Fee-for-service Health Care Makes a Comeback

Published March 1, 2001

Remember when you could choose to go to any doctor, pay a reasonable fee for your medical service, and not worry about co-pays, deductibles, and some distant stranger authorizing or denying the care prescribed by your physician?

If so, you have lived long enough to know “what goes around comes around.” And what has come around is the return to fee-for-service medical care.

A Return to More Simple Care

The leading proponent of a “new” old approach to health care is a Seattle-based nonprofit group, the American Association of Patients and Providers (AAPP). They call their approach SimpleCare.

SimpleCare was developed in 1997 by two Seattle physicians who were underpaid by managed care companies to the point of losing money. The doctors, Vern S. Cherewatenko and David McDonald, offered to substantially lower their fees to patients who would pay cash at the time of service. That move would allow them to avoid managed care companies and lower their administrative costs.

In a typical treatment scenario, a doctor spends 10 minutes treating an insured patient who has come down with the flu. The office staff submits a bill for $79 to the patient’s HMO. The HMO pays only $43 for the service.

The administrative cost of submitting the bill was about $20. So far, the doctor has netted $23. But the office overhead for that patient is $30 . . . and the doctor just lost $7 by treating one patient.

This is not a hypothetical situation. Before SimpleCare, Cherewatenko’s practice had 55 doctors and was losing $80,000 a month while handling insurance paperwork.

Under the SimpleCare plan, the doctors now charge the flu patient $35 if he or she pays by cash, check, or credit card. The practice earns $5 instead of losing $7. The doctors can avoid bankruptcy—a very real threat to many physicians due to low reimbursements from HMOs and government insurance plans like Medicare and Medicaid.

The consumer comes out ahead too. They get the full attention of a physician free of “maximum per-patient time limits,” and uninsured patients can get access to health care as well.

Today, Third Parties Pay

SimpleCare represents a dramatic departure from “business as usual” in health care finance.

Today, most health care is paid for through an expensive arrangement known as the “third-party payer” system , where the third party is usually an employer or government agency. Many health care experts believe this system is the primary reason we in the U.S. are dogged by health insurance premium inflation and intrusion into our doctor’s decision-making process.

According to economist Milton Friedman, in his analysis, How To Cure Health Care, “Two simple observations are key to the high level of spending on medical care and the dissatisfaction with that spending. The first is that most payments to physicians or hospitals or other caregivers for medical care are made not by the patient but by a third party. The second is that nobody spends somebody else’s money as wisely or as frugally as he spends his own.”

Friedman adds, “No third party is involved when we shop at a supermarket. We pay the supermarket clerk directly. The same for gasoline for our car, clothes on or back, and so on down the line.”

The majority of health care consumers have no choice in the selection of their insurance plan. As a result, they have no incentive to spend health care dollars wisely, nor do they have much of an opportunity to participate in the treatment process.

Consumers tied to the “third-party payer” system may feel they are spending “someone else’s” money, and therefore be tempted to take advantage of the arrangement by asking for unnecessary t3sts, treatments, and other services. Insurers have responded to this problem by hiring “gatekeepers” to review and approve or disapprove requests for treatment.

James Henderson, author of Health Economics and Policy (Southwestern Publishing, 1999) and professor of economics at Baylor University, describes a classic example of how spending other people’s money distorts the decision-making process.

Henderson writes about a documented case where a 70-year-old man suffering from a ruptured abdominal aortic aneurysm was brought to the hospital and spent weeks in an intensive care unit. The bill approached $275,000—none of which was to be paid by the patient.

The man’s physician determined that his slow recovery was caused by poor eating caused by poorly fitting dentures. The doctor asked the hospital dentist to perform the needed adjustments. Later, the doctor discovered the man had not allowed the dentist to adjust the dentures. When asked for a reason, the patient replied, “$75 is a lot of money.” Medicare would not pay for the adjustment, so it would have been an out-of-pocket expense.

A Nationwide Epidemic

The nation’s reliance on third-party insurance is expensive. The cost of health care and insurance coverage has been inflated many times over to cover the expense of having a “third party” involved in the process.

Little wonder, then, that programs that promise to return to the older model of patient choice and responsibility are increasingly popular.

“What started out with two doctors has grown to about 600 medical providers and 3,000 patients nationwide,” notes Keri Andrews, director of Simple Care operations for the AAPP.

“Thirty to 40 new providers and 300 new patients are enrolling in the program every month,” said Andrews. “SimpleCare represents a wide variety of medical specialties, including primary care. There are now member physicians in 43 states. Even a hospital in Colorado joined the program.”

“Membership,” said Andrews, “has been increasing steadily thanks to support from enthusiastic physicians and members of the media. Even some insurance agents are finding SimpleCare to be a very valuable complement to tax-favored, high-deductible medical savings accounts or MSAs.”

For more information . . .

visit the Simple Care Web site at http://www.simplecare.com. Or see Milton Friedman’s essay, “How to Cure Health Care,” in the Winter 2001 issue of The Public Interest, at http://thepublicinterest.com/current/article1.html.