FFS for Physicians: Fee-for-Service, Freedom-for-Service, or Flee-for-Service

Everybody knows fee-for-service drives health care costs. Doctors who do more are paid more. And doctors who want to make more money simply raise their fees.

In reformist jargon, FFS is a “structural problem” – a problem that can be corrected by various means - capitation; bundling of fees for episodes of care, chronic disease, or procedures; paying only for what works based on comparative research; and placing doctors on salaries.

Right?

Not so fast. What everybody doesn’t know is that third parties, particularly Medicare. but private plans as well, who follow Medicare’s lead, sets the fees, and “capitates “ the fees.

These fees often bear little relation to costs of providing them. Furthermore, third parties may refuse to “authorize,” i.e. pay, for a procedure or diagnostic test.

It Hasn't Worked

The basic problem of this approach is that it hasn’t worked. Compared to GDP expenditures (excluding health care), since 1977 federal expenditures for health have skyrocketed.

• Federal health expenditures, 410%

• State and local expenditures, 260%

• Private expenditures, 255%

• GDP excluding health expenditures, 160%

Containing costs for federal entitlement programs creating expectations for virtually “free” care is a very difficult thing to do. The constituents, aging and increasing in numbers, expect, even demand, to receive promised services.

Those providing the services do not willingly accept lower payments, so they compensate by scheduling more office visits, by investing in ancillary services outside the office, by performing services with higher Medicare payments.

The result is that Medicare is the most rapidly growing part of the federal budget, and the chosen villain for this federal largesse is FFS.

What the health reform bill proposes to do is to end FFS in one way or another, by,

• Systematically cutting doctor fees for Medicare over the next ten years, thereby forcing doctors to choose non-FFS options.

• Developing other payment mechanisms – employment by larger groups, bundled payments for episodes of disease or hospital procedures, capitated payments for managing groups of patients.

Physician Options

Given these scenarios, doctors have these options.

• Passively accept lower reimbursements ordered by government bureaucrats.

• Cut staff and services to Medicare and Medicaid patients.

• Accept fewer new Medicare or Medicaid patients or stop seeing them altogether.

• Reduce overhead by turning to new practice models that avoid third party payments with associated overhead, and rely on direct cash payments or concierge arrangements or health savings accounts with high deductibles with more freedom for patients and doctors alike. These new payment models might be dubbed Freedom-for-Service, or Fleeing-for-Service.

Fee-for-service is widespread in almost every other market – restaurants, lawyers, accountants, brokers, small businesses – and any other financial sector you can mention.

Fee-for service is not likely to spread in health care.

Why not? According to John Goodman, the conservative economist, because “We pay only 10 cents out of pocket every time we spend a dollar at a doctor’s office, and 90% of Medicare patients, almost all Medicaid patients and many privately insured do not even pay the 10 cents. That means we predominantly pay for care with our time, not with our money. As a result, doctors don’t compete for patients on the basis of price. And because they don’t compete on price, they don’t compete on quality either.”

“What is it that makes health care different?

There are three things: (1) third-party payment of the bill, (2) rationing by time and not money, and (3) an inability on the part of providers to repackage and reprice their services.”

The problem in health care is that patients who benefit from the service are not the same as the persons who pays the bill. Besides, having your health care paid for with other people's money has irresistible appeal. Knowing what health care really costs has no appeal, especially if you think you can get it for free without a fee from a federal Sugar Daddy.