ambulatory or home-based care, patients have to obtain care in hospitals or other expensive settings.
  • The fee amounts are often less than what it costs to deliver high-quality care. Physicians have generally been forced to spend less time with patients than is necessary or desirable because the fees paid per visit are too low to allow longer visits. This can result in additional visits for the patient, misdiagnoses, and/or complications that increase the cost of care. Hospitals do not receive adequate payments to support emergency care and other types of essential standby capacity, and they have to subsidize those losses by delivering extra services or charging more for services.

Not only do current fee-for-service payment systems fail to support all of the services that patients need, they do not assure patients they will receive the highest-quality care:

  • There is no assurance of the appropriateness or quality of the service delivered. Under fee-for-service payment, a healthcare provider is paid for delivering a service to a patient even if the service was unnecessary, and the fee is the same regardless of the quality of the service.
  • Healthcare providers are penalized financially when they reduce complications and keep patients healthy. Under fee-for-service payment, providers are paid more to treat an infection or complication than to prevent it from occurring. Moreover, because most fees are paid for treating and diagnosing health problems, a primary care practice or specialty care provider who successfully helps a patient to stay healthy will be paid less for that patient, and may not be paid at all.

An additional problem occurs when treatment requires multiple services:

  • It is impossible for a patient or payer to compare providers based on the cost of treating a health problem. Although the fees for each individual service are known in advance, different combinations of services can be used to treat a particular condition, and the services a provider uses for a specific patient will only be known after the services are delivered. This makes it impossible to compare two providers based on how much it would cost for each of them treat the same health problem. Current efforts to increase transparency about provider prices make it easier to find out what individual services cost, but not what treatment costs in total.

Fortunately, there is a better way to pay for health care: Patient-Centered Payment.

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The Strengths of Fee-for-Service Payment

While it is true that fee-for-service payment rewards “volume instead of value,” any payment system that doesn’t support a higher volume of service when more services are needed can result in worse outcomes for patients. Two important strengths of fee-for-service payment are:

  • Healthcare providers are paid more for patients who need more services. Under a fee-for-service system, payments to healthcare providers are automatically “risk adjusted” for patients with greater needs.
  • A provider is only paid if a patient receives a service. Under fee-for-service payment, patients and payers do not pay a provider if the patient does not receive care.

The problems with fee-for-service payment need to be corrected, but the strengths must also be preserved.

Fortunately, there is a way to pay for health care that preserves the strengths of fee-for-service payment while correcting its weaknesses: Patient-Centered Payment.

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