Change fee for service to another method that reflects quality

Fee-for-service payments need to align incentives with value of services rendered.


Policy experts across the political spectrum agree on the need to replace fee-for-service payments to physicians with new models that align incentives with value, defined as achieving the best possible measurable outcomes with the fewest resources. Getting from our current reimbursement system to a better one will prove to be a formidable challenge.

The shared critique of fee for service goes like this. Paying doctors on a piecemeal basis promotes high volume and inefficient practices instead of cost-effective care. Quality outcomes are incidental because doctors are paid on how much they do, not on how well they do it. Fee for service could even hurt patients by creating incentives for doctors to do unnecessary and potentially harmful procedures.

Fee for service also creates inequities, according to the Medicare Payment Advisory Commission. In March, the commission told Congress that the system rewards physicians who increase their volume of services regardless of medical benefit. Second, the fee schedule establishes considerable differences in physician compensation that are inconsistent with the difficulty of furnishing the service. Primary care physicians, in particular, have been disadvantaged with lower payments for their services.

Alternative payment models

Many policy experts favor replacing fee-for-service models with bundled payments that incorporate everything done for a patient within a defined time period. Bundled payments could be extended to the entire team involved in a patient's care: primary care physicians, subspecialists, nurses and physician assistants. The base bundled fee could then be adjusted based on quality, outcomes and the health status and diagnosis associated with the patients.

Compensation would depend on how well physicians manage care and prevent avoidable hospital admissions, along with other metrics of outcomes and efficiency. Payments might vary among the team members based on how the team as whole views individual contributions toward achieving better outcomes and lower costs.

A variation of this would reward physician practices for forming a patient-centered medical home. Practices that do so would receive a monthly risk-adjusted prospective payment for each eligible patient, in return for demonstrating effective, patient-centered care. Payments might be combined with continued fee-for-service models for office visits and a performance-based component.

Hospitals and physicians could be encouraged to form accountable care organizations rewarded for achieving measurable improvements in outcomes and efficiency of care. For example, if physicians worked with hospitals to reduce preventable admissions or readmissions, they would get an additional shared-savings payment in addition to a base bundled payment.

There are other variations on the drawing board, but the common features are global payments structured around episodes of care, not individual services; payments to teams, not individual physicians; base payments adjusted up or down for better outcomes and lower costs; and payments based on the characteristics and risks of the patients being treated.

Challenges going forward

Practices with five or fewer physicians provide much of the medical care in the U.S., yet small practices may encounter the greatest difficulties with bundled payments. They are less likely to have the information technology and resources to do well when performance would be regularly monitored. They also are less likely to have the formal arrangements with other health professionals needed to become medical homes, and may be unable or unwilling to join with local hospitals to become accountable care organizations. Also, small practices treat fewer patients, so higher-than-average costs associated with a few complex patients can make their overall performance appear poor.

Within an accountable care organization, control issues are likely to be paramount. Who is in charge, the hospital administrator or the physicians? How will bundled payments be divvyed up to team members? How will the team assess each member's contribution?

Because of such challenges, policymakers are likely to speed up pilot tests of different bundled payment models. Legislators have considered creating a center of innovation within the federal government to provide seed money to design, test and evaluate new payment models. The center would rapidly expand the models that are shown to be most promising in terms of producing better outcomes and lower costs.

Over the near term, fee for service will continue to be the predominant method for paying physicians. But over the next decade, it is likely to be phased out and replaced with risk-adjusted and bundled payments to health care teams. As this evolution takes place, it will be important for organizations like ACP to help and support members who make the transition, especially those in small practices. We also will need to influence the design of the new payment systems to ensure that all physicians and patients are treated fairly and paid appropriately for their contributions.