The Commonwealth Fund Blog

Wielding the Carrot and the Stick: How to Move the U.S. Health Care System Away from Fee-for-Service Payment

August 27, 2013

Tags: health spending Medicare payment reform

SXG 75 X 75By Stuart Guterman

The U.S. health system is plagued by fragmented care, variable quality, and high and rapidly growing costs. Underlying these problems is the prevalence of fee-for-service payment, in which health care providers are paid per visit, test, or procedure. Not only does fee-for-service payment fail to provide incentives for efficiency, quality, or outcomes, it encourages the provision of unnecessary care and often discourages coordination of care and management of patients across providers and settings.

broad range of policy experts have called for the adoption of alternative approaches to paying for health care. But how do we move our $2.9 trillion health system from fee-for-service payment to other approaches?

Three elements are key to successfully moving toward alternative payment approaches:

  • The carrot—Implement policies that reward high performance and encourage changes in the organization and delivery of health care.
  • The stick—Reduce and eventually eliminate the option of remaining in the fee-for-service payment system. 
  • The muscle—Coordinate policies across public programs and private payers so they are applied consistently and their impact is maximized.

The carrot. Instead of tying payment to the volume and intensity of services, policies should be put in place that employ both financial and nonfinancial incentives to reward high quality and effective care. The U.S. health care system gets what it pays for, but it pays for the wrong things. Alternative approaches that redirect payment toward desired outcomes—and are structured to engage providers in developing and implementing more productive relationships with their patients—are needed to achieve improved outcomes and more efficient use of resources.

Health care providers and payers are increasingly recognizing the need for new approaches to organizing, delivering, and paying for care. The federal government is undertaking innovative initiatives in Medicare and Medicaid, as well as in partnerships between the two programs and between public and multiple private payers. These initiatives include the development of patient-centered medical homes to help patients more easily obtain needed care, bundled payment to promote better coordination of care across acute and postacute settings, and accountable care organizations to reward providers for increasing quality and reducing costs.

The Center for Medicare and Medicaid Innovation’s State Innovation Models initiative provides resources to state governors to engage in multipayer payment reform and innovative service delivery models. Arkansas, Maine, Massachusetts, Minnesota, Oregon, and Vermont have received grants to test their models. Many other state-level initiatives to pursue payment and delivery system reforms are under way. Private sector organizations such as Geisinger Health System in Pennsylvania, Appleton Medical Center and Theda Clark Medical Center in Wisconsin, Virginia Mason Medical Center in Washington, and the Blue Cross and Blue Shield plans in Massachusetts and Michigan are also engaged in innovative efforts to improve care and reduce costs.

It’s important to be flexible in adapting this array of initiatives to local circumstances. Areas may differ along several dimensions, including their population, the availability and mix of providers and the degree to which they are consolidated, and the regulatory environment—these and other factors can affect the success of alternative approaches.

The stick. The potential benefits of improved incentives cannot be realized as long as the current fee-for-service system, with it distorted incentives, is an available option for providers. Several recent proposals include policies that would diminish the attractiveness of fee-for-service payment over time, usually by making provider participation in alternative payment and delivery system models a prerequisite for future payment increases.

Moving away from the status quo is challenging, though, as seen in Congress’s ongoing inability to find acceptable alternatives to Medicare’s sustainable growth rate formula for physician payment. In the private sector, only 11 percent of current payments for health care are value-oriented. Even though the disadvantages of the current system are widely recognized and the potential benefits of alternative payment methods are becoming clearer, it is all too easy for providers to stay the current course unless fee-for-service is no longer available.

Payers and providers need to recognize that payment and delivery system reform does not necessarily mean a reduction in health spending, but rather slower spending growth. Even if health spending could be held to the same growth rate as the overall economy, it would increase by 60 percent over the next decade. To be sure, spending would be less under this scenario than currently projected—$1.4 trillion less—but we still would be spending considerably more than any other country in the world, and considerably more than we spend today. But we not only would be taking some of the financial pressure off of government, business, and families, we would be spending that money better and smarter.

The muscle. Perhaps the most difficult—but absolutely essential—element of success in the adoption of alternative incentive systems is coordination across the public and private sectors. If a “tipping point” is to be reached systemwide, it must involve both public and private payers, using consistent—even if not necessarily identical—approaches.

The process of moving a massive health system in a new direction will be challenging—but it has already begun. Many innovative changes of this type are already beginning to emerge on the health system landscape as the Affordable Care Act is implemented and both public and private stakeholders recognize that reengineering health care is preferable to rationing it. To ensure the sustainability of our health care system, we need to continue to pursue alternative payment approaches while coordinating our efforts to maximize their effectiveness. The potential benefits are too great, and the alternative is simply unacceptable.

Post Comment Read or Post Comments

Author Comment

Stuart Guterman of The Commonwealth Fund says:
September 5, 2013

The comments from readers are insightful and important. Certainly, the 'muscle' needs to be applied in a coordinated way, with all payers understanding that pulling in different directions is less effective than pulling together. The incentives that are applied should reward behavior that helps achieve the improved performance that's in the interest of everyone--and that should be determined with input from all concerned parties.

John Bennett of CDPHP says:
August 30, 2013

One of the greatest difficulties in obtaining "the muscle" is the ever increasing consolidation of providers. This must be managed very carefully, especially as "integration efforts" often create huge provider organizations with powerful market dominance.

Nandini Kuehn of Health Services Consulting says:
August 27, 2013

For those of us who work on reforming the current moribund health system, the kinds of changes called for in this great article is critical to bending our current volume-driven cost curve to something more sustainable and desirable. Because the system rewarded volume, providers provided volume and our health system has a hard time reporting on health outcomes. However, my concern is that if every payer comes through with processes for bundling costs that vary significantly between payers for the same patient groups - the administrative cost impact could be significant on provider systems. The muscle clearly is with them that pays the bills, but the call for coordinated and consistent policy across payers needs to be emphasized. Payer groups must allow delivery systems to organize efficiently and report on outcomes without requiring a doubling of reporting requirements that cause greater costs.

Katherine Sullivan of BTL Health, Inc says:
August 27, 2013

Beware. If all you have is a hammer, then everything is a nail. One of the greatest challenges to the success of the ACA implementation is that the primary discussants are those who have gained the most from our dysfunctional and fragmented health system. Thus, legal experts, policy makers, for-profit healthcare organizations, health insurance gate keepers, and powerful professional organizations have the power, financial resources, and lobbyists to manage the outcome of healthcare reform. In contrast, the licensed health professionals are pawns and commodities to these various interests. The ones who know the problem, have practical cost-effective solutions that will improve health, healthcare, and health outcomes have no voice. Even worse, the policymakers will continue to make policies that make our job more difficult to do. What if your job was to make our job less onerous?

Ellen Stovall of National Coalition for Cancer Survivors says:
August 27, 2013

Payment and delivery reforms for cancer care are in need of innovative and implementable ideas. Dr. Guterman's blog is written in a clear, concise manner and offers concrete incentives for implementing reforms in these areas. His recommendations for specific processes and measures of quality improvement would likely lead to desirable outcomes in patient-centered care and are worth noting. As patient advocates, we believe that changing the conversation to one of a candid discussion about the goals of treatment for cancer (curative or palliative) will result in a truly shared decision-making conversation between the physician and patient. The payment system(s) should reward physicians for changing the conversation and coming up with a plan with the patient about how they will proceed with the treatment that best reflects the patient's values, preferences and understanding of their condition.