Fee-for-service

flying cadeuciiAn organization’s “business model” means: How does it make a living? What revenue streams sustain it? How it does that makes all the difference in the world.

Saturday, Natasha Singer wrote in the New York Times about health plans and healthcare providers using “big data,” including your shopping patterns, car ownership and Internet usage, to segment their markets.

The beginning of the article featured the University of Pittsburgh Medical Center (UPMC) using “predictive health analytics” to target people who would benefit the most from intervention so that they would not need expensive emergency services and surgery. The later part of the article mentioned organizations that used big data to find their best customers among the worried well and get them in for more tests and procedures. The article quoted experts fretting that this would just lead to more unnecessary and unhelpful care just to fatten the providers’ bottom lines.

The article missed the real news here: Why is one organization (UPMC) using big data so that people end up using fewer expensive healthcare resources, while others use it to get people to use more healthcare, even if they don’t really need it?

Because they are paid differently. They have different business models.

UPMC is an integrated system with its own insurance arm covering 2.4 million people. As a system it has largely found a way out of the fee-for-service model. It has a healthier bottom line if its customers are healthier and so need fewer acute and emergency services. The other organizations are fee-for-service. Getting people in for more tests and biopsies is a revenue stream. For UPMC it would just be a cost.

The evil here is not using predictive modeling to segment the market. The evil here is the fee-for-service system that rewards waste and profiteering in medicine.

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In a previous blog we demonstrated how guidelines can compromise the care of individual patients when designed to serve the health care system.

Why should treating physicians defer to guideline committees at all, we asked? For decades medical students have been taught to read and understand information from published papers.

We are all trained in critical appraisal and can keep up with the clinically meaningful literature, the literature that is relevant and accurate enough to present to patients. Just because there are nearly 20,000 biomedical journals does not mean that any, let alone all are replete with meaningful information. We can discern the valuable from the not valuable; why do we need others to tell us?

In fact, we even argued in our last post that patients can and should judge the value of medical information. After all, they face the consequences of misinterpreting the likelihoods of benefit and of harm associated with various options for care.

No one remembers the numbers that describe the chances for benefit and harm or ask more questions about the veracity of information than a patient who must choose. The smartest information managers we have ever encountered are our patients; when informed, they quickly determine the validity of the information and apply their personal values to the estimations of the chances for benefit and harm.

Patient Empowerment

Take the example of a patient who recently entered into a therapeutic dialogue with one of us, RAM. This was not the traditional clinical interview. This patient had been diagnosed with prostate cancer and was scheduled for an approach to treatment that the diagnosing physician had offered as the most sensible. However, the decision did not rest easily.

The appointment with RAM was scheduled because the patient sought a dialogue that might offer a chance to reflect on the rationale for the approach he was about to initiate. Two hours into the dialogue, the patient, a 40ish year old African-American man accompanied by his wife, were mulling over the marginal benefits and harms of the options for treating an early stage prostate cancer.

The wife asked how many African-Americans were in the study under discussion. “None”. The husband perked up and then asked, “How many people in the study was my age?” “None”. They then asked if the difference in benefit was a certain, fixed amount? “No, it varies over this range.” – examining the descriptive statistics.

They then asked when the study was started and did it pertain to the present day. “It started over 15 years ago” and the stage of disease of the men in the study was generally more aggressive than in this particular case.

Continue reading “Fee for Service vs. Fee for Serving”

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The shortcomings of the Fee For Service (FFS) model are widely known.

During the 1800s, the British empire shipped prisoners to newly formed penal colonies in Australia (technically, these were British prisoners, but that doesn’t make a catchy title).  Ship captains were compensated for each prisoner who boarded the ship.  The financial incentive ruled over decency, each captain stuffed as many prisoners on to the ship as it could handle.  Of course, the prisoner survival rate lingered at a precarious 50%, while those who managed to survive the journey often arrived beaten, sick or starving.

