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Tag: Fee-for-service

How Doctors Are Trapped

Every lawyer, every accountant, every architect, every engineer — indeed, every professional in every other field — is able to do something doctors cannot do. They can repackage and reprice their services. If demand changes or if they discover a way of meeting their clients’ needs more efficiently, they are free to offer a different bundle of services for a different price. Doctors, by contrast, are trapped.

To see how trapped, let’s look at another profession: the practice of law. Suppose you are accused of a crime and suppose your lawyer is paid the way doctors are paid. That is, suppose some third-party payer bureaucracy pays your lawyer a different fee for each separate task she performs in your defense. Just to make up some numbers that reflect the full degree of arbitrariness we find in medicine, let’s suppose your lawyer is paid $50 per hour for jury selection and $500 per hour for making your final case to the jury.

What would happen? At the end of your trial, your lawyer’s summation would be stirring, compelling, logical and persuasive. In fact, it might well get you off scot free if only it were delivered to the right jury. But you don’t have the right jury. Because of the fee schedule, your lawyer skimped on jury selection way back at the beginning of your trial.

This is why you don’t want to pay a lawyer, or any other professional, by task. You want your lawyer to be able to reallocate her time — in this case, from the summation speech to the voir dire proceeding. If each hour of her time is compensated at the same rate, she will feel free to allocate the last hour spent on your case to its highest valued use rather than to the activity that is paid the highest fee.

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Barking Up The Wrong Tree: Affordability, Not Cost Growth, Is The Policy Challenge

A recent spate of commentaries on the continuing health spending moderation raise an important policy question:  If the cost curve is well and truly bent, why are we investing so much of our policy energy on bending it further, when the more pressing problem is the declining percentage of Americans that can afford our health system’s astronomical costs?

Health spending the past two reported years (2009 and 2010) have grown in the high 3 percent range, the lowest growth rates since Dwight Eisenhower’s last year in office (1960), five years before Medicare. Medicare’s actuaries have pointed to the recession as a root cause.  Yet even Medicare spending growth has subsided to about 5 percent in 2010, a development hard to attribute to recession since so few Medicare patients have first-dollar cost exposure. This analyst’s extensive industry contacts suggest no spending rebound in 2011 and 2012, despite an aging population and fee-for-service’s pernicious volume-increasing incentives in full force.

Pharmaceutical spending. The two most explosive cost problems of the 1980’s and 1990’s, pharmaceutical spending and imaging — which together now represent about 20 percent of total health spending — are now seeing low single digit growth, and seem likely to remain quiescent.  In the pharma case, the main contributor is the ruinous outflow of branded drugs from patent protection, and the failure to replace them with new protected drugs.  This outflow continues unabated until 2018.  Branded drug prescriptions are shrinking by 5 percent per year, and the only things preventing pharmaceutical sales from actually declining are brand price increases and growth in generics, which now represent almost 80 percent of prescriptions, according to IMS Health.  While specialty drugs (biologicals) remain a concern, those too begin losing patent protection in earnest in the next few years.

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Will Doctors or Patients Bend the Cost Curve?

The American Board of Internal Medicine (ABIM) and nine other professional medical societies announced that doctors should perform 45 tests and procedures less often than currently done because there is no good medical evidence that they add any value. Specifically, a xray or other imaging for low back pain in an otherwise healthy individual or an EKG as part of a routine physical, just add a lot of unnecessary cost to the health care system as a whole and don’t provide doctors or patients any meaningful information that would be helpful in improving health or arriving at the right diagnosis and treatment.

The ABIM partnered with Consumer Reports to create a new campaign called Choosing Wisely and are joined also by collaborators like employers (the National Business Group on Health, the Pacific Business Group on Health), hospital safety (the Leapfrog Group), and labor unions (SEIU).  The mission is simply to have doctors and patients deliver and receive care that is medically necessary, based on evidence, avoids harm, and minimizes duplication.

The real question is – will it work? Will doctors follow what their professional societies recommend?

Though Choosing Wisely is a laudable attempt to make medical care better quality, the truth is doctors won’t likely follow these guidelines from their medical societies. If it was that easy, we would not have this problem! Even today, it is still a challenge for the medical profession to have all doctors wash their hands correctly every patient every time, get immunized routinely against influenza, or even not to prescribe antibiotics for coughs, colds, and bronchitis due to viruses! What is more disturbing is that doing these basic interventions did not impact a doctor’s income. Some on the list of Choosing Wisely, however, will.

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Pay for the “A”

Medicine is simple and straightforward; except when it’s complex and nuanced.

Medical diagnosis is a simple matter of taking a history, performing an examination, and reviewing the results of ancillary testing; except when it’s a complicated case of eliciting subtle nuances from the patient in both the interview and the exam, and interpreting multiple pieces of conflicting data.

