Phasing Out Fee-For-Service

(The New England Journal of Medicine, May 22, 2013)

By Bill Frist and Steven Schroeder

In March 2012, the Society of General Internal Medicine convened the National Commission on Physician Payment Reform to recommend forms of payment that would maximize good clinical outcomes, enhance patient and physician satisfaction and autonomy, and provide cost-effective care. The formation of the commission was spurred by the recognition that the level of spending on health care in the United States is unsustainable, that the return on investment is poor, and that the way physicians are paid drives high medical expenditures.

The commission began by examining factors driving the high level of expenditures in the U.S. health care system. It found that reliance on technology and expensive care, higher payments for medical services performed in hospital-owned facilities than in outpatient facilities, and a high proportion of specialist physicians as compared with generalists were all important cost drivers. But fee-for-service reimbursement stood out as the most important cause of high health care expenditures.

The commission then set out 12 recommendations for changing current methods of physician payment. The aggressive approaches that are recommended below provide a blueprint for containing costs, improving patient care, and reducing expenditures on unnecessary care. (The commission’s report is available at and in the Supplementary Appendix, available with the full text of this article at

Blueprint for a New Physician Payment System

Recommendation 1: Over time, payers should largely eliminate stand-alone fee-for-service payment to medical practices because of its inherent inefficiencies and problematic financial incentives.

The fee-for-service mechanism of paying physicians is the major driver of higher health care costs in the United States.1 It contains incentives for increasing the volume and cost of services (whether appropriate or not), encourages duplication, discourages care coordination, and promotes inefficiency in the delivery of medical services.

Recommendation 2: The transition to an approach based on quality and value should start with testing new models of care over a 5-year period and incorporating them into increasing numbers of practices, with the goal of broad adoption by the end of the decade.

The long-range solution is a system that provides appropriate and high-quality care, emphasizes disease prevention and the management of chronic conditions rather than treatment of illness, and values examination and diagnosis as much as medical procedures. This implies a shift from a payment system based on a fee-for-service model to one based on value through mechanisms such as bundled payment, capitation, and increased financial risk sharing. But changing from the current model of care to one that is value-based cannot be accomplished overnight. It will require a transition period, with the likely end point being a blended system with some payment based on the fee-for-service model and other payment based on capitation or salary.

Recommendation 3: Because the fee-for-service model will remain important into the future, even as the nation shifts to fixed-payment models, it will be necessary to continue recalibrating fee-for-service payments.

Whatever system reforms (accountable care organizations, bundled payments, patient-centered medical homes, or capitation) are ultimately adopted, fee-for-service payment will remain an integral part of physician payment for a long time.2 Although paying a fixed payment through bundling or capitation is reasonable, appropriate, and desirable for acute episodes of care requiring hospitalization, many issues remain as the concept is expanded outside of hospitals. Some services are not appropriate for bundling. And the best ways to allocate bundled payments to individual physicians remain to be clarified.

Recommendation 4: For both Medicare and private insurers, fees should be increased for evaluation-and-management codes, which are currently undervalued. Fees for procedural diagnosis codes, which are generally overvalued and thus create incentives for overuse, should be frozen for 3 years. During this period, efforts should continue to improve the accuracy of relative values, which may result in some increases as well as some decreases in payments for specific services.

The time that physicians spend on services that fall under codes for evaluation and management is reimbursed at lower rates than time that is spent providing services under procedural codes. The undervalued evaluation-and-management services at issue are often those that provide preventive health and wellness care, address new or undiagnosed problems, and manage chronic illnesses.

The current skewed physician-payment system creates disincentives to spending time with patients with complex chronic conditions. It leads physicians to offer care for highly reimbursed procedures rather than lower-reimbursed care. It neglects illness prevention and disease management. Lastly, it induces medical students to choose procedural specialties over evaluative ones. Although the relative undercompensation of primary care physicians has commanded much attention, the real issue is not one of relative payment for primary care physicians versus specialists but rather of payment for evaluation-and-management services as compared with procedural services. These evaluation-and-management services include those that are provided by neurologists, psychiatrists, pediatricians, obstetrician–gynecologists, and internal medicine subspecialists.

Recommendation 5: Increased payment for facility-based services that can be performed in a lower-cost setting should be eliminated. In addition, the payment mechanism for physicians should be transparent and provide physicians with roughly equal reimbursement for equivalent services, regardless of specialty or setting.