Attempts were made to improve the survival rates, through what might be considered early wellness programs.  Captains were mandated to bring citrus to combat scurvy, a 19th century wellness program.  Doctors were required on each ship carrying prisoners, improved access ala concierge medicine.  I’m sure someone may have proposed it’s the prisoners responsibility to survive the trip and they ought to engage in their own survival.  Nevertheless, requiring lemons and limes and placing physicians on the ships proved equally ineffective.

In 1862, economist Edwin Chadwick suggested a change to the incentive structure.  Ship captains were no longer compensated for each prisoner who boarded in England, but, instead, received payment for every living prisoner who got off the ship in Australia.  The first pay for outcomes program in healthcare.  The survival rate on ensuing trips jumped from 50% to 98%.

The moral of the story is that incentives matter.

  • Primary care physicians are the ship captains of the 21st century.
  • American patients are prisoners of the US healthcare system.
  • Misaligned incentives are the root cause for what ails the system.

Christopher DeNoia is the Vice President of Business Development at Amplify Health, where this post originally appeared.

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For Medicare, this has been a summer of good and bad news. On one hand, the program’s costs continue to rise remarkably slowly. So far this fiscal year, they have gone up by only 2.7 percent in nominal terms, the Congressional Budget Office reports.

On the other hand, opposition to the Independent Payment Advisory Board — created as part of the Affordable Care Act — continues to mount. And opponents continue to mischaracterize the whole point of the board.

What they seem not to understand is that the board is needed mostly so that that Medicare can continue to encourage slower growth in costs.

One reason costs have been rising so slowly is that systems for paying hospitals and doctors are changing. We’re moving away from the old fee-for-service plan and toward paying for value in health care — and we’re making the shift more rapidly than expected.

Redesigning the payment system is a fundamentally different approach to containing costs. The old way was to simply slash the amounts that Medicare pays for services. And here is where the criticism of the Independent Payment Advisory Board becomes somewhat Orwellian.

The point of having such a board — and here I can perhaps speak with some authority, as I was present at the creation — is to create a process for tweaking our evolving payment system in response to incoming data and experience, a process that is more facile and dynamic than turning to Congress for legislation.

Medicare Experiments
In particular, as Medicare experiments with accountable care organizations, bundled payments and other new strategies, the agency will inevitably need to make adjustments. Questions will come up, such as: How should the payments to doctors, hospitals and other providers be changed to reflect what is learned about the quality of care they provide? How much should the penalties or bonuses be? Is it better to have hospitals face all the costs associated with patient (as in an accountable care organization) or only the costs incurred during a specific episode of care (as in bundled payments)?

Continue reading “The Critics Are Wrong About IPAB”

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Every day, 10,000 people in the U.S. celebrate their 65th birthday, making each one of these seniors eligible for Medicare. The very program that gives America’s seniors access to affordable health care will turn a youngish 48 on July 30, but in a biting irony, it could go bankrupt before reaching its 65th birthday.

We cannot wish away or ignore the reality that Medicare’s Part A trust fund — the portion that pays hospital claims — is currently projected to run out of money by 2026. The good news, however, is that it is possible to put Medicare on a sustainable path if we can surmount current political hurdles.

It is no secret that Washington is better known for what it is not doing than what it is doing these days. Partisan gridlock has proved to be an insurmountable impasse for potentially worthy legislative efforts. This is especially true when it comes to making the changes needed to sustain Medicare’s future, where Washington is truly making things much harder than they need to be.

Much of the current debate has focused on reforms that would only slightly defer Medicare’s pending insolvency, with the potential for mere cost-shifting. With many of those recommendations, political disagreement is so strong that an extremely limited chance exists to pass a compromise version. However, even if enacted, these reforms would only address the symptoms of Medicare’s condition rather than the underlying problem. The result would only help Medicare limp to its 65th birthday at best.

There is a much more meaningful reform out there that addresses the underlying problem, and, surprisingly, bipartisan consensus exists around the need to end the fee-for-service system in Medicare.

