The predominant payment model in American healthcare – a fee-for-service (FFS) model – is so engrained in our system that most patients, providers, payers, and employers don’t think twice about it. It’s an outlier economically, as one of the only industries with a third party between service providers and customers that manages all the payments, and where customers have no idea what the cost of service will be as they engage with the healthcare system.
On top of the confusing charges and billing, navigating care in a fee-for-service system is often frustrating for patients. Which doctors are in a network, the authorized treatments available, and the potential outcomes can differ dramatically depending on where and when someone gets care. In this system, patients often wait until they get sick before engaging with the healthcare system, and the ensuing care is often inadequate, redundant, or ineffective. Some patients (particularly those without insurance or with limited coverage) may wait so long to see a healthcare professional that their condition worsens, making it more costly and difficult to treat.
The reality is our FFS system is broken. That broken system is failing everyone, but in particular it is failing patients. Value-based care offers a better way forward, and a better care experience for everyone.
In a FFS payment system, payment and revenue are tied only to volume. Clinics, hospitals, and providers must remain profitable to continue providing care, so it makes sense they must focus on ensuring adequate revenue for operations. In this system, providers may even be punished for trying to lower costs because it negatively affects revenue.
Patient outcomes are not factored into fee-for-service reimbursement structures. While most providers care about their patient’s overall health and well-being, there is no financial incentive to make it a priority. Reimbursements do not increase when they personalize care to the needs of each patient or follow up to ensure that the treatment led to the best possible outcome.
Additionally, worsening sickness or medical errors that are detrimental to patients often benefit providers and clinics under a FFS model. If something goes wrong – complications after surgery, for example, or a poorly managed chronic condition that worsens over time – providers and facilities get paid even more because patients come back for follow-up care.
For healthy price competition (that could lower costs), consumers need the ability to compare costs and determine what they are willing to pay for a specific product or service. But FFS models offer no transparency to the end consumer, with damaging results.
In our FFS system, there are more than 70,000 ICD-10 codes that doctors use to indicate a patient’s diagnosis, and another 17,000 CPT and HCPCS codes to document care provided to a patient. The goal is to bill for as many different codes as possible to maximize revenue, and the specific codes and number of codes billed are different depending on where a patient gets care. Even if someone could compare costs for similar treatment, they likely wouldn’t include the same charges or the same rates and would make it nearly impossible to get an ”apples to apples” picture of which one was a better value.
Additionally, many patients are limited in where they can seek healthcare services as a result of their insurance coverage networks. They can only compare prices within a network, limiting their choice (or requiring them to pay out of pocket), even if they could find better value elsewhere.
In one study, physicians estimated that about 20% of care (including prescribed medications, tests, and procedures) is unnecessary. Another report from Dartmouth found that places with more intensive care hospital beds available tend to have higher rates of ICU usage, while areas of the country with more specialist physicians have higher rates of specialist visits. But none of those excess medical services resulted in better outcomes (and in many cases, overutilization actually led to worse outcomes).
Overutilization is costly on a personal and societal level. For example, a patient who gets a duplicate CT scan after seeking a second opinion is exposed to twice as much radiation in the process, and these types of duplicate tests cost the healthcare system billions every year. Unnecessary antibiotic prescriptions to treat viral infections contribute to societal microbial resistance and the rise of “superbugs” like MRSA that are resistant to antibiotics.
In other cases, fee-for-service models contribute to underutilization and patients who don’t get the care they need. If patients are unable to pay the high cost of services, they may avoid seeking care entirely. Or they may wait until their condition worsens and go to more expensive sites like an emergency room, which by law cannot deny care based on someone’s ability to pay.
Additionally, FFS assigns value to care based on factors like complexity. Specialty care is thus deemed a higher value than primary care. Providers have limited incentive to offer services that could keep someone healthy and avoid high-cost procedures or interactions like a hospital stay or surgery. Higher reimbursements for specialty services have also contributed to a system where specialists get paid, on average, about 2.5 times as much as primary care providers. That is one factor contributing to a shortage of PCPs, which is projected to get worse in coming years. Fewer primary care providers means fewer people have access to affordable or necessary care, and these shortages predominantly affect rural and low-income communities.
Other complications from a fee-for-service system include high drug prices for necessary or lifesaving medications. For example, about 20% of diabetic patients report using less than their prescribed insulin dose to save money, which puts them at risk for costly chronic disease complications. When there is no accountability in the system for patient outcomes, the cost burden and the ramifications of missed doses falls entirely on patients, and not their doctors.
These challenges overwhelmingly impact low-income and non-white patients, further contributing to health inequities in the U.S.
“Diagnosis: Debt,” an investigation by Kaiser Family Foundation and NPR released earlier this year, found that an estimated 100 million Americans – 4 out of 10 adults – have medical bills they cannot pay. The debt is highest among working-age adults, with 69% of adults 30-49 and 60% of those 50-64 reporting medical debt in the past 5 years. But young adults and older adults are not immune from the problem either.
Households making less than $40,000 a year and people without insurance are the most likely to have medical debt, with about 70% of each of these groups reporting debt in the past 5 years. But again, the problem is not isolated to low-income households or the uninsured. Even among households with higher income, debt is still a serious issue – 57% of households making $40-$90K and 45% of those making $90K or more reported experiencing medical debt.
The problems of medical debt cross racial barriers as well, affecting Black and Hispanic patients at a higher rate (69% and 64%, respectively), but still impacting more than half of white Americans (54%). It seems that the singular thing that unites Americans – across almost every income, race, and age group – is the potential for crushing medical debt.
Many of the contributing factors to medical debt are outlined above:
While the challenges and shortcomings of a fee-for-service health system are significant, they are not insurmountable. Value-based care offers an alternative to FFS models. It shifts the focus from volume to value, creating an incentive structure that benefits patients. When payment is based on care quality and outcomes, healthcare stakeholders like providers, payers, and self-funded employers can focus on keeping individual patients and entire populations healthy.
These payment models create disincentives for overutilization or costly care that does not result in a better outcome. They discourage duplicative tests or unnecessary procedures, instead focusing on steering patients toward the right care in the right settings.
Payment models like capitation and bundles also help manage costs. Prospective bundles set the price up front for common and costly procedures, so everyone knows what the reimbursement will be and can manage care within those parameters. They incentivize providers and facilities to minimize errors and risks, because they would be responsible for covering the cost of an avoidable hospital readmission or ER visit following a patient’s initial discharge.
Similarly, capitation payment models provide a fixed reimbursement for managing a patient’s care. Primary care providers can now get reimbursed for keeping patients out of ERs and hospitals, for helping them manage chronic conditions, and for staying on top of preventive care and screenings that will help avoid disease in the future.
VBC won’t immediately fix everything that is wrong with our healthcare system, but it does address some of the biggest challenges that are negatively affecting patients in a FFS model. We have seen a slow shift toward VBC, but it’s time to accelerate the change. It’s time to move forward to a better healthcare system. It’s time to join the Value Revolution.
