Is the Fee-For-Service Model to Blame for America’s High Cost of Healthcare?

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September 3, 2015 by Lisa Brammer

Everyone knows that healthcare in the United States is extremely costly, but what exactly is the cause of its high price? When asked, many experts will tell you the fee-for-service reimbursement model is to blame. I read an article last year in Forbes magazine called “The High Cost of American Healthcare: You Asked for It.” I thought it was clever when the article compared the fee-for-service model to hiring a contractor for a kitchen remodel. And instead of obtaining competitive bids and choosing what you want, you defer to his expertise and allow him to pick all materials as well as their source—whatever he wants to do—under a time and materials contract. At the end of the day, you could not only end up paying for more hours than you were expecting (in part because he charged for the extra time it took to redo mistakes) but you could also be stuck with a heavily marked-up Sub-Zero refrigerator when you would have been perfectly happy with the much cheaper, Consumer Reports recommended brand you researched earlier.

Like the “time and material” contractor, the fee-for-service financial model pays healthcare providers for the number and type of services they provide to patients—the more they deliver, the more they’re paid. It’s long been thought that this incentivizes healthcare providers to do more—regardless of benefit—and that’s what’s caused the high cost of healthcare here in the States.

Provider-owned health plans join the insurer with the provider. This integration has been touted as a way to get away from the fee-for-service model which many experts believe would lower insurance costs by reducing excessive spending from unnecessary procedures, tests or surgeries.

HealthPocket, the health plan comparison company that provides unbiased information to consumers to help them make more informed decisions, wanted to calculate the actual health insurance premium cost savings that takes place when the fee-for-service model is eliminated. To do so, they compared the lowest premium costs for provider-owner plans in the Obamacare marketplace to nonprovider-owned plans within twelve counties (that contained both types of plans) spread across eastern, central, and western regions of the U.S.

Results were quite different than anticipated. The cheapest provider-owned health plans were on average more expensive than the cheapest nonprovider-owned plans.

Bronze Plans: in 10 of the 12 counties, the least expensive plan was a nonprovider-owned plan.

Silver Plans: the cheapest plan was a nonprovider-owned plan in 8 of the 12 counties studied.

Gold Plans: in 10 of the 12 counties, the least expensive plan was again a nonprovider-owned plan.

Platinum Plans: only 3 of the 12 counties had provider-owned platinum plans, and 10 of 12 had nonprovider-owned plans. Only two counties had both provider-owned and nonprovider-owned platinum plans. The cheapest provider-owned plan was more expensive in one of the counties, but less expensive in the other.

HealthPocket conclusion¹: “The results of the provider-owned health plan premium investigation illustrate the sobering reality that the best intentions in reforming American healthcare do not necessarily produce the cost-savings imagined. Despite their theoretical promise of reducing expenses by eliminating the waste associated with the fee-for-service model, a cross-country analysis found that far from being the least expensive health plans, the provider-owned health plans without fee-for service model were, in fact, more expensive on average than their nonprovider-owned counterparts.” ¹ infostat 8/20/15

I think we can all learn something from the “time and material” comparison. Can it lead to unscrupulous spending and inflated costs? Yes. But if employed by an honest trustworthy contractor, it can also save money. When paid hourly, the contractor doesn’t have to add unforeseen problems into his bid. Not to mention that some contractors receive price breaks on materials and pass them on to their clients. To me, it’s more important to investigate the reputation or trustworthiness of a business—or healthcare provider—than their reimbursement model. In both cases you are going to them for their expertise, but it’s your kitchen, your health, and your money, ultimately the decision is yours. It is imperative that you ask questions and understand exactly what you are agreeing to.

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