Over the past years, there has been a trend toward reimbursing medical services that are performed in facilities owned by hospitals at a higher rate than that for the same services provided in office settings. This disparity has a negative effect on the way health care services are delivered. Cardiology presents a telling example. Medicare pays $450 for an echocardiogram performed in a hospital and only $180 for the same procedure performed in a physician’s office.3

Furthermore, spurred in part by the inducements of enhanced income from procedures, large hospital systems are buying up independent practices, threatening the viability of independent physicians and raising the cost of health care. In 2010, the New York Times reported that practices around the country were selling to health systems or hospitals; the CEO of the American College of Cardiology was quoted as saying, “The share of cardiologists working in private practice had dropped by half in a year.”4

Moreover, private payers negotiate payment for services with individual health-care-delivery groups, often resulting in different payment levels for the same physician services, depending on the market power of the physician group. Payments by private payers for medical services should be transparent to the public. These payment differentials are difficult to justify in concept or in practice.

Recommendation 6: Fee-for-service contracts should always include a component of quality or outcome-based performance reimbursement at a level sufficient to motivate a substantial change in behavior.

The incentive inherent in fee-for-service payment arrangements to increase volume can be mitigated by incorporating quality metrics into the negotiated reimbursement rates. This is already being done in programs conducted by the federal government and private insurers. On a budget-neutral basis, the modifier will increase or decrease payment rates to physicians on the measures of quality and cost.2 Although to date the overall evidence on the effectiveness of pay-for-performance programs based on quality measures is mixed, some programs are showing positive results.

Recommendation 7: For practices with fewer than five providers, changes in fee-for-service reimbursement should encourage methods for the practices to form virtual relationships and thereby share resources to increase the quality of care.

Large, integrated networks of providers dominate the provision of health care services in some areas of the country, but small, independent practitioners provide care for 9 out of 10 Americans, including millions living in rural and underserved areas.5 Fee-for-service payment should reimburse small practices for care that is not delivered in person (e.g., by telephone or e-mail) and for coordination among providers, as well as allow for sharing of ancillary providers, such as nutritionists, social workers, and psychiatric providers, who are critical to the integrated “whole person” model envisioned in the medical home.

Telemedicine and other forms of remote communication have improved outcomes for many types of patients, including those in remote intensive care units,6 the frail elderly,7 and those being treated for depression in clinics not served by a psychiatrist.8 These interventions have shown reduced costs in some populations and should be reimbursed appropriately.

Recommendation 8: As the nation moves from a fee-for-service system toward one that pays physicians through fixed payments, initial payment reforms should focus on areas in which there is substantial potential for cost savings and better quality of care.

The sickest 5% of patients consume half the nation’s health care resources. Many of these patients have multiple chronic conditions, including behavioral health disorders. Improving their care offers substantial potential for cost savings and improved quality. A logical place to start is by changing how physicians are paid to deliver care to these high-cost patients.

Another logical place to begin implementing payment reforms is with in-hospital procedures and their follow-up. Treatments for many conditions, such as heart attack and joint replacement, lend themselves to fixed payments.

Recommendation 9: Measures should be put in place to safeguard access to high-quality care, assess the adequacy of risk-adjustment indicators, and promote strong physician commitment to patients.

Any prospective payment system should be accompanied by adequate protections for patients and recognition of the centrality of patient care. Quality measures are necessary to ensure that evidence-based care is not denied as a cost-saving mechanism. A body of evidence now shows that prevention, care coordination, and the prudent practice of medicine not only will save money but also will lead to better outcomes. Risk adjustment is important for any type of fixed payment to discourage physicians and other providers from cherry-picking the healthiest patients and avoiding the sickest ones.

Recommendation 10: Medicare’s sustainable growth rate (SGR) adjustment should be eliminated.

The SGR has not worked in practice and shows no prospect of ever working. The practice of setting expenditure targets for 1 year and ignoring the consequences of exceeding them the next year makes no sense. Moreover, setting a spending cap without addressing the underlying issues of the volume and price of services and health outcomes is a short-term answer to a problem that requires a long-term solution. And since the SGR is based on the aggregate payment for physicians’ services by Medicare, there is no incentive for individual physicians to try to hold down costs, and those who do so are, in effect, penalized.

Recommendation 11: Cost-saving measures to offset the elimination of the SGR should come not only from reduced physician payment but also from the Medicare program as a whole. Medicare should also look for savings from reductions in inappropriate utilization of Medicare services.

The commission believes that the $138 billion that the Congressional Budget Office estimates will be needed to offset the elimination of the SGR can be found entirely by reducing overutilization of medical services within Medicare. We believe that enacting the recommendations in this report can go a long way toward recouping those dollars.

Recommendation 12: The Relative Value Scale Update Committee (RUC) should continue to make changes to become more representative of the medical profession as a whole and to make its decision making more transparent. The Centers for Medicare and Medicaid Services (CMS) has a statutory responsibility to ensure that the relative values it adopts are accurate. Therefore, it should develop additional open, evidence-based, and expert processes beyond the recommendations of the RUC to validate the data and methods it uses to establish and update relative values.

The RUC, which is managed by the American Medical Association and composed of members named by national medical-specialty societies, makes recommendations to the CMS regarding updates to the relative value scale on which fee-for-service physician payment is based for Medicare as well as private payers. Both its composition and its operations are flawed.

