Global Payments: Is Eliminating Fee-For-Service Feasible?


The Boston Globe weighed in today with an editorial on scrapping traditional fee-for-service healthcare reimbursement in favor of a global payment method. They know a thing or two about health costs in Massachusetts, the state where I trained to become a surgeon. After passing their landmark healthcare reform legislation in 2006, they decreased their already lower-than-average number of uninsured. The predictable side-effect of this achievement was a steady increase in overall healthcare expenditures. Now, they are struggling with getting these costs under control. The same story would very likely have played out if national health reform had passed (and still might, if the effort is salvaged). The Globe is correct in noting that fee-for-service is a significant driver of healthcare spending (but not the only cause). The Globe advocates a global payment scheme with annual updates ‘ratcheted downward’ to contain cost increases. The problem is that there is no real way to eliminate the fee-for-service structure in the majority of markets right now. The reason is simple: the elements needed for success are not aligned. Most doctors are members of small group private practices. How will global payments be implemented for them? Paying the hospital and expecting them to equitably distribute the bundled payments to various private physicians who served on a given patient’s hospitalization is not realistic. This could work for cases where the physicians are hospital employees, and perhaps that may be the venue for implementing a pilot study of the global payment effort. I also do not think that arbitrary ‘payment ratcheting’ makes much sense, and is just another inefficient central planning gimmick which would likely have severe unintended consequences. Global payment and similar efforts work best when the economic interests of providers, hospitals, and payers are all aligned. This is best seen in cases where the hospital acts as the provider and the insurer of care, with doctors on salary. In these cases, neither the hospital nor the physicians benefit from providing excess or costlier care than that required. Two good examples are the VA system and Kaiser Permanente. If global payments are tried before the system is ready for it, the best chance for success will be to start with less complex procedures. Inclusive packages could be created for the basic interventional procedures. The institution and providers will have even more reason to provide a high-quality, efficient experience with reproducible results. These forces normally operate in most businesses, but it should be borne in mind that it is past regulative interference with market functioning which has led to the current incentive structure.

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