Tuesday, April 17, 2007

Replacing Fee-for-Service

Any serious effort to reform or redesign the health care system will have to include doing something about the fee-for-service system of financing.

Under fee-for-service, providers get paid separately for each service element; i.e., so much for this lab test, so much for that x-ray, so much for the use of the operating room, so much for a physician office visit, and so on.

The system creates a host of problems. For one, it rewards providers who provide more services rather than less, thereby discouraging any exercise of judgment as to whether the value of the service bears any relationship to its cost. Another is that it fortifies the costly guild system that dominates health care by limiting payment for specific services to particular specialties. Because the amount of payment for a service bears no necessary relationship to the cost of providing it, entrepreneurs are encouraged to set up specialty houses that offer only the services for which payment is generous, thus further fragmenting the delivery system.

In an editorial that appeared in the April 9 issue of Modern Healthcare, Todd Sloane discussed the problem in the context of angioplasty. Recent studies indicate that this expensive procedure is no more effective than much less costly drug therapy. But many doctors who provide lucrative angioplasties continue to defend them.

Sloane calls for someone to fix this faulty system, but like most critics does not offer any suggestions on what ought to be done.

Well, I have one. It is called global capitation. Under global capitation, the patient signs up with a provider organization like Kaiser or the Mayo Clinic, which is paid a fixed amount per month to provide whatever care the patient needs. That rewards providers who find more efficient ways to provide care instead of those who figure out how to maximize revenue.

Global capitation was tried in the 1990’s and although it was effective in controlling cost, people didn’t like it because it restricted their choice of hospitals and physicians. Also, provider organizations still left medical decisions in the hands of individual physicians instead of improving efficiency by managing care, which the system expected them to do.

But times have changed and I think it deserves another try.

And if not that, what?

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