Why is healthcare so expensive: part one

October 15, 2020
Steven Cutbirth

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For our first blog in our "Why is healthcare so expensive" series, we’re going to look at reimbursement models. Specifically some of the differences between the traditional fee-for-service (FFS) model versus alternatives like value-based healthcare.

What is fee-for-service?

Let’s start by explaining what FFS is. FFS is the most widely used reimbursement model for healthcare systems. It’s exactly what it sounds like, a model that is based on a per-service price. The origins of FFS can be traced back to the Social Security Act that established Medicaid and Medicare back in 1965. This act laid out the basis for our system that charges a patient (and their insurance) for every piece of their visit and as a result incentivizes an increase in quantity of care.

Sometimes that means that there’s a fee for the three Advil they took, a fee for the bandages, a fee for the room, and so on. It does vary and isn’t quite as granular at some healthcare systems or for some services. In hospitals there are a lot of granular pieces though. Everything that gets scanned has a fee. Every time the doctor or specialist comes in and scans their badge, often even if they’re just saying hi and checking on the patient, there’s a charge. Insurers reimburse healthcare systems for the services they provide, rather than the outcomes of the procedure so patients aren’t paying for their value or benefit, they’re just paying for services. Even if they’re not better after the procedure, they still have to pay for all those services.

Fee-for-service seems flawed, so why is it still widely used?

The basic reason is because change is hard, especially in a large system like healthcare where people’s lives are on the line. There are also entrenched players in this field that benefit from the current system and have incentive to keep it that way, because changing could decrease their revenue. In the end, it’s here because change is hard, we default to the status quo, and transforming healthcare is complicated.

That being said, people are trying to change it. There’s a ton of people who recognize it’s not helpful, even most doctors. Most doctors would prefer a different system that doesn’t make them track every single interaction and service provided, or to be encouraged to provide a service that isn’t the most beneficial but gets the most reimbursement.

How value-based care works and decreases healthcare costs.

CMS defines this model as one that rewards health care providers with incentive payments for the quality of care they give to people. For CMS, this pertains particularly to Medicare, but value-based healthcare can be applied to any healthcare system or insurer. Check out our previous blog about value-based healthcare for a deeper dive. The simplest way to think about value-based healthcare is through the value equation:

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This equation comes from the great work of Dr. Elizabeth Teisberg & Dr. Michael Porter. In value-based healthcare it’s not about individual charges, it’s about how the patient’s outcomes were improved and how much that care cost. For more on outcomes measurement and how we can actually measure what matters to patients, I would suggest reading Dr. Teisberg’s work on her 3 C’s (Calm, Comfort & Capability) model.

On the payment side, one value-based model that makes a ton of sense is a bundled payment model where a bundled price is offered for the entire exchange. Surgery Center of Oklahoma, for example, has bundled all the different pieces of care into one price and set that at a point where they can make a profit, pay their doctors a fair price, pay for overhead, etc. and still save patients thousands of dollars. Bundled payments are an attractive option to move away from the fee-for-service model.

There are also ways for self-insured employers and other payers to go straight to hospitals and health systems via direct contracting. For example, hospitals can create direct contracts with large, self-insured employers to implement value-based care and care bundles for employees.

How can value-based healthcare become more widely used?

It takes multiple stakeholders to expand value-based care. We need hospitals, doctors, insurance companies, self-insured employers, and even government support to move to a value-based system. Hospitals and health systems can also actively seek out insurers that use value-based care reimbursement models (like BCBS North Carolina who recently shared that their value-based care initiative saved $153 million in their first year.) We have to reward the groups that are taking chances and implementing value-based models by partnering with them and choosing to work with them when opportunities arise.

At the end of the day, the way hospitals and health systems get reimbursed contributes greatly to overall healthcare costs. Since the most widely used model, fee-for-service, focuses on reimbursing services and resources used, this incentivizes over-utilization and unnecessary care resulting in higher healthcare costs for all parties involved. An expansion of value-based care will not only decrease healthcare costs, but return medicine back to its original intention of actually making patients better.

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