The current fee-for-service payment system compensates physicians and other health care providers for each service they deliver, such as an office visit, test or other procedure. While it is critical that providers be fairly compensated, Medicare’s fee-for-service structure contributes to inefficient care that is often disconnected with actual patient outcomes. It has accelerated the program’s financial imbalance with inflationary spending that has little or no connection to helping beneficiaries get healthier.
Continue reading “Can Medicare Reach Its 65th Birthday?”

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The Next Health Care calls for very different strategies and tool sets. Many systems are acting as if they read a manual on how to do it wrong. How many of these critical strategic and tactical mistakes is your system making?

So I was beta testing FutureSearch, this cool new Google add-on app I’m writing with a coder, and I found an article that I wrote in 2025. My first thought was, “Cool! It works!” My second thought was, “I’m still working at the age of 75?” It was only then that I focused on the title of the article: “Fail: The 16 Steps by Which Hospitals Failed in the Post-ACA Risk Environment — An Analysis.”

The article detailed a dispiriting history from 2013 to 2020. More important, it listed the 16 most common mistakes that hospitals and health systems made while trying to navigate the new risk environment of the Next Health Care.

I found this interesting because of course right at this moment much of the health care industry, in many different ways, is trying to move away from the traditional fee-for-service payment system, which has given the whole industry adverse incentives, leading to much higher costs, poorer quality and restricted access. The rubric of the day is “volume to value.” And I see many different institutions and systems across the country making exactly these mistakes already in 2013.

Step-by-Step Instructions

As you read this list, ask yourself in what way you and your institution might be making the wrong decisions, and ask yourself what they will look like looking back from 2025.

Stick with fee-for-service. Though they included various incentives and kickbacks, most accountable care organizations and ACO-like structures built in the 2012–2014 period were based on a payment system that remained stubbornly fee-for-service. Systems continued to make more money if they checked off more items on the list (and more complex items), rather than solving their customers’ problems as well and as efficiently as possible.

Continue reading “How to Fail at the Next Health Care”

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What is the path forward for physicians who want to remain in private practice, outside the constraints of health system employment? How will the environment change and what new demands will that place on practices and physicians? What follows are the observations of one industry-watcher who has worked on all sides of health care, but who now spends most his time focused on the interests of those who pay for it. No crystal ball, but several trends are clear.

There are now concrete signs that health care’s purchasers are exhausted and seeking new solutions, that a competitive marketplace is emerging and getting increasing traction. As they abandon ineffective approaches, the paradigm that has dominated the industry for the past 50 years will be upended. The financial pressure felt by buyers will transfer to the supply side health industry that has come to take ever more money for granted.

For decades, fee-for-service payment, inclusive health plan networks, and a lack of quality, safety and cost transparency have been enforced by health industry influence over policy, effectively neutralizing the power of market forces.

Without market pressure, physicians have felt little need to understand their own performance relative to that of their peers. The variation of physician practice patterns within specialties has been high, with some physicians’ “optimizing their revenue opportunities” by veering wildly away from evidence-based practice. Even so, until recently in this dysfunctional environment, it has been nearly impossible to identify high and low performers.

Continue reading “How Physician Practices Can Prepare for a Health Care Marketplace”

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We should have seen it coming, really. It was entirely predictable, and the most recent RAND report proves it.

We incentivized comprehensive IT adoption, making it easier to bill for every procedure, examination, aspirin, tongue depressor, kind word and gentle (or not) touch without first flipping the American healthcare paradigm on its head, if such a thing is even possible.

According to analysis by the New York Times, hospitals received $1 billion more in Medicare reimbursements in 2010 than they did five years earlier. Overall, the Times says, “hospitals that received government incentives to adopt electronic records showed a 47 percent rise in Medicare payments at higher levels from 2006 to 2010 … compared with a 32 percent rise in hospitals that have not received any government incentives …”

To paraphrase the mantra of Bill Clinton’s successful 1992 presidential campaign: It’s the system, stupid. More specifically, it’s the business model, stupid, the fee-for-service system in which electronic health records are enabling tools.

