News | Payment Models

Why fee-for-service can have a place in a reimagined healthcare system, but not as the primary mode of payment

News | Payment Models

Why fee-for-service can have a place in a reimagined healthcare system, but not as the primary mode of payment

  • Fee-for-service was heavily critcized during a workshop in which prominent healthcare industry experts discussed ways to achieve better integration of financing and care delivery.
  • Fee-for-service can have a peripheral role in a revamped payment system.
  • The head of the Center for Medicare & Medicaid Innovation hopes to nudge the industry toward a total-cost-of-care payment model.

Fee-for-service has been coming under increasing scrutiny in recent years, but the healthcare industry shouldn’t dismiss it as a mode of payment altogether.

Even if capitated payments become the primary payment mechanism, fee-for-service will be appropriate for some care, such as highly specialized hospital treatments, noted Timothy Ferris, MD, who was CEO of the Massachusetts General Physicians Organization before taking a leadership position with England’s National Health Service this year.

“I don't see fee-for-service as the enemy, nor do I see capitation as salvation,” Ferris said during a recent workshop hosted by the National Academy of Medicine (NAM). “Healthcare is a very heterogeneous set of services, and I would make the argument that many of those services can and should be paid for on a fee-for-service basis.

“I don't want the confusion [around] the integration of financing to mean that internal to that integration, you're not actually paying for things as you use them. That's just basic economic principle.”

Innovative payment approaches are needed

Ferris’s comments represented a rare instance in which fee-for-service was mentioned in a semi-positive context during the NAM’s three-day event on how the industry can finance models that promote whole-person health.

Conversely, Liz Fowler, PhD, JD, director of the Center for Medicare & Medicaid Innovation (CMMI), spoke of taking actions to at least “make fee-for-service more uncomfortable.”

To that end, CMMI is looking at ways to implement a greater array of mandatory alternative payment models. In Fowler’s vision, the industry would “move in the direction of total-cost-of-care models, and with the right set of incentives and resources, I really do believe providers can get on board. We can move toward total cost of care by making sure all patients starting with Medicare are in a relationship with an accountable care entity, including alignment with an advanced primary care practice.”

Fowler also wants to reassess risk adjustment mechanisms in payment models “so that innovation is around care delivery and outcomes and not just about gaming the system and upcoding.”

David Muhlestein, PhD, JD, chief strategy and chief research officer with Leavitt Partners, echoed Fowler’s points that the industry should move on from fee-for-service and that mandatory models will be a key tool.

“We need to come to models and to a system that's paying for health, not for the care,” Muhlestein said. The advantage of mandatory models, he added, is that “even if people aren’t changing their business model, they’re getting experience in value-based models so that if there is a time that they have to change their entire business model, they’re in a better position to do it.”

In addition, contracting periods should be extended well beyond 12 months to promote true population health management, Muhlestein said, and incentives such as tax benefits should be provided for organizations to construct business models that are not built on fee-for-service.                                                                                    

An overlooked advantage of risk-based payment

Emily Brower, senior vice president with Trinity Health and leader of the Michigan-based health system’s accountable care organization (ACO) operations, said a benefit of expanding the Medicare ACO approach would be the potential to negate the friction that can affect provider-health plan contracting.

“One of the wonderful things about the Medicare ACO model is that Medicare has a known, published and non-negotiable — at least by any one delivery system — fee schedule. It takes off the table fee-for-service rate negotiation.

“It creates a level playing field among participants, at least in terms of fee schedule. [The] fee schedule therefore becomes irrelevant, which means you can focus all your energies on improving health outcomes and reducing unnecessary utilization and waste. So it's incredibly freeing.”

Donald Berwick, MD, president emeritus and senior fellow with the Institute for Healthcare Improvement and formerly administrator of CMS, noted that a health plan’s ideal medical loss ratio (MLR) is 100%. Too often in the modern insurance system, he said, MLRs fall way short of that mark.

Fee-for-service “fails,” Berwick said as a solution to remove waste from the system and to achieve other transformative goals such as improving equity.

For that matter, Berwick added, traditional value-based payment is “played out also. It’s a nonstarter. It can’t help.”

“The dimensions of social commitment and investment that would lead us to universality or cost reduction to 15% or 10% [of GDP], to make MLRs 100%, overall lie outside the boundaries of what currently is meant by value-based payment," he added.

“I think mostly when people say value-based payment, they're using it as a trick, as a way to get more money a different way, instead of being more disciplined about actually getting to what matters to people.”

Like Fowler, Berwick sees global budgeting as the way forward.

“I just can't think of a shorter road to success on the real aims for health and well-being than to fund organizations to take care of populations with global budgets — with extreme discipline, that is, no more than ‘this amount’ of money; but [also] extreme flexibility [to] use the money any way that you think could help.”

About the Author

Nick Hut

is a senior editor with HFMA, Westchester, Ill. (

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