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A must for health care reform: End fee-for-service medicine

Doctors need incentives for good care, not more care.

By Anthony L. Schlaff / September 10, 2009


President Obama is right on many of the big things on health reform. It is a moral imperative to provide universal access. We must solve the cost problem. And, yes, we can. In his rhetoric, however, the president is mixing up the fix for access with the fix for costs.

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The reforms being debated in Congress are about insurance. They are attempts to fix the access problem. They do this through a variety of mechanisms, including requiring coverage for preexisting conditions, providing subsidies, creating mandates, and creating insurance pools.

These are all good, but none of them in any serious way begins to address the most critical driver of rising costs: a provider payment system built on a "the-more-you-do-the-more-you-get-paid" incentive system.

Fee-for-service medicine

"Bending the cost curve" requires us to reform, not the way we are insured, but the way we pay providers. We may not yet know the best way to do this, but we know the fundamental thing that must be done: End fee-for-service medicine.

Providers must be paid in a way that rewards good care, not more care. The most straightforward way to do this is to pay providers with a salary, allowing bonuses based on quality measures, but not on incentives to do more or to do less.

The confusion between insurance reform and payment reform, and their effects on access versus costs, reflect a persistent and dangerous lack of clarity about the desired roles of government and of market competition in healthcare.

The insurance system that pays for care and the delivery system that gives the care are fundamentally different, and confusing them confuses policy. Medicare (and proposed public plans) are not government-run healthcare. They are forms of government-run insurance. The delivery system is private.

When policymakers call for the need for competition in the insurance market as a way to hold down costs and increase innovation, they are caught in the same confusion. Promote competition among providers, by all means, but multiple insurance companies do nothing to affect provider competition, and it is among providers that we need to lower costs and might wish to increase innovation.

Is there really any benefit to competition among insurers? Hardly. We don't need innovation as to who gets covered. We want everyone covered! Nor do we need it regarding the basic coverage package, which we need to standardize.

Furthermore, the notion that competition for price on insurance can hold down costs of care ignores a basic law of economics: Price competition is effective when the competition is applied at the time and place where the decisions get made.

When each of us chooses our insurance (or when our employer does it for us), we know little about the decisions to be made over the next year. A $50,000 bypass operation is less than worthless to me now. I'd even pay to avoid it. But six months from now, if I have a massive heart attack, overnight it may become priceless to me.