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

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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.

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