Fee-for-Service 101: What it Means for Your Organization

September 3, 2015

Fee-for-Service 101: What it Means for Your Organization

Fee-for-service healthcare simply means that each service, test or procedure performed by a care provider is billed for. This is the model found in most hospitals, urgent care clinics, and doctors' offices, and dominates the reimbursement structure across our healthcare system

Incentivizing quantity of care—not quality or coordination

In this payment structure, providers must have in-office visits or perform tests or procedures to be reimbursed for care. This can result in unnecessary or duplicative healthcare—creating waste in the healthcare system and in your health claims. The Archives of Internal Medicine found than an estimated $6.8 billion in unnecessary medical tests are billed each year.

Many factors, including this reimbursement structure, have contributed to what is a very fragmented healthcare system. In this fragmented fee-for-service system, lack of or failures in care coordination plays a significant role in wasted healthcare spending—accounting for $25 billion to $45 billion annually.

How incentivizing quantity of services impacts patients—your employees

Setting up an appointment with a physician in today's healthcare system often involves long wait times. In a study from Merritt Hawkins, patients trying to see a primary care physician experienced average wait times of 18.5 days for an appointment.

The average primary care physician in the fee-for-service payment structure has a panel of 2,500 patients and sees about 19 patients per day, limiting the amount of time they can spend with each individual patient.

And, after a patient has waited nearly 20 days for an appointment, because of their large daily appointment loads, the average primary care physician spends, on average, just 7 minutes with their physician.

Patients’ experiences in the fee-for-service healthcare system can feel hurried, impersonal, and lead to unnecessary referrals, procedures and tests—driving costs up for all payers and consumers.

A false sense of transparency

There is a misconception that the fee-for-service model is inherently transparent because each service is billed. The reality, however, is that patients are not aware of the pricing structure—and those who pay the claims, often employers on behalf of their employees, have no insight into the cost of services until they receive a health claim.

In fact, without any insight into pricing or influence over where a service is delivered, employers can pay significantly more for services delivered. For example, an MRI can cost anywhere from $300 to $3,000 for the exact same quality—the only difference being the cost structure of the facility billing for that MRI.

Essentially, healthcare consumers in the fee-for-service healthcare system are unable to impact the prices they pay—or even understand how much healthcare is worth. A key economic fundamental that goes unaddressed is price versus worth, or, in other words, price vs. value.

The outcome is that healthcare consumers and payers are at the mercy of the cost structures of a place of service—whether a specialist’s office, hospital or urgent care center.

The takeaway

To reduce or contain healthcare costs, we must look outside of the fee-for-service payment structure and change this upside-down incentive dynamic.

By leveraging innovative care models, such as direct primary care other value-based payment mechanisms, we can begin to control healthcare costs—and move the needle on long-term negative health outcomes and cascading healthcare costs down the line.

Want more information on Paladina Health’s value-based healthcare approach? Contact us.

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