It’s also the law of unintended consequences. You know … you take action, planning on this but instead you get that.

Like the introduction of cane toads in Australia to kill beetles (they couldn’t jump high enough). Like letting mongooses loose in Hawaii to manage the rat population (they preferred native bird eggs). Like Kudzu, the insatiable vine that’s devouring the South.

According to the authors of the RAND report, the problem is with the incentive structure that encourages more tests and procedures. Well, of course it is. Doctors and administrators have a clinic or hospital to run. They have expensive invoices from Epic and Cerner to pay. They can now track and bill for all this stuff they used to not get paid for. Are we surprised?

And meanwhile, fee-for-service leads us down a contradictory rat hole of massive healthcare costs and lousy public health. Continue reading “It’s the System, Stupid: Reversing the Law of Unintended Consequences”

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What a week last week! First the disgraced cyclist confession and later the baffling college-football-player-and-his nonexistent-(dead)-girlfriend story, with the RAND report sandwiched somewhere in between. It’s positively a scandal-palooza.

What’s that? You don’t feel like the recent RAND report, which basically says that a 2005 RAND study financed by GE and Cerner was wildly optimistic in predicting about $81 billion in potential health care cost savings through widespread adoption of electronic health records, qualifies as a genuine hoax, controversy, scandal?

Me neither.

But it does neatly frame what is arguably a unique characteristic of the healthcare industry—a trait that extends to peripheral industries as well. Basically, healthcare is an interconnected environment. Call it the systems theory of healthcare, co-dependency … or just regular dependency. Call it what you want, but there is an interconnectedness in healthcare that we ignore at the expense of national wellness.

Witness key data points provided by the RAND report:

  • Modern health IT systems are not interconnected and interoperable, functioning “less as ‘ATM cards,’ allowing a patient or provider to access needed health information anywhere at any time, than as ‘frequent flier cards’ intended to enforce brand loyalty…”
  • Neither are they widely adopted, with an estimated 27 percent of hospitals utilizing a basic electronic record. Without broad adoption, interoperability is far less relevant.
  • Improvements in quality of care / patient safety and reductions in healthcare costs (which have grown by $800 billion since 2005) are not manifesting with EHR adoption, in part because hospitals and clinics are rushing to adopt mediocre solutions and garner federal funds.
  • The provision of care is the same as it ever was, even though EHRs are frequently promoted as the optimal tool for a different kind of care.

The reasons for these disappointing stats are readily apparent and unalterably interconnected.
Continue reading “Are Healthcare and Health IT in a Dysfunctional Relationship?”

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We physicians like to think that we are really different from other workers.

We physicians, perhaps thinking back to that medical school application essay we all wrote, really believe that we went into this career to simply help others.  We physicians truly believe that we always put our patients first.Because we sincerely believe all of the above, we are shocked when someone like Uwe Reinhardt points out that collectively we act just like any other worker in the economy.

The classic 1986 letters between the Princeton professor Reinhardt and former New England Journal of Medicine editor Arnold Relman highlight the tension between how we think of ourselves and how we act.

Relman thinks physicians are special and he asks Reinhardt the following question:

“Do you really see no difference between physicians and hospitals on the one hand, and ‘purveyors of other goods and services,’ on the other?”

Reinhardt is ready with a long answer that should be read in its entirety.  The short answer is that doctors act like any other human beings. A portion of his answer includes the following:

“Surely you will agree that it has been one of American medicine’s more hallowed tenets that piece-rate compensation is the sine qua non of high quality medical care.  Think about this tenet, We have here a profession that openly professes that its members are unlikely to do their best unless they are rewarded in cold cash for every little ministration rendered their patients.  If an economist made that assertion, one might write it off as one more of that profession’s kooky beliefs.  But physicians are saying it.”

Continue reading “The Battle for the Souls of American Doctors”

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