An MD's Thoughts on Payment Reform

David F. Torchiana, MD, Chairman and CEO of the Massachusetts General Physicians Organization says payment reform is critical, but it's important not to repeat the mistakes of the past...

There’s a lot to recommend payment reform in healthcare because of the significant flaws in our current approach of fee-for-service (FFS) payment. In the opinion of many, FFS is the principal cause of medical inflation because there is a built-in incentive to do more of everything. It is certainly fair to say that pure FFS creates no obstacle to using expensive medical services, which is why utilization review and pre-authorization programs are so widespread. But it is an exaggeration to assert that healthcare costs are principally driven by doctors churning FFS business for personal financial gain. In day-to-day practice, most testing and referrals do not financially benefit the ordering physician either directly or indirectly. At least as many areas of utilization are driven solely by the incidence and prevalence of diseases (surgery for hip fracture or colon cancer) as are subject to the potential problem of provider-generated demand (spine surgery or coronary angioplasty).

The more significant problem with FFS is that it is transaction-based.

Only encounters and procedures are funded. Coordination of care, which can greatly benefit patients, is not. In fact, FFS works against coordination of care because savings that accrue from better coordination of care go to payers while the costs of coordination go to providers. Building care coordination in as an insurance company service, in the form of disease management, has repeatedly failed because patients appropriately want their care managed by their doctor not their insurer. A payment system that covers the cost of provider-based care coordination is badly needed: 70 per cent of costs are generated by the most complex 10 percent of patients and there is no way to cover the costs of coordinating that care under FFS.

The Payment Reform Commission in Massachusetts has proposed statewide, all-payer capitation as the solution to the flaws of FFS. Insofar as capitation funds coordination of care, this would be an improvement. But there are four reasons why capitation has such a negative history with doctors and patients and renaming it global payment doesn’t solve any of them.

The first is that the financial risk is shifted to providers but much of insurance risk is uncontrollable except at the population level (you can’t predict which patient is going to have a catastrophic illness, only that a certain percentage will). Insurance doesn’t work when doctors bear the financial risk because no doctor has enough patients to make that risk predictable.

Secondly, when you shift financial risk to individual doctors there is an accompanying incentive to avoid potentially sick and costly patients and no risk adjustment system can change that.

The third consequence of shifting financial risk to doctors is that it puts the patient and doctor at odds. Patients do not want to have their doctor financially rewarded for limiting services or encouraged to send them to a cheaper institution if there is another institution that is better. Doctors don’t want to be placed in that position either. Capitation creates an underpinning of mistrust, no matter how ethically the physician behaves or how rigorously oversight is imposed.

Finally, capitation means restricted choice. It has to, if you as a physician are at risk for all the costs your patient incurs, you must influence where they receive care, otherwise how can you hope to manage the costs?

Payment reform is a good idea whose time has come. It should take place incrementally, in steps that are logical and by transferring costs that are controllable. Transitioning from FFS to bundled payments and supporting the costs of care management through a shared savings model make more sense than a wholesale leap to capitation. Massachusetts went through that experiment in the 1990’s and the results weren’t pretty – hospital bed days declined by 33%, a quarter of the state’s hospitals closed and capital investment dried up with the result that parts of the hospital system are still capacity constrained. While premium growth did actually drop to a negative level for one year, the trend was not sustained and may have fueled premium hyperinflation for a time during the catch up period. We should try to do better this time.