Kenneth J. Terry, MA

There’s good news and bad news about fee for service, the system under which most US physicians are reimbursed today.

The good news, for those who are comfortable with fee for service, is that it’s not going away anytime soon.

The bad news is that fee for service will likely not just continue in its current form, nor will rates remain the same.

Kent Giles, a healthcare consultant in Atlanta, explains that fee for service is one of the reasons why healthcare costs are twice as high in the United States as in other countries. “Beyond the fact that we pay doctors more here, we reward overutilization of procedures,” he notes. “If doctors’ payments are cut, they do more procedures. We have to move away from fee for service to control healthcare spending.”

If doctors’ payments are cut, they will do more procedures.

Some doctors expect this to happen and are prepared for it. New Orleans urologist Neil Baum, a clinical professor of urology at Tulane University, is one of them. But few of his colleagues think the same way. “The majority of doctors are living like an ostrich with their head in the sand and think that fee for service is going to last forever,” he says. “But I don’t think it will. The healthcare system we have now is unsustainable.”

Whichever way you see things, it’s clear that some kind of change is coming. Here are the views of a few experts and practicing physicians on where fee for service is likely to go in the next decade.

New Payment Models: Do They Help?

The obvious alternative to fee for service is capitation, in which physicians are paid a flat monthly amount to provide some or all care to each patient, whether they seek care or not.

But in the late 1990s, physicians and consumers decisively rejected capitation on the grounds that it motivated doctors to skimp on care and made it difficult for patients to gain access to specialists. Today, capitation survives mainly in California and a few other managed-care hotspots.

The new payment models, like capitation, involve budgeting. But they combine that with quality measures to ensure that doctors aren’t cutting corners on care. All of these systems pay doctors fee for service, although those fees and/or bonuses may go up or down with performance. The overall goal is to induce physicians to provide high-quality, cost-efficient care.

Here’s a brief summary of these payment models, all of which are either being piloted or will soon be tested by Medicare and/or private health plans.

Bundled Payment

Unlike case rates, which apply only to individual procedures, bundled payments cover care provided across care settings and over specific time periods.

In Medicare’s Bundled Payment Initiative, which is already underway, the Centers for Medicare and Medicaid Services (CMS) will bundle payments for a hospitalization, for postdischarge care for 30 days, or for the inpatient stay plus postdischarge care for 30 or 90 days, depending on which option a provider or group of providers chooses.

Physicians who participate in these arrangements will be paid fee for service and will share in the savings if total costs are less than the budget. Their payment will be reduced, however, if costs exceed the budget. Under a fourth option, CMS will prepay the hospital for an episode of hospitalization, and the facility will divide the prepaid amount with physicians and other providers.

Episodic Payment

In addition to bundled payment, other forms of episodic payment are being considered. For example, several large healthcare systems are piloting Prometheus Payment, which rewards physicians for practicing efficiently and avoiding complications.

Physicians are paid fee for service for performing a portion of an evidence-based guideline, and their payments are debited against a care team’s budget for an episode of care. (The episodes may be built either around procedures or around chronic disease care for an extended time period.) If the care team avoids complications, the physicians share in the savings from averted emergency department visits and hospitalizations. They can also get bonuses for meeting quality goals.

Accountable Care Organizations

Accountable Care Organizations (ACOs) are groups of doctors and hospitals that agree to coordinate patient care across care settings and to deliver seamless, high-quality care. If they meet certain criteria, ACOs will be eligible to participate in a Medicare shared-savings program, starting in 2012.

CMS offers ACOs 2 options for reimbursement, both contingent on the providers meeting CMS’ quality benchmarks: 1) share any savings they produce with Medicare for the first 2 years, and share in both surpluses and losses in the third year, or 2) take upside and downside financial risk for all 3 years. Physicians will be paid fee for service at the current Medicare rates; but, under option 2, their payments will be adjusted downward if the ACO goes over budget.

Global Prepayment

Some health insurers are testing new approaches to “global capitation,” in which all care provided to patients — including professional and hospital services — is prepaid. For example, Blue Cross Blue Shield of Massachusetts offers an “alternative quality contract” that combines global capitation with quality bonuses.

A dozen large healthcare organizations have accepted this contract so far. The Blues plan pays physicians fee for service, and those payments, along with hospital and other costs, are reconciled against the budget at the end of the year. In groups with salaried physicians, however, the fee-for-service payments are only an accounting device. For example, at Atrius Healthcare, which includes six physician groups in eastern Massachusetts, physicians continue to receive salaries and production bonuses that are not affected by the alternative quality contract budget.

Are Doctors Ready for Risk?

The continuing dominance of fee for service in the new payment models should not fool physicians into thinking that nothing will change, experts say. “I view this as a step on the road away from fee for service. You could say it’s fee for service with some capitation or bundling blended in,” says Paul Ginsburg, president of the Washington, DC-based Center for Studying Health System Change.

Ginsburg doesn’t think financial risk is an insurmountable obstacle for physicians. “Traditionally, doctors were willing to take risk for their own services,” he points out. “If they needed more of their own services [than the budget covered], they could work longer to provide them. They were also willing to take risk for some services that they felt they had a good degree of control over.”

