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Tags: healthcare

Fee for Service in Medicine Makes Sense

Richard Amerling By Friday, 30 January 2015 10:38 AM Current | Bio | Archive

The new “big lie” in medicine has been around for years, but was in the news all week. The occasion was the announcement by the secretary of Health and Human Services, which runs Medicare and Medicaid, of an ambitious plan to move forward with Accountable Care Organizations, “bundling,” and other schemes of “payment-for-performance.”

Here is the relevant quote from The Wall Street Journal coverage: “Ms. Burwell … hopes that setting a goal is what Medicare needs to move away from its current fee-for-service model. There is widespread agreement in the healthcare industry, and among politicians from both political parties, that paying providers by volume contributes to abuse and wasteful spending.”

That so many well-educated people accept this canard is a tribute to the power of the “big lie.” The fee-for-service payment model has absolutely nothing to do with abuse and wasteful spending. The evidence is overwhelming.

Fee-for-service is the standard model through which all manner of goods and services have been paid for since the dawn of civilization, and remains the dominant mode of payment for lawyers, dentists, veterinarians, car mechanics, plumbers, and a whole range of services. Perhaps there are isolated cases of abuse within these realms, but I don’t hear any clamoring for a complete overhaul of the payment system.

It's also the way medical services have been paid for since colonial days. Why is it only very recently that this has become a problem? If you examine government data on national health expenditures, there is trivial inflation until the mid-1960s. What happened then? How about Medicare and Medicaid!

But before we explore the real causes of medical cost inflation, let’s look closer at what goes on in another profession.

If you go to a lawyer to draw up a will, this will perhaps cost $1,000. He may then suggest you also create a power of attorney, a trust for your kids, and comprehensive estate planning, which might cost $10,000.

Well, you have the option to accept or reject these proposals based on your needs and means. You can also check with other attorneys and get different opinions and prices.

Your attorney also knows this, and will keep his prices in a range he thinks is reasonable. Have attorneys been known to “churn” cases, that is, prolong and complicate matters in order to drive up hourly charges? I’m sure this occurs. Where is the anti-churning legislation? Haven’t seen any? Neither have I.

But I digress. What if a third party was paying your legal bills? You would be more likely to agree to the comprehensive plan offered above, and maybe even go for a divorce! And therein lies the true culprit behind medical inflation: The third party payment system.

Medical care has been subsidized since World War II by the tax break given to employers to offer medical insurance as part of a total benefit package. But this generally took the form of “major medical” plans and did not include first dollar coverage for routine expenses.

In 1960 almost half of total health expenditures were out of pocket. The system evolved away from true insurance to one of prepaid care, pushed along by the passage of Medicare and Medicaid in 1965, so that by 1975 about 30 percent of spending was out of pocket. As of 2012, this was down to 12 percent.

It is the notion that “someone else” is paying for your care that has led to overuse and inflation of medical costs. This is an expensive illusion, because of course you are paying through the nose, either with higher taxes, premiums, or lost wages diverted towards insurance premiums. This is why CT scans and MRIs are ordered at the drop of a hat for a headache or flu, and why people visit the ER for a routine problem. If someone else is paying (or if I have prepaid), the answer is “sure, why not?”

The arcane system of price controls on medical services, imposed by third-party payers, also drives up spending. The price for any medical procedure has nothing to do with supply and demand, and is only occasionally linked to the cost of providing the procedure.

Prices are set by fiat by Medicare, Medicaid, and other payers. If a price is set below the actual cost, volume of that service may initially go up. Eventually though, availability of this service will soon disappear.

Prices are not posted, and very few people working within the system can actually quote a price for anything. The disappearance of the price signal, and the absence of price sensitivity at the level of the consumer, is driving massive overuse of the medical system, often with deleterious effects on health.

A true free market for medical services does exist in areas outside the third-party system. These include concierge medical practices, direct pay practices, cosmetic surgery, and Lasik eye surgery. Competition and transparent pricing have led to prices declining for many of these services, and improved quality. There is no reason why the entirety of the medical marketplace cannot function this way.

Since 1990, Dr. Amerling has been on staff at the Beth Israel Medical Center (now Mount Sinai Beth Israel) in New York.  He served as director of Outpatient Dialysis from 1995-2012. Amerling is board certified by the American Board of Internal Medicine for Internal Medicine and Nephrology. He also is president of the Association of American Physicians and Surgeons. He has been published in many journals. For more of his reports, Go Here Now.

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Fee-for-service is the standard model through which all manner of goods and services have been paid for since the dawn of civilization.
Friday, 30 January 2015 10:38 AM
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