Exploring Fee-for-Service: How This System of Physician Payments Creates Misaligned Incentives and Harms Patients

The majority of physicians in the United States are paid, or reimbursed by insurance companies, for their medical services on a fee-for-service (FFS) basis. Under this system, each procedure, intervention, prescription, and medical device is billed for separately. This structure of payments harms patients through the creation of misaligned incentives for physicians. The FFS structure encourages duplication of tests and discourages coordinated care between physicians. For a given treatment, every patient is likely to see several different doctors, each of whom is billed separately for their specialist service(s). This leads to fragmented and disjointed care for the patient. Often times, largely because of a lack of communication an coordination between a patient’s physicians, medical tests and scans may be duplicated. This is not only costly, but has adverse outcomes for patients because their illnesses are not consistently treated. Patients in FFS are also more likely to be readmitted to the hospital and develop avoidable complications, especially for the chronically ill. Nearly one-fifth of FFS Medicare beneficiaries discharged from the hospital are readmitted within 30 days. Three-quarters of those readmissions (costing an estimated $12 billion annually) are in categories of diagnoses that are potentially avoidable. We need incentives for physicians to communicate with one another and link their services for a patient’s course of medical treatment.

Fee-for-service also neglects to encourage low-cost, high-value services, such as preventive care and patient education, even though these could significantly improve patients’ health and reduce systemic health care costs. For example, many patients with poorly controlled diabetes or heart failure enter hospitals through emergency rooms and need acute care, when their conditions could be managed with better preventive disease management. This approach would have better outcomes for the patient and eliminate the need for costly hospital stays, but it is not encouraged in the FFS system.

Lastly, the FFS system encourages health care providers to overuse medical care by rewarding quantity, rather than quality, of services. This subjects patients to care that, according to sound science and the patients’ preferences, does not benefit them but can have harmful effects. For example, in July 2012 the US Preventive Services Task Force recommended against an antigen-based blood test screening for prostate cancer because of “substantial overdiagnosis” of tumors, many of which are benign. Excessive treatment of these tumors, including surgery, leads to unnecessary harms. A 2004 Dartmouth study found that states with higher Medicare spending per-capita actually had lower-quality care. Fee-for-service encourages wasteful spending on treatments, which leads to patients suffering needless side-effects and hospital-borne illnesses.