But Alice Gosfield, a Philadelphia-based healthcare attorney and health policy expert, doubts that many physicians outside of California are ready to take on risk contracts. Actuaries build the budgets in most risk contracts, she notes, by “looking in the rearview mirror. Whether the care was good, bad or horrendous or stellar, they don’t know. So doctors are terrified of the idea of taking risk. The people who can do it effectively are the ones who have a strong primary care component and have been taking capitation for a long time.”

At Atrius Healthcare, which was totally prepaid in the 1990s, only the older doctors really knew how to manage care when Atrius took on the Massachusetts Blues’ alternative quality contract, says Eugene Lindsey, MD, Atrius’ CEO. The younger doctors had to be taught how to practice in a prepaid environment. “They’ve always been incentivized on a production basis,” he notes.

If it’s just holding my feet to the fire…that’s a danger.

The blended fee-for-service models, however, are designed to be less threatening to doctors than global capitation is. Even Gosfield believes physicians can get used to their fee-for-service payments being adjusted up or down, depending on their efficiency and quality.

Baum is opposed to capitation but says he has no problem with this kind of arrangement. “I’d welcome the opportunity to get a risk contract because my outcomes are good and because I can keep my costs down,” he said. “I have a busy practice that believes in 1-day surgery. I do things on patients for which other doctors keep them in the hospital overnight or for several days. So I’d do very well with an at-risk contract.”

Similarly, Kenneth Kubitschek, an internist in a medium-sized group in Asheville, North Carolina, says he can foresee a day when his practice will be taking risk contracts. However, he cautions, “The models have to be done correctly. If it’s just holding my feet to the fire so they can save money, without ensuring that I’m rewarded for doing all the extra work of quality and making sure patients are well taken care of, that’s a danger. I embrace the idea of quality; I just want to be sure that’s not a disguise for another way to cut charges and make the system less expensive.”

Who Divvies Up the Pie?

Although more than one third of hospitals say they’re interested in forming ACOs, only a handful have so far, and the barriers to ACO formation are huge.

So it’s likely that the first new payment model that most physicians will see is some kind of bundling arrangement, rather than an ACO shared-savings contract.

Consultant Kent Giles believes that bundling, if done right, could be very successful. He recalls that when he managed a hospital’s transplant program, global payments for transplant-related services “allowed us to be creative and change what we did for patients.” As a result, he notes, both the physicians and the hospital earned more from transplants.

Doctors should have an equal voice in the decision.

In his example, however, the surgeons made a few thousand dollars more, while the hospital raked in $50,000 extra per transplant. Some physicians fear that if hospitals determine how the pie is divided, they’ll get the short end of the stick.

Kubitschek believes that doctors should have an equal voice in this decision, and he says this is not just about ensuring that reimbursement is fair. “I want doctors to be at the table driving better quality of care, because we bring a different perspective than other entities, which are more business driven and less patient centered.”

The Future of Fee for Service

Many experts and physicians believe that straight fee for service will continue to be the dominant mode of payment for the next few years. That’s partly because none of the new payment models have been proven to save money yet.

Medicare’s Physician Group Practice demonstration, the precursor to its shared-savings program, had mixed results. And an analysis of the first year of the Massachusetts Blues’ AQC experiment showed very modest savings.

With healthcare costs still rising rapidly and the economy on the ropes, however, pressure is mounting to cut physician reimbursement. It’s considered unlikely that Congress will reduce Medicare payments by 30% at the end of this year, as current law requires.

Paul Ginsburg believes it’s possible that Congress might follow the recommendation of the Medicare Payment Advisory Commission (MedPAC) to resolve the standoff over the sustainable growth rate method of determining Medicare payments. The Medicare Payment Advisory Commission would slash specialist payments by 17% over 3 years and then freeze them for the following 7 years; primary care reimbursement would not rise for the next decade.

And that doesn’t include anything that might come out of the Congressional “super-committee” on the budget. If the committee doesn’t agree on specific cuts that meet the mandatory goal for deficit reduction, Medicare’s budget would be cut 2% across the board. Moreover, private payers are expected to follow Medicare’s reimbursement changes in their payment policies.

Lindsey expects big cuts in physician reimbursement. “I think the elevator ride down is going to be huge,” he says. “I’ve talked to consultants who expect at least a 7% fall in hospital revenues, which is going to destroy the bottom line of most hospitals. Whatever they end up doing with the sustainable growth rate is going to cost physicians, and I’m sure this super-committee is going to cut their reimbursement. All of that’s going to have a devastating impact.”

Vicious Cuts in Fee for Service Rates

Rather than endure these “vicious” cuts in fee-for-service rates, Ginsburg speculates, many physicians might prefer risk contracts that offer them a financial upside. But Gosfield doubts that, because “physicians are scared to death of downside risk.”

As Baum and Kubitschek indicate, not all doctors feel that way. But even these physicians are in a wait-and-see mode right now, and they say that most of their colleagues are uncomfortable with the idea of change. “I think most people want to continue with the kind of fee for service that they’re used to, because they’re familiar with it,” notes Kubitschek.

Nevertheless, he doesn’t believe that, 10 years from now, he’ll still be paid the way he is today. “I think there will still be some fee for service. But the trends are away from that. It’s hard to achieve the desired goals in that model.”

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