The Business of Health Care

Is Fee-for-Service Really Dead? Really?

The 21st century challenge for the American health care delivery system is to deliver higher quality care for less money.   Republican and Democratic experts agree that payment reform involving transitioning from fee-for-service to global, value-based systems is necessary for us to achieve that goal.  Accountable care organizations (ACOs) are the new entities that will receive the new global payments and distribute them to the doctors, allied health professionals, hospitals, and post-acute care facilities that care for the patients; Medicare ACOs are being piloted under provisions in the Affordable Care Act (ACA) and Commercial ACOs are being developed by private insurance companies, hospitals, and physician groups.

The ideal payment system would support the ideal value-driven health care delivery system.  Distinguished expert panels convened by the Commonwealth Fund and the Institute of Medicine have described the attributes of a system that would be far superior to our current delivery system:

· Care would be patient-centered
· Care would be safe
· Care would be timely and accessible
· Care would be efficient with little waste
· Care would be coordinated among providers and across facilities
· Continuity of care and care relationships would be facilitated
· Collaboration among providers would deliver high quality, low cost care
· Patients’ clinical information would be efficiently exchanged
· Caregivers would engage patients in ways that would maximize health
· Accountability for each aspect and for total care would be clear
· Continuous innovation, learning, and improvement would occur


Although fee-for-service does not have all of the above ideal attributes, it does have a long history of paying for medical care.  Atul Gawande’s fascinating description of how he negotiated for his first salary as an attending surgeon at Harvard includes a brief history of fee-for-service medicine.  He starts with eighteenth century BC Babylon where surgeons got ten shekels for lifesaving operations on citizens and two shekels for the same operation on slaves and ends up with the standardized fee schedule that was developed in the 1980s to replace the “usual, customary, and reasonable fees” that insurance companies did not always find reasonable.  Gawande’s article is a good place to start understanding the strengths and weaknesses of this a la carte approach to paying doctors with its 600 page master fee schedule that lists what 24 different insurers pay for different services that Harvard physicians bill (

Fee-for-service has lasted so long because it does have some advantages.  Conceptually, it is easy to understand because each procedure, service, intervention, or medical device is billed and paid for separately.  Fee-for-service encourages the delivery of care, is flexible enough to work with different sizes and types of physician practices, different types of care such as office visit, operation, procedure, or therapy session, and different sites of care such as office, skilled nursing facility, nursing home, hospital, or out-patient surgery center.  Fee-for-service supports accountability for each separate portion of care, but it falls down in supporting accountability for total clinical care provided by many different providers. (

While the concept of fee-for-service is relatively straightforward, the reality can be quite confusing for both patients and providers.  Fee-for-service payments are constrained by CPT and ICD-9 rules that establish what can and cannot be billed for.  Unlike normal consumer markets, the list price for a service is hard to pin down because the amount paid is negotiated between different insurers and providers.  When a health reporter was told by her physician to obtain an expensive MRI to work up her migraine headaches, she experienced frustration trying to establish just how much the test would cost  (  Her local hospital could not tell her how much it would cost; an academic medical center quoted her a price of $5,315 for an uninsured patient, but could not tell her what the price would be to her insurance company; an independent imaging center told her that the price would be $2,000 to $3,600 for an uninsured patient and about $600 to $1,200 for an insured patient.  She finally got the scan at her local hospital and was surprised to get a bill for $7,468.

Fee-for-service also makes coordination of care across multiple providers and different settings difficult.  Since the payments are limited to one provider performing one service, this arrangement leads to hospitalized patients receiving different bills from the surgeon, the anesthesiologist, the pathologist, the infectious disease consultant, the radiologist, and the respiratory therapist.

The biggest problem with fee-for-service payments is that it results in overutilization and unnecessary care.  Dr. Gawande’s New Yorker article about McAllen, Texas explained the problem of medical overuse so clearly that President Obama had members of the Senate and the House of Representatives read it during the debate over the Affordable Care Act.  One cardiac surgeon in McAllen said, “Medicine has become a pig trough here.  We took a wrong turn when doctors stopped being doctors and became businessmen.”

“Compared with patients in El Paso and nationwide, patients in McAllen got more of pretty much everything – more diagnostic testing, more hospital treatment, more surgery, more homecare.”  (

Health care policy experts on both the left and the right agree that ending the fee-for-service payment system will be necessary to control health care costs.  The New England Journal of Medicine recently published back-to-back articles with how the two approaches would bend the health care cost curve.  The Republicans responded with the following proposals:

•Medicare premium support replaces defined benefit to be used to purchase insurance

•Convert tax subsidy for employer insurance to predetermined refundable credit

•Transition from fee for service to bundled payments

•High option plan for Medicare

•Regional Medicare plans to encourage greater entrepreneurship

•Health insurance exchanges without “heavy regulation imposed by ACA” (

Not surprisingly, the Democratic health policy wonks came up with a slightly different list of solutions:

•Model of state self-regulation with spending targets where public & private payers negotiate payment rates with providers

•Replace fee-for-service with bundled and global payments

•Medicare competitive bidding for medical devices, lab tests, X-rays, etc

•Insurers should offer tiered plans with lower copays if patient chooses high value providers

