What's Wrong with Fee-for-Service?

Do you think that a restaurant would survive if there was a 'market price' label beside the entree and your final bill was broken down into dozens of items? Why is that ok in healthcare?

What's Wrong with Fee-for-Service?

It is now common knowledge that the world is on an unsustainable trajectory with regard to healthcare costs. For industrialized nations in particular, we are spending more and more of the GDP on care, while at the same time watching our chronic conditions skyrocket. (To see GDP spending stats for each country - check out the WHO Global Health Expenditure Database.)

There are a number of factors that contribute to increased healthcare spending. One of which is reimbursement models. The most common payment approach that is in place worldwide for healthcare reimbursement is fee-for-service (FFS) model. It has been in place for centuries.

If we look way back to the beginning of provider reimbursement, we'll come across healers making house calls. When an individual was sick and the family reached a point where they needed assistance in making them better, they would call on the individual in their village/town/area that was known to heal. That person would come to the house with their tonics and tools and treat the patient. When they left, the family would often offer them 'payment' for their services. Now ... going back centuries this wasn't always a monetary amount, but the concept of payment was there.

Fast forward quite a few years and in many places, the healer evolved into a general physician making house calls with their 'little black bag'. (Tonics and potions were also replaced with pharmaceuticals.) If something needed to be done from a diagnostic perspective the family or the physician had to run samples over to a local laboratory for processing. The families continued to reimburse the provider, but now also needed to pay the pharmacist for medications and pay the lab to run the tests. Eventually the medications needed to be purchased from a pharmacy, and the house calls started to decrease dramatically.

The model that evolved from this over the years is the traditional FFS model we have come to accept. Only now, patients travel to specific locations to see their providers and the healthcare industry has tried to make it a bit more convenient by placing labs, pharmacies, and other services in close proximity.

The Fee-For-Service (FFS) Model

The model for FFS is fairly simplistic. When services are provided, the are billed in an itemized manner and the designated payer reimburses the service provider. Where things start to get more complicated is around patient outcomes. You see .... they aren't really a factor in the traditional FFS model. Payers reimburse for all services provided, regardless of their impact on the patient's health. (Note: by payers I am referring to any organization or individual that is responsible for payment.)

Throughout the centuries that this model has been in place, society has somehow dissociated healthcare services from other personal services that we want or require and subsequently pay for. Let's look at a simple restaurant dining experience as an example. Do you think that a restaurant would survive if there was a 'market price' label beside the entree and your final bill was broken down into the following line items ....

  • In-person dining fee (includes hostess charges)
  • Primary waitstaff services
  • Secondary waitstaff services (e.g., food runner, water refill person, etc.)
  • Chef services
  • Butcher/fishmonger processing fee
  • Gas charge for use of oven and range
  • Pasty chef services
  • Meal (broken down a la carte so each element is a different line item)
  • Beverages
  • Bartending surcharge
  • Dishwashing services
  • Bill processing fee
  • Taxes
  • Gratuity

How about car repair services? Or buying a pair of shoes? That's how the fee-for-service model in healthcare works. 😳

FFS Challenges

The FFS model is incredibly flexible. The provision of services can be unique for every single patient that receives care. While this may sound like a good thing, what it really results in is a model that has no standardization. Service providers, including physicians, can perform whatever services that they 'deem appropriate.' Since every patient is in fact unique, the amount of oversight that would be required to assess the appropriateness is simply too big to facilitate. Leaving many things unchecked.

For certain countries, like the U.S., there is also a litigious culture that factors into the provision of healthcare services. With many providers worrying about being sued for malpractice a counter culture of defensive medicine has emerged. This involves running tests and performing procedures 'just in case' to ensure that nothing gets missed. (You might be thinking that 'just in case' sounds great ... but keep in mind someone has to pay for everything and the more tests you run the more backlogged the system gets.)

While I would like to think that there are only good, ethical individuals practicing medicine .... there is also a profitability factor. If you aren't being assessed on the health outcomes directly tied to the services, and you are paid for each service .... There are some significant concerns that things are being done unnecessarily to increase the total reimbursement for providers and healthcare systems overall. In the end, preventive care doesn't pay very well.

Setting the whole concept of billing transparency aside. The final challenge that the healthcare industry faces with FFS reimbursement is that it's really, really hard to figure out the cost of care. With a system that lacks the standardization needed and a system that supports a different billing composition for every patient, there are huge challenges to determine the cost of care for any particular ailment or acute event.

The industry is aware that the traditional FFS model has many challenges and is not sustainable. However, the amount of change required to 'overhaul' things is enormous and there are some pretty intelligent individuals that are doing quite well financially with the current model. They may not be overly motivated to change ....