Most healthcare providers (physicians, hospitals, laboratories, etc.) are currently paid on a fee-for-service basis, i.e., when the provider delivers a specific service to a patient, the provider receives a pre-defined fee associated with that service.
The Problems With Fee-for-Service Payment
Fee-for-service payment has been widely criticized because it “rewards volume instead of value,” but a much more precise definition of the problems with fee-for-service payment is needed in order to ensure that an alternative approach to payment would actually be better, not just different.
One major problem with fee-for-service payment is that there are large gaps in the types and amounts of fees Medicare and health insurance plans pay:
Not only do current fee-for-service payment systems fail to support all of the services that patients need, they do not assure patients they will receive the highest-quality care:
A third problem occurs when treatment requires multiple services:
The Strengths of Fee-for-Service Payment
While it is true that fee-for-service payment rewards “volume instead of value,” any payment system that doesn’t support a higher volume of service when more services are needed can result in worse outcomes for patients. Two important strengths of fee-for-service payment are:
The problems with fee-for-service payment need to be corrected, but the strengths must also be preserved.
“Value-Based Payment” is a generic term used to describe a payment system where the amount of payment for a service depends in some way on the quality or cost of the service that is delivered. To date, most value-based payment systems have fallen into three general categories:
The most common approach to value-based payment has been “pay for performance” (P4P). Under this approach, a healthcare provider may receive bonus payments if it performs better than other providers on a set of payer-defined measures of quality, utilization, or spending, and it may have to pay penalties or have its payments reduced if its performance is lower than what other providers achieve on these measures. Most physicians, hospitals, and other healthcare providers now participate in at least one pay-for-performance system because of the P4P programs created in Medicare, such as the Merit-Based Incentive Payment System (MIPS) for physicians, the Hospital Value-Based Purchasing Program, and the Skilled Nursing Facility Value-Based Purchasing program. The Centers for Medicare and Medicaid Services (CMS) describes this as “Category 2: Fee for Service with a Link to Quality and Value” (in contrast to “Category 1: Fee for Service - No Link to Quality & Value”).
This approach has been unsuccessful in improving the quality of care for a number of reasons:
It is often suggested that P4P systems have been unsuccessful because the “incentives aren’t large enough,” but the real problem is they don’t actually solve the problems with fee-for-service payment. Moreover, the simplistic quality measures used in these systems can discourage providers from delivering care to disadvantaged patients who have complex needs or difficulty adhering to standard approaches to treatment.
Value-based payment systems have increasingly focused on reducing healthcare spending, rather than improving the quality of care. The most common approach has been “shared savings” payment models. In these programs, a healthcare provider continues receiving standard fees for the services they deliver, but the provider is eligible to receive a bonus payment if the payer determines that total spending on the provider’s patients has decreased or if spending has increased less than the payer expected. A growing number of these models now require “downside risk,” i.e., they require the provider to pay penalties if the payer’s total spending increases or increases by more than the payer expected.
Most of the “alternative payment models” created by the Centers for Medicare and Medicaid Services (CMS) are designed this way, including the Medicare Shared Savings Program, the Bundled Payments for Care Improvement (BPCI) program, and the Comprehensive Care for Joint Replacement program. Providers participating in these programs continue to receive standard fees for individual services, so the payment systems are really just a variation of the pay-for-performance concept. The primary difference from typical P4P programs is that the focus is on reducing spending rather than improving quality, and the amounts of the bonuses and penalties are proportional to changes in spending. This is why CMS describes these payment systems as “Category 3: Alternative Payment Models Built on Fee-for-Service Architecture.”
In general, shared savings and downside risk models have failed to significantly reduce healthcare spending or improve the quality of care because they do not make any fundamental changes in the way healthcare providers are paid:
Of greater concern, however, is that this approach to payment has the potential to harm the quality of care for patients, make it more difficult for high-need patients to access care, and force small healthcare providers out of business:
“Population-based” payment systems do not pay fees for individual services, but instead pay a healthcare provider a fixed amount each month to provide a patient with as many services as the patient needs. The payments are referred to as “population-based” because the total amount of revenue a provider receives depends on the number of patients the provider is caring for, not how many services or what types of services are used to treat the patients.
Population-based payments are fundamentally the same as traditional capitation payments except that (1) the payment amounts may be higher for individual patients who have more chronic conditions, and (2) the average payment amounts may be adjusted up or down based on measures of quality or spending similar to pay-for-performance and shared savings programs.
