Is Fee-for-Service Really the Problem?

The authors’ recent book, Medicine in Denial, briefly mentions the subject matter of this post — the effects of fee-for-service payment.  This post examines the issue in more detail, because of its importance to health care reform.

The medical practice reforms contemplated by Medicine in Denial have large implications for a host of policy issues. As an example, consider the issue of fee-for-service payment of providers. The health policy community has arrived at a virtual consensus that fee-for-service is a root cause of excessive cost growth in health care. Payment for each medical service rendered seems to involve an unavoidable conflict of interest in physicians: their expertise gives them authority to increase their own payment by deciding on the need for their own services. This conflict of interest has driven countless attempts at health care regulation. These attempts usually involve some combination of price controls, manipulation of incentives, and third party micromanagement of medical decision making. For decades these attempts have proven to be hopelessly complex, illegitimate in the eyes of patients and providers, often medically harmful, and economically ineffective.

Because regulating the conflict of interest has proven to be so difficult, the health policy consensus is now that the only escape from the conflict is to avoid fee-for-service payment. But this consensus misunderstands the conflict’s origin. The conflict of interest arises not from fee-for-service payment but from physicians’ monopolistic authority over two distinct services: deciding what medical procedures are needed and executing the procedures they select. The conflict does not disappear when payment switches from fee-for-service to its opposite–-capitation. Indeed, then the conflict becomes even more acute–-physicians have an incentive to withhold their expertise from costly patients who need it the most.

The conflict of interest can be avoided only by disaggregating physician authority. Whoever executes medical procedures must not be the party who decides what procedures are needed. Who should make those decisions? Here we need to distinguish between two situations: (1) situations of relative certainty, where assembling the right information reveals only one reasonable option, the option that would be selected regardless of who makes the decision, and (2) situations of genuine uncertainty, where assembling the right information reveals several medically reasonable options and the choice among them is inherently personal to the patient. In neither situation should physicians have decision making authority. The situation of greatest risk (medical and economic) is the second one, and there decision making authority should rest in the informed patient.

That shift to patient-driven decisions would replace the conflict of interest with heightened practitioner incentives to improve pricing and quality from the patient’s perspective. Improving either one enhances the practitioner’s competitive position in a fee-for-service environment driven by patient decisions.

That environment should involve open competition among practitioners, coupled with mandating high standards of performance within a safe and effective system of care. Innovative practitioners could compete at exceeding the mandated standards of quality but could not gain a pricing advantage by falling short of those standards. Within that constraint, most providers would compete on non-medical factors such as price, location, convenience, amenities, cultural compatibility and personal rapport. A marketplace of this kind might turn out to have huge benefits, tangible and intangible. The tangible benefits would be not only lower prices but also higher medical quality and thus cost avoidance. Informed patients would drive greater demand for high value services and lesser demand for low value services, while avoiding the medical harm and costly responses so often triggered by low value services.

To reiterate, the essential change is to break the system’s dependence on the monopolistic authority of physician practitioners. This becomes feasible with the infrastructure and institutions described by Medicine in Denial. The book describes a system of care where practitioners would be credentialed based on their demonstrated competence at performing discrete medical procedures, where their personal knowledge would not be a basis for credentialing, where patients and practitioners would jointly use tools designed to elicit objective knowledge individually relevant to patient problems, where knowledge tools would not be contaminated with vendor marketing, where patients would decide what medical procedures meet their personal needs, where patients could safely choose among highly competent practitioners who offer the specific services needed, where other practitioners could specialize in helping patients navigate the decision making process. In such a system of care, fee-for-service payment would reward the most productive practitioners, those who deliver the most in terms of money, time, and other patient needs.

The point of this discussion is not to advocate fee-for-service payment. The point is simply that the pros and cons of fee-for-service depend on the environment in which it occurs. John Goodman points out that in most market environments fee-for-service coexists with other payment approaches. On his view, third party involvement seriously distorts fee-for-service payment in the health care environment. He would minimize third party payment by shifting payment authority from third parties to patients. Our point is that this shift in payment authority needs to be aligned with a similar shift of medical decision making authority, which in turn depends on fundamental medical practice reform (see especially part II.B.2.d of Medicine in DeniaI). In both contexts, medical and financial, the health care system must equip patients with the information tools and funding needed for them to safely assume the risks and burdens involved in health care decision making. The information and funding they need can be placed in their hands, in a manner that offers them reasonable trade-offs but shelters them from the trade-offs now faced by the uninsured and underinsured.

The reforms presented by Medicine in Denial would do more than change the dynamics of fee-for-service payment. The entire marketplace for health professional services would be transformed. The current severe shortages in the primary care workforce might well disappear. No longer would practitioners enter an out-of-control, demoralizing, non-system of “care”; no longer would they be deprived of the emotional, intellectual and financial rewards that caregiving should naturally produce. The health professions could attract countless individuals with the interpersonal skills and technical aptitudes needed to become compassionate and skilful practitioners. They could freely enter into competition for patients by acquiring high levels of skill in clearly defined roles. Costly, prolonged, knowledge-based education would no longer block entry into medical practice. Individual practitioners would be free to find niches that offer the best fit between their own abilities and patient needs. They would be free to expand their expertise as their abilities and drive permit. They would be free to innovate in delivery of services. Virtuoso performers would be rewarded in money and status without regard to formal education. Upward mobility would then become part of the health professions, unlike the status quo, where few upward career paths exist for non-physician practitioners.

Freed from physician hegemony over medical practice, institutional providers could organize highly efficient teams of skilled practitioners. Underserved communities would be similarly free to develop practitioners from their own populations. And more innovation in health care delivery would occur as more providers and new organizations have greater opportunity to pursue innovation and its rewards.

Physicians may find such a marketplace deeply threatening. But they are also threatened by the status quo. Their monopolistic credentials burden them with unaffordable education debts, incomprehensible third party demands, unattainable standards of care, unpredictable litigation exposure, and unbearable risks of error for their own patients.

Larry Weed is a physician who originated influential standards for organizing medical records more than 50 years ago. His son Lincoln practiced employee benefits law in Washington, D.C. for 26 years and now specializes in health privacy at a consulting firm.