Thursday, January 20, 2011

Religious dogma

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.

In contrast, medicine is characterized by friction. Doctors are trained as radiologists, pathologists, or other specialists. The only thing they can do for a living (more or less) is sell their services as specialists. As the people at the Dartmouth Atlas have noted, this leads to supply-driven treatment patterns. If there are more radiologists in a given community, the usage of imaging will be greater than in less well staffed communities.

Likewise, hospitals generally do not come and go. They, too, represent huge investment in fixed costs, and they stay in the marketplace for decades.

But in addition to this, the main attribute of the practice of medicine is opacity. You and I as consumers (patients) have no idea what a given service costs because it is covered by insurance, and the actual rates paid to doctors and hospitals by each insurer are confidential. You and I also have no metrics by which to judge the quality of the service being provided. You have every incentive to request or demand more service for your medical problem.

If you are an insurance company holding a hammer, every problem looks like a nail. What is the most direct thing you try to do to influence levels of care that might be excessive? Design a pricing system that shifts risks to providers and is subject to an annual budget.

But, that is not the only solution. In the post below, I discuss the path being taken by Harvard Pilgrim Health Care. It is good for Massachusetts that two of the largest insurers are trying different approaches. It establishes the possibility of comparing results across the two populations.

Now, though, let me let you in on a little secret with regard to capitated care. Underneath the global budget, there is still a fee-for-service arrangement establishing the transfer prices among the providers in a network. That GI specialist will still get paid for each colonoscopy. The big thing to work out in this system is the allocation of any surplus or deficit in the annual budget among the various specialists.

Unless that allocation is skewed heavily towards primary care doctors, decisions about the level of care given will not change. But, if the allocation is skewed too heavily towards the PCPs, there is no real income signal for the specialists, leading to a danger that they will not feel invested in the end result. Unless the system is accompanied by intensive, real-time reporting, along with clear penalties for excessive care, it will not work.

Did I say penalties? You bet. Without those, there is no enforcement of the global budget. But with those, global budgets are likely to raises hackles and resentment among specialists. I predict that the biggest issue facing physician groups in the coming years is the perceived interference by the global payment risk unit in the clinical decisions made by specialists.

If we were designing the health care system from scratch, I am guessing that the HPHC approach would be more likely chosen than a global payment approach. It would be accompanied by a shared savings mechanism, where physician groups and hospitals that beat an annual budget target would get a cash reward. It would also have a hefty dose of transparency with regard to clinical outcomes, so that the pricing levels charged by each provider would be accompanied by meaningful medical information that could help consumers make more rational choices. In short, a lot of the opacity of the health care delivery system would be eliminated.

That does not solve the problem of friction with regard to market entry and exit by doctors and hospitals. But global payments are weak on that front, too. Such friction may be an inherent characteristic of this sector for some time to come -- unless, as appears likely, overall payment rates for Medicare, Medicaid, and private insurers fail to keep up with the cost of living. In that case, the future will belong to the efficient, hospitals and doctors who implement Lean or other front-line driven process improvement.


e-Patient Dave said...


I hear you on this, but if the situation is as you describe, we're in a more complicated mess of denial than I realized.

Correct any of this that's inaccurate:

My impression after just a couple of years spottily watching healthcare is that FFS has two big problems because you mainly get paid when you deliver treatments, not when people are kept healthy. Si?

First, there's the perverse incentive: if you want to make more money, you HAVE to do more services/procedures. Which is NOT what anyone sensible would want the system to do. (I ask people to think about this for their kids: "Would you prefer to send your child to a system where their income is tied to diagnosing and treating more illnesses, or a system where they invest in keeping kids healthy?")

Then there's the problem of "pelletizing" how docs can spend their time. There's no insurance billing code for researching the latest treatment options, coordinating care between providers, etc. From what I've heard, those services must be done out of a practice's spare change, or funded by philanthropy.

You cite the resentment we'll face from "interference in the clinical decisions made by specialists." We're painted into a corner with this one, because of the problem of practice variation, which means a whole lot of doctors are doing work that they BELIEVE is medically necessary, although their neighboring colleagues do it several times less often. That's likely to be difficult to undo - no matter how we solve it, we'll be (correctly) taking many billions of income out of those pockets.

I think it's a feeble excuse to say "We have to keep overspending and overtreated because some docs are addicted to the income."

How is this handled in systems like Mayo, Geisinger, Kaiser?

p.s. I pretty much agree with your thoughts on income signals, and I sure think primary care should be emphasized. We need more Amy Ship and Danny Sands doctors.

p.p.s. In hospitals like Beth Israel Deaconess here's an essential structural obstacle to change: the fact that most docs don't work for the hospital so practice standards can't be enforced. One example is the fact that although I like what PatientSite offers, many (most?) docs won't participate. Ugh.

Anonymous said...

I disagree with --> "The only thing they can do for a living (more or less) is sell their services as specialists."
From what I've experienced, a physician can walk through the door of just about any place, flash the M.D., and get a job... as a journalist, a venture capitalist, a stock/hedge fund analyst/consultant, a corporate CMO, a professor, you name it. All jobs that others covet, but have a hard time getting. Not that this has anything to do with payment reform, but I just wanted to debunk this common claim that I often hear from medicine. It's simply untrue.

