Today’s Managing Health Care Costs Number is 8
There are many mechanisms for paying physicians; some are good and some are bad. The three worst are fee-for-service, capitation, and salary. Fee-for-service rewards the provision of inappropriate services, the fraudulent upcoding of visits and procedures, and the churning of "ping-pong" referrals among specialists. Capitation rewards the denial of appropriate services, the dumping of the chronically ill, and a narrow scope of practice that refers out every time-consuming patient. Salary undermines productivity, condones on-the-job leisure, and fosters a bureaucratic mentality in which every procedure is someone else's problem.
The late August issue of Annals of Internal Medicine has a thoughtful article proposing a new way to look at provider payment. Author Kevin Quinn proposes 8 ways to pay providers (see table above). As we move down the list, provider risk decreases and payer risk increases. Quinn distinguishes between epidemiologic risk (prevalence of medical conditions) and performance risk (treatment of medical conditions). I’ve often heard the epidemiologic risk called “insurance risk,” and it makes sense that insurance risk should not be borne by providers. Excellent risk adjustment, of course, can decrease insurance risk – or on the other hand can encourage aggressive diagnosis upcoding to harvest additional risk adjustment revenue.
Quinn notes that the bottom four payment methods are all “fee for service,” but the service is defined as a day (5), a unit of service (6), proportional to cost (7) and proportional to charges (8). He notes that most recent health payment reform has moved risk toward providers (moving up in this hierarchy).
I’m not sure that I agree with all elements on this taxonomy. For instance, I think “per time period” (1) means that providers have the highest risk only to the extent that they are responsible for an entire population. A dermatologist who is on salary is paid a set amount per year, but the “risk” to the provider organization for this is only high when the organization is responsible for the care of an entire population. If the physician organization feels no obligation to meet all a population’s dermatologic need, the epidemiologic risk is not borne by the provider organization.
Quinn concludes with four questions he believes will determine the success in payment reforms:
First, as more payments are based on capitation and episodes, will providers avoid costly patients? The answer depends on the accuracy of case-mix adjustment and the effectiveness of nonpayment mechanisms to minimize risk selection.
Second, will an overabundance of uncoordinated reforms create a muddle of incentives? Some accountable care organizations have raised this concern already.
Third, will providers rebel against the administrative burden and clinical oversight inherent in many initiatives? For example, the American Medical Association describes the current scene as a “regulatory nightmare”.
Fourth, will provider mergers subvert efforts to control health care spending? Accountable care organizations and other reforms encourage providers to band together, but consolidation helps providers negotiate higher prices from commercial payers.
I've given up on the idea of finding the "ideal" method to pay providers. Too much health care is not amenable to capitation, whether because the care is rare or the provider volume is small. This taxonomy is helpful in that it makes it clear that per episode payment approaches can also drive more accountability to providers. Fee for service clearly induces too much utilization of high margin services, which tend to be low value when deployed to additional patients.
Many high performing provider organizations benefit from having a portfolio of different types of payment, including those which involve more provider risk and those which do not. Understanding stakeholder implications of each provider payment methodology can help us design better provider payment approaches. Provider organizations should realize that there is no provider payment nirvana that guarantees success- and provider payment is just one lever to improve organizational performance.
