Fee-for-Service is not Dead.......It is not even Wounded

Most industry leaders believe that, in the near future, fee-for-service payment will be replaced by “population-based payment,” intended to reduce incentives to over-treat patients and to encourage prevention. However laudable these goals, we believe the expected shift to population-based payment is unlikely to materialize.

We take population-based payment to mean time-limited fixed per-capita payment for a defined population of covered lives. Much of the inevitability of the trend toward population health is attributed to the Medicare ACO/Shared Savings programs created by the Affordable Care Act. The accountable care organization has been touted as the eventual successor to DRG and Part B payments in regular Medicare. Medicare's ACO programs now cover about 8 million of its beneficiaries (compared to 17 million in Medicare Advantage).

While advocates in the CMS claim hundreds of millions in savings (in an overall program spending more than $600 billion a year), the Pioneer ACO program and its much larger younger sister, the Medicare Shared Savings program, have struggled to gain industry acceptance. Medicare ACOs have so far had minimal impact in reducing costs. (PDF)Managed-care veterans (hospital- and physician-based) that have succeeded in Medicare Advantage or commercial HMO markets have largely failed with ACOs.

After a decade of experimentation, the pattern in these ACO programs is that a small fraction of ACOs generate most of the bonuses, and that excessively high prior Medicare spending, rather than excellent infrastructure and clinical discipline, may be the real reason for those successes. For the majority of ACOs, the return on investment for setting up and operating them is negative and likely to remain so. The recently issued ACO regulations did not materially improve the ROI calculus. In our view, it is extremely unlikely that ACOs will evolve into a “total replacement” for regular Medicare's current payment model.

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On the commercial side, about 15 million patients participate in ACO-like commercial insurance contracts. More than 90% are so-called “one-sided” contracts, where there is no downside risk for providers who miss their spending targets. Yet some providers are giving up 30% discounts upfront to enter commercial ACOs that are really narrow-network PPOs. The discounts function as withholds with an earn-back if providers can meet spending and quality targets.

The commercial ACO deals we've looked at are one-sided in more than one sense: they frequently limit future rate increases, so nearly all inflation risk is borne by providers. As structured, they are a no-lose proposition for insurers that deliver real benefits to providers only if their competitors are excluded from the networks. Shifting more insurance risk to providers is unnecessary since insurers have already shifted a large amount of the first-dollar risk to patients (and therefore providers) through deductibles and copayments.

Moreover, with commercial medical-cost growth trends continuing in the mid-single digits, there is no cost emergency requiring a major change in insurers' contracting strategy; the present hybrid discounted fee-for-service model is doing its job. Deeply discounted fee-for-service with a small fraction of payments tied to “performance'” is not population health.

While many healthcare executives have embraced population health in concept, it is our experience that many of their physicians are not participating in a meaningful way. A recent RAND study of clinician acceptance of these models concluded that they have not substantially changed how physicians deliver face-to-face care, and that the additional nonclinical work required (mostly documentation) is perceived to be irrelevant to patient care.

Economists remind us that pursuing a given strategy means sacrificing gains from pursuing alternatives—the concept of “opportunity costs.” Not only are the potential gains from public or private ACO models limited, but the opportunity costs are steep. For hospitals and systems, they include recruiting and retaining physicians; improving hospital operations and profitability; reducing patient risk and improving their clinical experience; and commitment of clinician time to actual practice. Squandering scarce resources on a low-payoff strategy could prove costly for many health systems.

As industry veterans well know, our field is prone to periodic spasms of groupthink. The inevitability of population health is one of them. Though some may succeed in mastering population-health models, fee-for-service is likely to remain the core of the U.S. healthcare payment system for some time to come.

Jeff Goldsmith is president of Health Futures and an associate professor of public health sciences at the University of Virginia. Nathan Kaufman is managing director of Kaufman Strategic Advisors.