Unknown said...

Fascinating posts. Just a minor suggestion: On the examples from other industries of fee-for-service versus global payments, perhaps an interesting comparison (at a very general level) would be financial advisors. In the old transaction fee model, the incentive was (for some, in theory) to churn portfolios. However, in the model where annual fee is based on percentage of assets, the interests of the advisor and the investor should be somewhat more closely aligned (There are certainly still issues regarding minimum fees, fiduciary responsibilities around advice, etc, but this is the spirit of it anyway.). Thanks.

76 Degrees in San Diego said...

Let me see if I get this....each system of reimbursement cannot prevent "gaming" at many levels. You start by seeming to contrast "religious dogma" with "rigorous analytical support". But, what keeps gaming from happening all the time is something that is "moral", even possibly "religious". "Calling", "honor", "dedication", "self-sacrifice", "fear of consequences", have moral tonality. You have demonstrated the great amount of work it takes to supplement "morality". But I do agree that fiscal incentives on the part of patients, providers, and financers should parallel optimal healthcare.

Ron Cormier said...

Interesting that you say some insurance companies favor the capitated model. I thought this model put the ACO squarely between the employer and the payer, essentially relegating the payer to the role of third party claims administrators.

Anonymous said...

I agree with 76 if he is saying that you can't legislate morality; clearly a true statement. It worries me that docs seem to increasingly allow the innate morality that presumably led them to this profession to be superceded by the "everybody else is doing it; gotta get mine" mentality which has long pervaded Wall Street. We're better than that - I think?

nonlocal MD

Thomas Pane said...

Very nice post as usual Paul.

I think systems like Kaiser work well because the company acts as the both health insurer and employer of the doctors. That does a somewhat better job of aligning the interests of the three parties than most other systems.

Fee-for-service works well in most other service industries. (law, accounting, consulting). It also works well when patients make value choices on services they choose and prices they pay (Lasik).

I don't agree that it is easy to "walk through the door... flash the MD, and get a job". Getting a nonclinical position can be very challenging. It is perhaps a comment on the current state of affairs that there has emerged a cottage industry specializing in helping doctors make nonclinical career transitions.

CLSMT said...

I think systems like Kaiser work well because the company acts as the both health insurer and employer of the doctors. That does a somewhat better job of aligning the interests of the three parties than most other systems.

Having been a Kaiser baby and used Kaiser all my life for healthcare, I can say that I’d never go back to fragmented private care if I had a choice. My interests are protected better within an integrated system and my care is provided in a more coordinated way.

When I go in for a throat swab, they remind me if my flu shot is due or tell me if I need to get an annual exam. I’ll be reminded to get other vaccines, colonoscopies and mammograms when they’re due. I get the preventative care I need and my physician benefits because she gets a bonus each year for meeting quality metrics. She gets the same salary whether I show up for visits or not. She has the option to provide me with phone and internet visits that are free for me and substantially reduce the cost of my care (no front end or rooming costs for the medical office, no co-pay for me) and count towards her total required encounters per day (no insurance company to battle over reimbursement). The non-profit group benefits because I’m less likely to need hospital care. My insurer pays a set negotiated amount to both the non-profit and the physician group, spending less time trying to negotiate with a patchwork of providers. The loss of friction between the three groups means that my care is cheap but also comprehensive.

I know the price of my care when I show up at the hospital ($0) and when I go to see the doctor ($15). I know the price of lab tests ($0) x-rays ($0) and procedures ($0). I have a more limited formulary to choose from for some things (birth control pill options for example are more limited) but on the whole, I’ve been able to get every drug I needed when I was sick. And I can access all of those services in one building without having to worry about getting a huge bill later from multiple providers or worry that my claim will be denied.

If fee for service has to die so that everyone can get this level of coordinated care, I say it’s a good thing.

Anonymous said...

Although I favor global payments, I agree the problems with our current fee for service system are not solely due the fact that it is fee for service. In many ways, our current fee for service is far from a true free market.

1. At the point of negotiation, the buyer generally has no idea of prices.
2. Buying decisions are usually not made by the those who bare the cost.
3. Patients are responsible for paying for all services provided even if they never realized they got them.
4. Standard prices are usually proportional to relative value units (RVUs) which are mostly decided by the AMA (not the free market).
5. Assessing quality in healthcare is really hard. This is especially true at the level of each bill a complicated patient might get for one episode of care.

I also think it is interesting that many who advocate report point to the greater value in healthcare offered in other countries, but in many of these countries with universal coverage, the provider are paid in fee for service model. Although global payments have great potential to be an improvement, there is also room for improvement in the fee for service model. My guess is that we are going to end up with combination of both so we might as well work to make both models as good as they can be.

Mary Albert said...

I strongly believe that the best model is fee-for-service. If you do not have accountability to the medical user you will always get the end user abusing the system. That is human nature and there really isn't a way around it.

Mary Albert