Medical treatment is a straightforward affair of providing appropriate treatment; except when there are multiple treatment options with unclear risks and benefits, technically challenging surgical or other procedures to perform, not to mention fully informing the patient and family about all of those treatment options, risks, and benefits, plus eliciting and answering all their questions.

Nothing to it.

Notice, though, that the key ingredient here is DIAGNOSIS. Performing a flawless appendectomy won’t do a thing for an ovarian cyst, nor will a PPI prescription do much for an acute coronary syndrome. Performance measures that look at treatment without addressing diagnosis are somewhere between misguided and ludicrous.

Why does American medicine have this so bass-ackwards? Follow the money. Thanks to the specialty-heavy RUC, the commission that sets fees for various procedures, doing something — anything — is paid far more handsomely than thinking (even thinking about what to do).

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Mitt Romney Treads Carefully

Presidential candidate Mitt Romney’s reform plan for Medicare is just as cautious―and carefully vague on some key details―as might be expected from an politician famously sensitive to the winds of public opinion.

Romney’s proposal looks a lot like those offered by last year’s Rivlin-Domenici Debt Reduction Task Force and the 1999 National Bipartisan Commission on the Future of Medicare. Like those proposals, and also the plan offered by House Budget Chair Paul Ryan, Romney’s would convert Medicare into a premium support program in which beneficiaries would receive a fixed contribution towards the cost of coverage. However, unlike Ryan’s plan―received so negatively by seniors that it cost Republicans a House seat―beneficiaries would still have traditional fee-for-service Medicare as an option.

Under the Romney proposal, commercial insurers would compete with traditional Medicare in offering a basic set of benefits. Beneficiaries would choose from a “menu” of plans, paying out-of-pocket for any difference between the premium and the federal support contribution. Lower-income individuals would receive larger premium support amounts, while beneficiaries selecting options with premiums below the support amount would keep the savings. Also, as with the other similar proposals, there would be a gradual increase in the Medicare eligibility age from today’s 65 years.

Although it was immediately attacked by various liberal commentators, the Romney proposal seems on the surface to be a reasonable approach to a program that otherwise is headed for bankruptcy. How reasonable, however, will depend on numerous details that have been carefully left vague. (Interestingly, the proposal is nowhere mentioned on candidate Romney’s campaign web site.)

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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.

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The End of the World as We Know It

One aspect of religious dogma that has entered the medical world is that fee-for-service pricing of medical services is bad and should be replaced by a capitated, or global, arrangement that establishes an annual budget for care for different risk groups of patients. Like other religious beliefs, this is often offered without rigorous analytic support. Some insurance companies are particularly pleased with this approach because it shifts risk from insurers to providers and makes it easier for the insurers to create budgets and price their products.

Don’t get me wrong. This may be the right way to go, but the topic is worth more time and discussion than it has received.

It may be illustrative to think about other sectors of our economy and see which of them are characterized by global payments. Not many. Sure, there are products like cellular phone service that are sold in monthly fixed dollar amounts. But that is because it is a high fixed-cost product, where the marginal cost of additional phone calls is essentially zero. Fixed prices offer revenue stability to the vendor and a way to recover those fixed costs.

But most other goods and services in our economy are sold on a piece-work basis. Think of groceries, automobiles, electricity, gasoline, televisions, and clothing. Why is fee-for-service pricing appropriate for these? Or, in economists’ terms, why does such pricing lead to a reasonably efficient solution? The answers are pretty straightforward. Other markets are characterized by open entry and exit and by transparent information concerning quality, value, and pricing. Consumers can make more or less knowledgeable choices based on that publicly available information. New firms enter the market when they see an opportunity. Successful firms grow. Other firms fail.

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HPHC Goes Its Way, Thoughtfully

Lots of people are thinking about the form of payments between insurance companies and providers for health care services, but it is also important to think about how each such approach would be marketed as an insurance product to the population.

The payment model that gets the most attention is capitated, or global payments, combined with accountable care organizations. In this environment, an average annual budget is established for each person served by an integrated health care delivery system (ACO), and that budget is shared among the providers according to some mutually agreed upon arrangement.

But the insurance product that would accompany this kind of payment scheme is often left without much of a description. As I have talked with insurance executives, they often fail to explain how they would offer consumers a desirable choice for a product based on this payment plan. Instead the main focus seems to be on shifting risk from the insurer to the providers, reducing the amount of unnecessary expenses, and sharing the benefits of those changes between the insurance company and the providers. Over time, the theory goes, the cost curve is slowed and premiums go up less quickly. But, it remains unclear what the role is for consumer in this scheme.

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