Is Fee-For-Service Really the Problem?

by Stephen B. Kemble, M.D.

In their article “Phasing Out Fee-for-service Payment,” published online by The New England Journal of Medicine earlier this year, Drs. Schroeder and Frist, along with many other contemporary health policy experts, conclude that the most important cause of high health care expenditures is fee-for-service reimbursement, and that the solution is to move to payment arrangements such as bundled payment, capitation, and increased financial risk sharing. However, their diagnosis of the problem misses the mark. If fee-for-service were a root cause of runaway health costs, then how are other countries that use fee-for-service payment of doctors able to cover everyone and spend 50-60% of what we do per capita on health care? 

Much of the evidence for a large amount of unnecessary care in the U.S. is based on studies of regional variation in Medicare spending, but if this is due to fee-for-service, then how do we explain the fact that high and low spending regions use fee-for-service equally? There is plenty of evidence that exorbitant administrative costs in U.S. health care are a bigger driver of excessive cost than unnecessary care driven by fee-for-service1, and many of the proposed “solutions” will actually increase these administrative costs.

Capitation, bundled payments, and pay-for-outcomes schemes do eliminate incentives to over-treat, but introduce incentives to avoid sicker, more complex patients and to under-treat and skimp on necessary care.  These perverse incentives are greatly compounded if doctors are employed by an investor-owned hospital or health plan whose incentive is to increase shareholder value, or to distort diagnosis codes and documentation to game risk adjustment and maximize reimbursement.2 

Pricing for hospital services and supplies is now wildly out of control, as documented by Steven Brill in his recent “Bitter Pill” article in Time Magazine3, compounded by problems due to cost shifting among payers. For hospitals, fee-for-service should be replaced with global budgeting, as is done in other countries that have universal systems, saving around 20% of hospital costs.

There are pro's and con's to paying physicians with either fee-for-service or salaried arrangements that need to be clearly understood in health care planning. Fee-for-service motivates doctors to work harder than they do under salaried arrangements, but can be an incentive to unnecessary care. Salaried doctors tend to work less hard and have to be pushed to maintain high productivity. Where there is a shortage of doctors, fee-for-service can encourage higher productivity. In urban areas where there is an over-supply of doctors, salaried arrangements may be better. For patients with straightforward chronic diseases, integrated systems that can enforce protocols for best practice are probably superior. For “complex” patients (around 25% of a primary care doctor’s practice4) with unclear diagnoses, unusual or complex problems, or poor compliance, fee-for-service is probably superior because doctors will be more motivated to put in the extra time required if they can get paid more for it.

There is a serious problem with the skewed way fee-for-service is implemented in the U.S., paying much more for procedures than for cognitive services and much more for newer procedures than for well established ones. However, a more targeted solution would be to move to an incentive-neutral fee-for-time system. Instead of the complexities of the Resource Based Relative Value Scale (RBRVS) and Evaluation and Management (E & M) procedure codes, let’s simply pay doctors for their time, with a multiplier for training and practice costs.5 Separate quality incentives may be appropriate, but must be in proportion to those components of health care that can be accurately and meaningfully measured, and these are probably no more than a quarter of health care due to its complexity. Specialties requiring more training and overhead would be paid at a higher hourly rate, but for each individual doctor this rate would be the same regardless of the activity or procedure being performed. Time for care coordination should be included in reimbursement. Time-based payment would greatly reduce the complexities required by “pay-for-documentation” and it would allow documentation to be re-focused on patient care and quality improvement instead of reimbursement. It would also enable large administrative savings compared to complex, data driven, pay-for-performance incentives that invite gaming of documentation. Detection of fraud and abuse would be far simpler, based primarily on adding up hours billed. 

If payment were task-neutral, there would be no preferential incentive to do procedures instead of things like talking to patients and obtaining a good history and thorough physical examination. The primary incentive for physicians would then be to simply use their time and skills, to the best of their ability as professionals, to serve the health care needs of their patients. 

Suggested Reading:

1. Woolhandler S, Campbell T, Himmelstein D. Costs of Health Care Administration in the United States and Canada. N Engl J Med 349:768-75, 2003.

2. Farmer SA, Black B, Bonow RO. Tension Between Quality Measurement, Public Quality Reporting, and Pay for Performance. JAMA 309:349-350, 2013.

3. Brill S. Bitter Pill: Why Medical Bills Are Killing Us. Time Magazine, March 4, 2013.,9171,2136864,00.html#ixzz2R1fT591k

4. Grant, RW, Ashburner, JM, Hong, CC, Chang Y, Barry MJ, Atlas, SJ. Defining Patient Complexity From the Primary Care Physician’s Perspective. Ann Int Med 155 (12): 797-804, 2011. 

5. Wachtel TJ, Stein MD. Fee-for-Time System: A Conceptual Framework for an Incentive-Neutral Method of Physician Payment. JAMA 270(10): 1226-1229, 1993.

Tag lines: fee-for-service; fee-for-time; Medicare spending; regional variation; administrative costs; unnecessary care; cost-shifting; Resource Based Relative Value Scale (RBRVS); E & M procedure codes.