A single monthly payment for each patient gives a healthcare provider greater flexibility to deliver different services and a more predictable revenue stream than paying fees for each individual service delivered, and it also makes it easier for a patient or payer to predict how much they will need to pay for care. However, this approach fails to solve all of the problems with current fee-for-service payment systems, and it also creates new problems that do not exist under fee-for-service:
Current approaches to value-based payment are payer-centered. Their primary focus has been to limit or reduce spending for health insurance plans, rather than to help patients receive high-quality care at the most affordable cost. Current approaches to value-based payment assess whether the average quality of care for the health plan’s members has improved or worsened, not whether each individual patient received high-quality care. Moreover, providers can be financially penalized when they treat patients with higher-than-average needs. As a result, the actions providers must take to succeed under these payment systems can be in direct conflict with doing what is best for patients.
What is needed instead is a patient-centered approach to value-based payment, one that will solve the problems in current fee-for-service payment systems without reducing access to services or the quality of care for patients.
In a Patient-Centered Payment system:
A patient is able to receive the services that will best address their specific health problems. In order for patients to receive the highest-value care, the many gaps in the services eligible for payment under current fee-for-service systems have to be filled. For example, the biggest transformation in healthcare delivery in decades was the dramatic expansion of telehealth services during the COVID-19 pandemic. None of the current value-based payment systems had supported this. It only happened because Medicare and health insurance plans began paying fees for these services for the first time. In a patient-centered payment system, providers should be paid for delivering the types of services that patients need in the way that will work best for the patient.
Each patient is assured of receiving appropriate, evidence-based care. In a patient-centered payment system, in order to be paid for delivering a service to a patient, a healthcare provider should be required to meet an appropriate standard of quality for that specific patient:
A healthcare provider receives adequate resources to support the cost of delivering services in a high-quality, efficient manner. No business can deliver a high-quality product unless it is paid enough to cover the costs of producing that product; similarly, a healthcare provider cannot be expected to deliver the kinds of services each patient needs in a high-quality way unless the payments it receives for its services are sufficient to cover the costs of doing so. Moreover, just like any business, a healthcare provider is less likely to deliver a high-quality service if it is paid more for delivering a low-quality service. In a patient-centered payment system:
A patient can select a provider or team based on the quality and cost of the care they deliver. Different patients have different needs and they will require different sets of services to address those needs. No one healthcare provider or health system will be the best at delivering all of the services an individual patient may need or for treating a particular health problem for all types of patients, so if patients are forced to receive services from providers in the same health system or from a “narrow network” chosen by a health insurance plan, some patients will not receive the best care possible. There is no simple measure of “value” that can be used to rank-order providers, because quality is multi-dimensional and cannot be converted into a dollar amount that is directly comparable to costs. Consequently, in a patient-centered payment system:
Patient-Centered Payment addresses all of the problems with current fee-for-service payment systems without causing the additional problems created by current approaches to value-based payment:
Patient-centered payments should be based on the types of health problems patients have and the services needed to address those problems, not which provider delivers the care. Payments should be higher if the cost of treating a specific condition or patient is higher, not simply because the services are delivered by a particular type of provider. In contrast to current fee-for-service payment systems, if a patient with a particular health problem can be appropriately cared for by either a primary care practice, specialty care provider, or hospital, the payment should be the same regardless of which provider delivers the care.
However, while many types of conditions can be treated and managed by a primary care practice, and some types of care can best be provided by a primary care practice, some types of conditions and patients require the services of a specialty care provider. In addition, while many types of conditions can be appropriately treated and managed in a physician’s office, in an ambulatory surgery center or other outpatient facility, or in a patient’s own home, some types of services and treatments for some types of patients can only be provided in a hospital or other inpatient facility.
In order to ensure that all patients can receive the most appropriate care for their specific needs, a patient-centered payment system needs to be designed in a way that ensures primary care practices, specialty care providers, and hospitals receive adequate payment to support and sustain the types of services only they can deliver or that they deliver more successfully than others.
Primary care is an essential component of a high-value healthcare system. Primary care practices deliver three important types of services to patients:
Ideally, primary care practices would also provide:
Neither the current fee-for-service system nor current value-based payment systems provide payments to primary care practices that are appropriately structured or adequate in size to support and sustain these services. As a result, there is a large and growing shortage of primary care physicians in the country, many primary care physicians are burning out, and most medical students don’t want to go into primary care.
In a patient-centered payment system, a primary care practice should receive adequate payments for each of these types of services in order to ensure that: (1) each patient can receive high-quality care appropriate for their specific needs, and (2) primary care practices with different types of patients receive sufficient revenues to cover the costs of the services their patients need.
