Fee-for-service reimbursement inadvertently punishes our best efforts.

In my last column, I wrote about the need for innovation in payment models for chronic disease management. One reader pointed out that who you are makes a big difference in how you view population health and cost reduction. Anyone who is paid under a fee-for-service model or who is part of a multi-specialty group that gets most of its revenue from procedures, has a big disincentive to cut costs, meaning that the best strategy is to do nothing.

The reader makes a valid point. Under fee-for-service, improving outcomes and reducing the need for services means cutting your revenue. A case in point is the Seton Family of Hospital’s campaign to reduce birth injuries, a successful project that earned the group the Joint Commission’s prestigious Codman Award in 2007. This group of hospitals reduced birth trauma by 93 percent despite having one of the lowest rates of birth trauma when they began the program. Conventional wisdom at the time was that some birth injuries are just not avoidable. Since then, they’ve had years with zero birth traumas. One result of this effort has been an 80 percent reduction in the average length of stay in the neonatal ICU for babies with birth injuries, from 15.8 days to just 3.1 days.

Those are fabulous results. Though birth injuries are rare, they are traumatic for the infant and family and can be very expensive to treat. The Seton results are a real victory for families and for the health system in general. But not so much for Seton’s bottom line. The improved care and outcomes netted Seton, by one executive’s estimate, a $1 million reduction in revenue.

Think of that. A hospital system does what is right and good and is punished with a large financial loss. That pretty much sums up the basic problem with the fee-for-service reimbursement model. If all Seton cared about was the bottom line, this project would be considered a disaster. While they fortunately care more about families than revenue, it just seems wrong that doing a good job results in financial punishment.

Painful, but necessary

There are plenty of physicians and hospitals that see the move toward value-based payment systems as a disaster. I understand their fears, of which include the fear of reduced income and increased oversight and reporting. And it certainly won’t be easy for many providers to make the change.

That’s why it is so very important for health plans to look carefully at how they reimburse care, building in tangible incentives and rewards for better outcomes. We can’t expect physicians and hospitals to change the way they practice if they will be financially punished for better care later. This is particularly true of hospitals. Better outcomes translate not just into better medicine, but also to fewer days in the hospital, which, in turn, translates into a big hit for health systems.

We could learn something from Chinese medicine, which counts amongst its foundational tenets “the prevention of disease and maintenance of health,” with a reimbursement system to match. In traditional Chinese medicine, doctors were paid a retainer by patients when they were healthy, but if a patient became ill, the doctor would not be paid again until the patient’s health returned. Somehow, health plans (including government health plans), need to create an incentive system that rewards hospitals for helping keep patients healthy and out of their beds. In fact, some health plans have moved toward capitation-based contracts, which provide incentives for reducing the need for services.

But hospitals don’t have to sit back and wait for health plans to change the system. They can be proactive in seeking contracts with the right incentives. This will work especially well for multi-disciplinary health systems that include significant outpatient care.

The new medical center for the University of Texas Dell Medical School will open its doors next year with a 100 percent value-based reimbursement model. UT Medical School officials are consciously rejecting the fee for service model precisely because of the twisted incentives inherent in the model. They are also planning for fewer inpatient beds, because they intend to see that fewer beds are needed.

Of course, it’s easier to do this if you have the luxury of building a system from scratch. But even long-established systems can work with health insurers to create contracts that make better, financially rewarding outcomes rather than financially punishing ones.

Why health plans should work toward value-based care
The same reader who commented on the skewed incentives for providers also pointed out that insurance plans, often acting as third party administrators (TPAs) for self-funded employer plans, earn their income based on a percentage of the gross premiums, which are often strongly related to medical expenses. In other words, the more care they pay for, the more profit they could potentially earn. Once again, this skews the incentives in the wrong direction.

But there is a flaw in believing insurance plans earn their income based, somewhat, on incurred medical expenses because both employers and individuals are becoming increasingly reluctant to pay high premiums. In the case of individual members, higher plan expenses translate to higher premiums, which can drive members to change their plan. And employers – especially those that are self-funding health insurance for employees – are beginning to take a very hard look at TPA contracts that don’t help them hold down costs. The health plans that will prosper in the future will be those that are able to help individuals and employers reduce the cost of care.

That means health plans have an incentive to move their own incentives toward value-based care.

We have to change course
If all that sounds complex, then you are getting a good sense of why U.S. healthcare is so expensive and so ineffective at improving health. To rebuild the system will require a concerted effort by the entire system, from consumers and employers to providers and health plans. Everyone has a role to play. We will get there, but it will take patience and persistence to change the direction of this mighty ship. But it is necessary, because the current course will land us on some pretty sharp financial and social rocks. 



Nick van Terheyden, MD, is CMO of NTT Data - Healthcare & Life Sciences. He previously served as CMIO of Nuance Communications. Dr. van Terheyden is a 25-year veteran of healthcare technology. He aided in the development of one of the first EMRs and served as a business leader in one of the first speech recognition Internet companies. He is a graduate of the Royal Free Hospital School of Medicine, University of London and has several professional memberships including HIMSS, mHealth Executive Committee, AMIA and AMDIS.


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