Fee for Service Is Not the Problem

Published November 3, 2014

If you go to your doctor with severe pain or some other symptom suggesting a serious injury or illness, do you want him or her to have a financial incentive to treat you, or would you rather the doctor have a financial incentive to withhold care?

Although few will admit it, a sizeable number of health care policy wonks seem to prefer the latter, having apparently diagnosed doctors being paid for the care they provide patients as one of the problems with the U.S. health care system.

This view was perhaps best expressed by President Obama back in the summer of 2009, when he was pushing for what ultimately became the Affordable Care Act, a.k.a. Obamacare.

“You come in and you’ve got a bad sore throat, or your child has a bad sore throat or has repeated sore throats,” Obama said at a press conference. “The doctor may look at the reimbursement system and say to himself, ‘You know what? I make a lot more money if I take this kid’s tonsils out.'”

The heart of this allegation is what is known as fee-for-service medicine. Essentially, this means doctors are paid for the treatment they provide patients, no more and no less. In other words, pretty much the same way most of us pay lawyers, accountants, mechanics, hair stylists, and anybody else who provides a service for us.

But medicine is different than these common services, we are told, because few of us have the expertise to understand whether we really need a particular treatment. So under fee-for-service, the argument goes, it’s difficult to check an unethical doctor who recommends unneeded care.

The supposed answer to this is to move away from fee-for-service and instead embrace alternative forms of compensation for doctors, primarily what are now called accountable care organizations (ACO).

The ultimate aim of those pushing the ACO model is to create a system where a group of doctors, typically affiliated with a hospital, is given a fixed amount of money per patient, and they are expected to provide care to their patients with those funds. The doctors and affiliated hospital can make more money if they stay under budget, and they lose money if they go over budget.

If any of this sounds familiar, it should. It’s basically what numerous people in the 1990s and early 2000s went hoarse screaming about when health maintenance organizations (HMOs) followed this model and were accused of withholding needed medical care in order to earn greater profits.

Defenders of ACOs use different buzzwords such as shared savings and coordinated care, and they claim this will be different from HMOs because of electronic health records, evidence-based medicine or some other reason. But it’s still the same old HMO model.

The solution to the fee-for-service problem isn’t gussied-up HMOs. It’s recognizing that fee-for-service itself isn’t a problem; third-party payment of medical bills is.

The reason fee-for-service generally works for lawyers, plumbers, and mechanics is we’re paying directly for those services, whereas insurance shields us from having to pay directly for more than a fraction of our health care.

Moving away from third-party payment and putting patients in a position to reap the savings when unnecessary care is avoided will provide the needed check on the handful of unscrupulous doctors who might try to take advantage of people who don’t have an expertise in medicine.

Most important of all, it will ensure that when you do go to the doctor with a serious problem, the incentive present is to treat you, not withhold care.