Patient-Centered Primary Care Payment should consist of:
In order to assure that each individual patient receives appropriate, high-quality care, a primary care practice should be required to:
The payment amounts should be based on the estimated cost for a primary care practice to deliver each category of service, considering the amount of time needed to deliver evidence-based services, the types of personnel who are most appropriate to deliver the services and their compensation levels, and non-personnel costs such as information systems, equipment, and space. The following amounts would likely be needed by most primary care practices to deliver high-quality care:
For patients with insurance, cost-sharing amounts should be established that enable and encourage patients to use the primary care practice:
Many patients have health problems that require specialized expertise to diagnose or treat. Specialty care providers deliver three types of services that complement the work that primary care practices do:
Many current value-based payment systems try to discourage the use of specialty care regardless of whether patients need it or not, or they penalize the use of expensive components of specialty care (e.g., drugs or rehabilitation) in ways that can be harmful to the patients who need those types of services. There are very few value-based payment systems specifically designed to support high-quality specialty care, particularly ambulatory specialty care.
In a patient-centered payment system, payments should enable patients to receive services that require specialized expertise, and the payments should encourage a team-based approach to specialty care delivery when multiple providers are involved. No one payment method can support all types of care for all patients.
Patient-Centered Payment for Specialty Care will require four different types of payment:
In order to assure that each individual patient receives appropriate, high-quality specialty care, a specialty provider or team of providers should be required to:
The amounts of payments should be based on the estimated cost for a specialty provider or team to deliver the care during a month or episode of care, considering the amount of time needed to deliver evidence-based services, the types of personnel and facilities that are most appropriate to deliver the services, the cost of drugs and medical devices used for treatment or condition monitoring, the cost of collecting outcome data and participating in a clinical data registry, and other costs such as equipment, utilities, and space.
For patients with insurance, cost-sharing amounts should be designed to enable and encourage patients to receive services that improve outcomes and to use providers that deliver good outcomes at a lower cost.
Most current value-based payment systems are specifically intended to reduce the frequency with which patients receive hospital services, since research has shown that many of the biggest opportunities to improve quality and reduce spending involve reducing avoidable hospital admissions and delivering services in ambulatory care settings or patients’ homes. Success under these value-based payment models means hospitals will receive lower revenues, but none of the current payment models attempt to ensure that hospitals will continue to receive enough revenues to support high-quality care for the smaller number of patients who will still need hospital care:
These financial losses could reduce access to hospital services for the patients who still need them. This is particularly a problem for small and rural hospitals, which do not make large profits on individual services that can offset the losses from reductions in the number of services delivered. These hospitals could be forced not just to eliminate services, but to close entirely.
Under a patient-centered payment system, most of the payments for hospital services would come from the hospital’s share of Acute Condition Episode Payments for procedures and treatments delivered in the hospital and payments for individual services delivered in the hospital for uncommon and complex conditions, and the amounts of these payments can be set at levels designed to cover the cost of delivering the services to the number and types of patients who need to receive services in a hospital. However, in addition to specific procedures and treatments, a hospital delivers an important set of services to the community that are not directly supported by current fee-for-service payment systems and that would not be adequately supported through the patient-centered payments for primary care or specialty care:
Since there are currently no payments specifically designed to support standby capacity, the hospital or other provider has to cover the costs through the profits on other services it delivers. This encourages the delivery of unnecessary services and/or charging prices higher than costs. Not only are these strategies undesirable and often unsuccessful, they are even less feasible in a value-based payment system where primary care practices and specialty care providers are delivering care to patients outside of hospitals whenever appropriate. Consequently, a better way to pay for these standby services is needed.
Since standby services provide a benefit both to individuals who potentially need them as well as those who actually receive them, a patient-centered payment system needs to have a component to enable “potential patients” to support the standby capacity costs:
If a hospital or other provider receives Standby Capacity Payments to cover the fixed cost of operating a service line, there would still be a need for an additional payment when a service is actually delivered in order to cover the variable or semi-variable costs of the service (i.e., the costs that are only incurred when an individual service is actually delivered, such as the administration of a drug). This payment should either come from an Acute Condition Episode Payment or a payment specifically for a specialized service. However, the amount of this per-service payment would be much lower than current fees for such services since it would be based on the marginal cost per service (i.e., the magnitude of the variable cost component), not based on the average cost of the service as fee-for-service payments typically are today. This will help make essential hospital services more affordable for patients, particularly those without insurance.