•Payers & providers electronically exchange eligibility, claims, etc

•Single-standardized physician credentialing

•Price transparency

•Non physician providers should practice to full extent of their training

•Stark Law extended to prohibit physician self referrals for services paid by private payers

•FEHBP transition to new payment models

•Safe harbor against malpractice if physician uses HIT & EBM guidelines

•Shifting costs to patients & cuts to provider payments are not good ways to cut costs (

Replacing fee-for-service payments with global, value-based payment methods is the one proposed solution that both liberal and conservative health policy experts agree on.  Ken Kizer, MD spoke for most health care policy experts when he stated at a recent American Society of Clinical Oncology meeting, “Payment reform is inevitable.  Fee for service is dead.”  (’re-not-there-y/#more-55492)  Health care experts are attracted to payment reform because of the estimated $200 to $600 billion savings over ten years (

Practicing physicians have not shown the same level of enthusiasm for the elimination of fee-for-service.

“A survey of doctors by Harris Interactive finds that 59 percent of physicians believe that the fee-for-service system encourages them to provide ‘an appropriate level of care.’ Only 15 percent disagreed. Although 37 percent of doctors thought such a system encourages the use of more care or expensive care, 38 percent also said that a fee-for-service system encourages coordination of care. Not surprisingly, the 400 U.S.-based primary care physicians and 600 U.S.-based specialists surveyed, did not favor the idea of a global capitation payment—or a fixed payment per month for all medical services. Nearly 60 percent of the doctors surveyed said that capitation put too much risk on the provider.”


Another problem for health care leaders is managing the transition from fee-for-service to global, value-based payment systems.  Dr. Don Berwick, former head of CMS, describes the transition problem facing leaders who are still paid mostly by fee-for-service arrangements:

They’ve got one foot on the dock and one foot on the boat and they’re drifting apart. One foot is fee-for-service, revenue-driven, grow the volume, do more and more, which is the dock, and the boat is, let’s focus on what patients really need and decrease unnecessary care and the liability or harmable (sic) unnecessary care. ( )

Steve Blumberg has described four types of health care leaders when it comes to dealing with the transition away from fee-for-service:

·      Leaders who are acquiring the necessary tools and shifting the culture to deal with new payment systems.

·      Leaders who understand the problem intellectually but have not embraced any solution.

·      Leaders who are just waiting and hoping the problem goes away.

·      Leaders who are trying to get their organizations acquired by others so they don’t have to deal with the problem.


Blumberg’s observations are spot on and match my impressions from talking with health care leaders from all over the country.  I have met executives who belong in each of the four groups, and the smallest number in my experience resides in the proactive first category.

I recently read with interest two reports out of California, which support the uneven preparation of health care to get ready for accountable care organizations that are not paid by fee-for-service.  In San Francisco providers appear to fall into all four categories ( In Fresno, California physicians appear content to remain in fee-for-service arrangements and appear to land squarely in the third category of waiting and not preparing to respond to federal health care reform. (

This gap between the health policy experts and practicing physicians and local health care leaders is worrisome.  Even if Accountable Care Organizations paid by global, value-based payments are inevitable and the best possible solution to the unsustainable cost of American medicine, the reform enterprise will fail or flounder without an enormous cultural change by all the participants in this complicated and important endeavor.

Kent Bottles, MD, is past-Vice President and Chief Medical Officer of Iowa Health System (a $2 billionhealth care organization with 23 hospitals). He was responsible for the day-to-day operations of a large education and research organization in Michigan prior to his work with in Iowa with IHS. Kent posts frequently at his blog, Kent Bottles Private Views.

6 replies »

  1. Mike, tell us more about the catastrophic insurance you’re providing direct-pay patients to protect people from financially backbreaking charges for unexpected, needed treatment that direct pay clinicians are ill-equipped to handle.

    You’re not doing that?


  2. Sadly, the ACA does very little to get at the core of what ails – pricing. Even bundled payments (for any value you want to pick) doesn’t solve our big dilemma – which is NHE (now at 18% of GDP and $3.5T per year).

    “Americans can always be counted on to do the right thing – after they’ve tried everything else.” Winston Churchill.

    We’re still trying everything else.

  3. All the ACO-physician contracts I see in my area include small productivity bonuses/big productivity penalties for not meeting goals; fierce non-compete clauses; and so on. They’re not counting on FFS going away anytime soon.

  4. If someone tried to “instruct” me not to tell patients about this or that treatment option, I would just ignore them.

  5. “· Care would be patient-centered……….”

    Interesting how that entire list of attributes is met though the direct pay practice model. Ah, but that is just an euphemism for Concierge medicine, you say, and we all know Concierge medicine is only for the rich. Tell that to the local community health clinic who has started a monthly fee option for the uninsured – and they (the patients and the facility) absolutely love it. Can an ACO model accommodate such an effective mechanism as direct pay? How are you going to feel about the ACO when you discover that the docs have been instructed NOT to tell you about the ‘might be more effective but costs a lot more’ type of treatments? Who does the doc really work for in the ACO? I can assure you it won’t be the patient. Who does the doc work for in direct pay?