Hospitals and Doctors - On Ending Fee-For-Service Through Bundling

What follows is a WSJ Blog on the Massachusetts Plan to end FFS by grouping doctors and hospitals into networks and forcing them to charge a flat or bundled fee. As I note in my comment on the piece, this is a typical government fantasy – borne in the belief that one can control costs from the top-down.


Mass. Panel: End Fee-for-Service Payments for Doctors

By Shirley S. Wang

One of the much-discussed drivers of the high cost of health care in the U.S. is that doctors are paid for every procedure and test, which gives a financial incentive to provide more and more treatments, even if they aren’t strictly necessary. That system could change drastically in Massachusetts, as the state struggles to pay for its universal health insurance plan.

A Massachusetts commission yesterday recommended that the state shift its payment method from the ubiquitous “fee for service” formula to one where health-care providers would be grouped into networks and paid a flat monthly or annual fee. Here’s the WSJ story.

The goal is to improve care while reducing costs by forcing health-care providers to work within a budget and coordinate care between providers, according to the Boston Globe.

Patients would choose a primary care provider to coordinate care, a model that resembles the “medical home.” But, they may not get all the tests and procedures they want with providers working within a budget and trying to keep costs down. In addition, the plan could fail if the provider payments are too low or not appropriately adjusted for very sick patients, the reason for the failure of a similar attempt to pay doctors that way in the 1990s, notes the Globe.

Many of the important details haven’t yet been determined and enacting the plan — the goal is to do so within five years — is expected to be tough, according to the New York Times. One of the committee’s leaders, state Rep. Harriett Stanley, told the NYT, “It’s going to be a very long haul, but it’s a trip worth taking.”

Comment: As a former Physician Hospital Organization chairman, who, with the help the PHO president, bundled bills for 150 hospital procedures and episodes of care in the early 1990s, I can attest to the fact that bundling is doable in a hospital setting.

We gathered data on hospital costs, brought specialists together and averaging their costs, gave the hospital a 3% discount and the doctors a 10% discount, added hospital and physician costs together, and backed the bundled bill with reinsurance. The hospital and the specialists were satisfied with the bundled bill, but the state’s BCBS organization was not. It preferred to negotiate separately with the hospital and doctors and had a “divide and conquer” mindset.

Trying to extend bundled billing to the medical system at large by including private practices and all ambulatory care settings is a top-down, command-and-control fantasy. It would be capitation, which largely failed outside of California, re-visited with an added layer of impossible to manage bureaucratic complexity. It would be an administrative nightmare and would compel bureaucrats to micromanage individual patient-doctor interactions, to define what constitutes an “episode of care,” to assume minor problems necessarily progress to chronic disease, and to bring innovative private activities under government control.

I would remind Massachusetts officials that among the fastest growing employment sectors, according to the Bureau of Labor Statistics, are: hospitals +3.4%, offices of physicians +4.1%, ambulatory health services +4.8%, and home health care services +8.6%. To try to simultaneously control costs in all of these segments through bundling is futile and harmful meddling.

Before pursuing their fantasy, I would suggest Massachusetts officials consult with Regina Herzlinger of Harvard Business School, who has consistently maintained that the best way to control costs is through consumer-driven care with responsible consumers spending their own tax-free money and providers competing for consumer favor on the basis of price , quality, and value with a modicum of government oversight.