In my previous column for Postindustrial, I set out to explain what’s going on with hospital pricing. I tried to keep it simple but to be honest, I don’t think I did a great job.
That’s part of the problem with the healthcare system in the United States: when trying to explain something simply, you feel like you’re glossing over important details. The result is that I ended up getting too far into the complexity… and it’s ridiculously complex.
So, this time, I’m aiming to talk about a somewhat simple concept and I’m going to try to keep it at a practical level. I’m going to try to explain the idea of fee-for-service in healthcare, why it’s a problem, and how you can try to move away from it.
What is Fee-for-Service?
Well, the simple part about it is that it’s exactly what it sounds like: there is a fee for a service that is provided. A doctor performs a test and there is a cost for that test.
Immediately, though, it stops being simple: who pays for the test?
Well, in a simplified experience for your average insured patient, the doctor will charge the test to their insurance. The insurance then pays the doctor.
Now, we know it’s more complicated than that. There are copays, deductibles, coinsurance, etc., on the patient side. On the doctor’s side, there are prior authorizations and coding issues that are navigated to see what the insurance will actually cover. All of these things are barriers to proper care.
But let’s focus on the ideal transaction – because it provides us with a simple example of what is going on.
In many cases, if the doctor knows what will and won’t be covered, they are able to order many tests, treatment plans, medications, etc. If insurance will pay for it. This seems great on the surface, but a problem emerges.
In this scenario, the doctor’s money comes from successfully billing insurance. The more they are able to get approved, the more they are paid. Have you ever gone to see your doctor for something you thought was a simple problem, and they gave you a bunch of different tests? Well, you may have fallen victim to a major issue with fee-for-service.
TO BE CLEAR, this doesn’t mean that every time a doctor prescribes a lot of tests, they are doing something wrong.
But the problem is that they are not financially incentivized to fix the problem quickly. Payment is not based on the outcome. The result of bad behaviors in this arrangement is the barriers that insurance companies then put on services to prevent unnecessary charges. Insurance companies don’t want to pay for everything – that’s not good business.
This misalignment of incentives is a major contributor to our rising healthcare costs.
What’s the Solution?
As with all things healthcare, it’s complicated. There are buzzwords out there like “value-based care,” where the implication is a shift in incentives, but the methods are varied and often equally complicated. It’s too early to tell if these are going to have any real impact on the number of services being prescribed or on slowing the cost of healthcare. But, in many markets, looking for value-based networks is about as good as you can get.
Something to get in the habit of doing is asking your doctor what each test does and why they think it is necessary. Ask them if it really needs to be done, especially if you have a high-deductible health plan – as these costs will go straight to you. Most doctors are not unethical; they’re just overworked and are as frustrated with the complicated payment structures as you are – they throw everything at the wall just because they know it won’t all be approved. If you work with them, it should help to eliminate some waste and excess costs.
In some markets, however, there are doctors who operate “Direct Primary Care” offices (sometimes called “Advanced Primary Care” if they have enhanced capabilities.)
Essentially, these are subscription doctor’s offices where you pay a flat rate per month directly to the doctor – and nothing else. In some areas with Advanced Primary Care, you have everything a small outpatient hospital can do included in one monthly fee – including the pharmacy. These can be as inexpensive as $200 a month, with nothing else out of pocket.
In these circumstances, the office is incentivized to get a good outcome. They aren’t being paid for each test or treatment – it’s in their financial interest to do it right.
Many individuals don’t have the finances to subscribe to this service themselves, so it’s important to talk with your employer to see if they can find services like this for their employees. It can help control year-over-year costs for the employer and helps keep the broken machine of fee-for-service at bay.
