Paying for results, not treatments

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One of the fundamental problems in the U.S. healthcare system is that the most common and straightforward payment method — paying a fee for each service rendered — encourages doctors and hospitals to provide more care, not better care. In fact, it discourages efficiencies that lead to healthier patients at lower cost because they translate into lower incomes for those providing the service.

Nowhere are these weaknesses more acute than in Medicare, which pays most participating doctors and hospitals on a fee-for-service basis. Shifting Medicare to new payment methods that encourage quality and efficiency is crucial to sustaining the program, which is the biggest driver in the federal government’s long-term fiscal problems. As the baby boom generation enters its dotage, the ranks of Medicare beneficiaries are expected to swell from the current 50 million to 80 million in 2030. Unless the government can motivate the industry to treat these patients more effectively at lower cost, the pressure will only grow to shrink Medicare benefits or cover fewer of the elderly and disabled.

The ideal payment system would give providers a stake in the savings generated by more efficient care, as well as in the financial risk of ineffective treatments. Prodded by the 2010 healthcare law, Medicare is moving in that direction, as are private insurers. Part of Medicare’s focus is on improving the quality of care delivered on a fee-for-service basis, on the theory that it will reduce the demand for treatment. To that end, it launched a value-based purchasing program that ties a portion of a hospital’s payments to how well it meets specific quality targets, and it has begun reducing payments to hospitals that quickly readmit too many of the patients they treat.


Those are sensible moves, but they don’t dramatically change the improper incentive in fee-for-service Medicare to perform as many billable treatments as possible. Doing so will require shifting fee-for-service doctors and hospitals into models that reward them for helping their patients stay healthy, or for achieving the same improvements in health while cutting treatment costs. A good example is Blue Cross Blue Shield of Massachusetts’ “alternative quality contract,” which gives provider groups an annual budget for meeting all the healthcare needs of their patients while still hitting quality targets. A recent study showed that this approach improved the quality of care while cutting costs as much as 10% below their fee-for-service level.

Medicare is experimenting with a number of variations on this theme. It has encouraged providers to join forces in “accountable care organizations” to combat the fragmentation of care and poor information-sharing that lead to unnecessary treatments and medical errors. It is experimenting with bundled payments that compensate providers in one lump sum for all the care related to a trip to a hospital’s acute-care wing. Beyond that, there are dozens of trials and demonstration projects that explore different ways to pay for care.

The new models promise significant savings, but there are big issues still to work through. One is how to prevent the sort of consolidation among providers that would impair competition and spur even higher prices. Another is the risk that providers will cut costs just by skimping on necessary exams and treatments. When health maintenance organizations appeared to adopt that course in the 1980s and 1990s, consumers rebelled. To avoid a repeat of that experience, Medicare is developing ways to measure and report how well doctors and hospitals are delivering care. These could provide a safeguard, but they’re still a work in progress.

The question for policymakers is how hard to push the system to change the way it compensates for care. One of the most controversial provisions of the 2010 law — an independent board with the power to limit Medicare spending per beneficiary — could also be the most effective in pushing Medicare away from fee-for-service. Alternatively, Rep. Allyson Schwartz (D-Pa.), who wants to repeal the board, has introduced a bill to cut fee-for-service payments gradually for doctors who don’t move to alternative payment models. One way or another, Medicare has to find a way to stop paying for treatments and start paying for results.