Sunday, May 23, 2010

A Step Towards Global Payment

There is a growing consensus that somehow our current fee-for-service system of financing health care is an important cause of high cost and needs to be replaced.

Under fee-for-service, providers get paid for each office visit, lab test, x-ray, hospital admission, etc. So the more they do, the more they get paid. It is generally believed that this incentive causes providers to increase the cost of health care by providing more services than are medically justifiable. The incentive effect is magnified by the unique economic arrangement in health care, whereby most purchasing decisions are made by providers (doctors) rather than by customers (patients).

The only alternative to fee-for-service that has been identified is global payment, which comes in two forms.

One is to pay a flat fee for an episode of care like treating a patient who has had a heart attack or who receives a total hip replacement. The idea here is that with a flat fee, providers will want to maximize profit by reducing the cost of the care provided. This arrangement has been used for years by Medicare Part A which pays hospitals a predetermined amount for each admission rather than for individual services. When the plan was introduced in the 1980’s, the swift reduction in the length of hospital stays convinced many that the incentive was effective. Consideration is being given to expanding this plan by “bundling” under a single fee the physician and hospital services as well as the related outpatient care provided before and after the admission.

The other form is capitation, in which the provider provides all of the health care services patients need in return for a predetermined monthly fee per patient. HMO’s are examples of this arrangement. The incentive to do more under fee-for-service is reversed under capitation since the amount of income remains the same regardless of the amount of service provided.

There are three main barriers standing in the way of implementing capitation on a wide scale.

One is the concern that patients will not be given all of the care they need and that care will be “rationed.” While there was lots of talk about this during the managed care era of the 1990’s when the capitation method of payment was widely employed, there is little evidence that patients were harmed and reason to believe that they may have benefitted by avoiding the risks associated with unnecessary treatments.

Another is restriction on choice of physician. Providers who accept capitation will have to live within fixed budgets. They will therefore need to create provider networks over which they have some control and require their patients to obtain their care from the providers who make up those networks.

A third is the need to consolidate hospitals and doctors into unified, centrally managed organizational entities. Providers that live within a pre-determined and fixed budget will have to manage their money and will not be able to tolerate unregulated decisions that have financial consequences. The medical profession has fought for years to preserve its independence from corporate oversight, but their position cannot prevail in the context of global payment.

These things need to be talked about and so I was pleased to see the Op-Ed piece by Joanna Weiss in the May 18 issue of The Boston Globe. Her main theme was that health care providers often profit from their own misdeeds, such as collecting fees for treating conditions caused by their own preventable medical errors. But later on she reported on Intermountain Healthcare, a Utah-based integrated healthcare system that is financed in part by global payments. Of the three barriers identified above, she mentioned only one – rationing.

So her discussion of global payment was incomplete, but it’s a step in that direction.

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