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Comparing Fee for Service and Pay for Value

By Dr. David C. Pate, News and Community
July 9, 2012

Last week, Mike Morgan commented on my blog piece titled, "Looking at the Patient’s Part in Health."

Here's part of his comment, where he asks some excellent questions:

"You stated that under pay for value, if the patient gets worse, it will significantly and negatively impact reimbursement and pay.

I am wondering what will happen with those patients who continue to get worse despite the best efforts of a health care system. Those patients will require more and more time and services, but it seems that the health care system would be financially punished for providing those services to them.

I know it would be unethical, but from a financial perspective it would be very tempting to only expend the minimum legally required resources on those patients. In a pay-for-value system, would the increased reimbursement and pay from helping others stay healthy be enough to prevent this?"

I thought it would be helpful to provide an example to illustrate how the incentives might change under pay for value compared with fee for service.

Under fee for service, a physician is incentivized to see patients and perform procedures, not for outcomes. If I am seeing a patient with diabetes who is not succeeding at self-care, I can spend time just addressing the complications that the inability to follow the plan is causing, or I can spend much more time trying to determine why it’s happening, what steps could be taken to improve the situation, making sure that the patient fully understands the risks of not sticking with the plan, and eliciting assistance from family members.

Under fee for service, the shorter visit just addressing the complications will be incentivized, because I will be paid little extra (let’s say $15 for the sake of the example) for the much longer visit required to attempt to change the patient’s behavior and in fact, would probably lose money, because now I can see fewer patients and will probably irritate those who are waiting to see me.

However, if I only address the complications and not the underlying behavior and risk factors, I know that this patient will, in time, develop very costly complications of vascular disease, heart disease, kidney disease, eye disease, and nerve disease that will end up costing potentially tens of thousands of dollars and more.

How do the two payment systems affect my decision? Under fee for service, the additional $15 is not worth the aggravation to my other patients having to wait and does not make up for the ability to see another patient in that same time and generate perhaps an $80 office visit fee. And if the patient develops further complications, those tens of thousands come to the health care system and the physician as revenue when we provide more services that are higher intensity and costlier.

Under pay for value, I can use a team-based approach to try to educate the patient, work to modify his or her behavior, and enlist the support of family. Because the health care system gets paid a fixed amount for caring for a population of patients and not for every service we provide, now those tens of thousands will be a cost to the system rather than revenue if the patient’s condition worsens. So it is clearly worth my time and the team’s time to spend extra effort with the patient when, instead of $15, it is now tens of thousands of dollars’ impact if we can successfully prevent expensive complications.

Mike wrote, “From a financial perspective, it would be very tempting to only expend the minimum legally required resources on those patients.” From my example, we can see why there is an incentive to devote the time and resources to prevent these costly conditions.

This is also why accountable care will succeed where managed care failed. Under HMOs, the only measure of success and rewards was health care costs. There was an incentive to withhold and deny care.

Under accountable care, providers are responsible for costs and outcomes. Therefore, an accountable care organization can reduce costs, but if the quality outcomes don’t improve and hit targets, generally the accountable care organization and its physicians would be ineligible for any financial incentive payment.

Mike asked, "... would the increased reimbursement and pay from helping others stay healthy be enough to prevent this?"

The answer in short is that current business models will not support this, will not sustain health care providers’ efforts to promote health and wellness, and will not align incentives to reduce utilization of services. My team and I think we have figured out some innovative ways to transform the business model that will allow for the transformation of the clinical model. It is extremely exciting, and I’ll write more on the topic in a couple of months. 

Really great questions, Mike! Thanks so much for following the blog and joining the discussion.

About The Author

David C. Pate, M.D., J.D., is president and CEO of St. Luke's Health System, based in Boise, Idaho. Dr. Pate joined the System in 2009. He received his medical degree from Baylor College of Medicine in Houston and his law degree from the University of Houston Law Center.