Center for American Progress

The Affordable Care Act Provides Promising Alternatives to Health Care’s Fee-for-Serice Payments

The Affordable Care Act Provides Promising Alternatives to Health Care’s Fee-for-Serice Payments

Health care's current fee-for-service payment system allows for high costs and a low quality of care. Pilot programs are suggesting that the Affordable Care Act could offer promising reforms.

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Our nation’s health care system is high cost and high volume, but it is certainly not high value. This year, we will spend more than $8,000 per person on health care, which is more than twice the average of $3,400 per person in other developed nations. But spending more on health care has not made us healthier. Even within the United States, different areas of the country spend very different amounts on health care, again with no correlation to better outcomes.

One of the key reasons for the high level of health care spending and its rate of growth is the predominance of the fee-for-service payment system, which rewards quantity over quality, especially for high-cost, high-margin services. Under this system, health care insurers, including Medicare and Medicaid, pay doctors, hospitals, and other health care providers separately for different items and services furnished to a patient. As of 2008, 78 percent of employer-sponsored health insurance was fee-for-service.

Fee-for-service payments drive up health care costs and potentially lower the value of care for two main reasons. First, they encourage wasteful use, especially of high-cost items and services. Second, they do nothing to align financial incentives between different providers. As a result, patients receive care that they do not need and may not want, and health care providers may not be on the same page about what type of care the patient should receive. It is not just insurers who bear these unnecessary costs: These costs raise premiums, deductibles, and cost-sharing for all health care consumers.

Moreover, the fee-for-service system does nothing to encourage low-cost, high-value services, such as preventive care or patient education—even if they could significantly improve patients’ health and lower health care costs throughout the system. Many patients with poorly controlled diabetes or heart failure, for example, enter hospitals needing acute care when their conditions could be managed with better preventive disease management, which would eliminate the need for costly hospital stays.

But there are signs this trend is changing. The Affordable Care Act includes a variety of payment and delivery system reforms designed to control costs and improve care, especially in the Medicare program. These reforms both complement existing private-sector innovations and encourage even wider adoption of alternatives to the existing fee-for-service system. Instead of basing payment solely on the volume and price of the items and services provided to patients, these alternative methods of payment create incentives to encourage preventive care and better care coordination, especially for patients with chronic illnesses.

Although many of these efforts are in beginning stages, early experiences of health care providers piloting these alternatives to fee-for-service are promising. Their initial experiences and results suggest these reforms can lower costs while increasing quality of care.

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