The RUC has come under scrutiny for its composition, which is skewed toward the procedural and highly technological specialties9 and its operating procedures: meetings are largely closed to the public; RUC members sign confidentiality agreements; individual voting records are not made public; and transcripts of meetings are not published. Moreover, critics contend that since nearly 90% of the RUC’s recommendations have historically been adopted by the CMS,10 it should be considered as a federal advisory committee and be subject to the sunshine requirements and oversight mandated by the Federal Advisory Committee Act.

As of 2012, improvements in the RUC include the addition of new primary care and geriatrics seats and the requirement that vote totals for all recommendations be published. The commission urges continued improvement of the RUC and encourages the CMS to look more widely at alternative sources of relative value and other payment recommendations.


Controlling rising expenditures for health care will not occur without changing the way that physicians are paid. This will require the aggressive pursuit of new physician-payment models with no delusions that the fee-for-service model will be swiftly or entirely eliminated. As we transition to various forms of blended physician payment, fixing current payment inequities under fee-for-service models will be of the utmost importance. Those fixes include reducing gaps in payments between different sites of care, rewarding caring for complex and underserved patients, and ensuring that evaluative and management services are valued as highly as technological care.

Bill Frist, a physician, is a former Republican senator from Tennessee and Senate majority leader, and Steven Schroeder is a professor of health and health care in the department of medicine at the University of California, San Francisco. The two men co-chair the National Commission on Physician Payment Reform, which has issued a report providing recommendations aimed at controlling health spending by changing the way doctors are paid.
This article was originally featured in The New England Journal of Medicine

Cost Sustainability

(Modern Healthcare, May 18, 2013)

By Bill Frist and Dr. Manoj Jain

We have done it. We have decreased the increase in the cost of healthcare. Let us explain. For three decades (1980–2009), the cost of healthcare has been increasing each year at an average rate of 7.4%—double the rate of inflation. However, over the past three years, the increase in healthcare expenditures has remained at a low 3.1%.

Is this decline the desperately needed bend in the healthcare cost curve or just the impact of the depressed economy?

Four leading studies point us in different directions. Last month’s Kaiser Family Foundation study deduced that 77% of the decline was attributable to the economic downturn and is likely temporary. A report by the Robert Wood Johnson Foundation echoed these conclusions.

In contrast, two articles in the May issue of Health Affairs point to structural changes such as “less rapid development of imaging technology and new pharmaceuticals, increased patient cost sharing and greater provider efficiency” as major causes of the decline, suggesting that only 40% to 55% of the decline was because of the economic downturn.

The final answer is probably somewhere in between, with about half of the decrease realized by encouraging changes in the way healthcare is delivered and the other half due simply to the downturn in our economy. Regardless, it is important to recognize—and celebrate—that the cost curve has bent without collapsing our healthcare system or being prompted by draconian measures in rationing of healthcare. Moreover, the decline has not led to deterioration in our quality measures. In fact, they have improved.

Now, the $2.7 trillion question is, “How can we sustain this slower growth over the next decades?”

Undeniably, during the past several years, the singular focus of conversation among policy makers has shifted from simply more care and better quality of care to better value in healthcare, where value is defined as quality over cost. The onset of value-based purchasing by Medicare and higher copays and deductibles for patients in employer-based plans has helped in disseminating this message to doctors and patients.

Yet if history is any indicator, the cost of healthcare will rise once again as our economy strengthens. So, last month the Bipartisan Policy Center made 50 bold recommendations on how to sustain the lower growth of healthcare costs. These recommendations are unique because they focus on improving the entire system of care over a prolonged period of time and break through the partisan rhetoric surrounding healthcare reform.

We want to highlight a few of the recommendations that will impact providers—hospitals and doctors. The BPC encourages advancing accountable care organizations to a 2.0 version where the entire spectrum of patients’ needs would be covered for a fixed payment, and in doing so replace the irrational and outdated sustainable growth-rate formula for physician reimbursement.

Also, the BPC policy paper suggests changing our present voluntary bundle payments program to the standard method of payments for certain DRGs. The impact of such a change in the payment system can be profound. When in the 1980’s Medicare changed payments to hospitals by DRG, length of stay and hospital payments declined.

If such measures are not successful in restricting the cost of healthcare, then a fallback spending limit or a “cap” would take effect based on annual per beneficiary spending growth to a target of GDP.

To sustain these reductions in cost, the availability of current cost data and transparency of such data are essential. At present when patients get their bills, they do not know the difference between healthcare charges, expenditures and costs. To borrow an analogy from car sales: the sticker price, the new owner’s price and the dealer’s invoice price, respectively.

As for providers, physicians are often unaware whether an antibiotic costs $150 or $15 when writing the prescription or a doctor’s order in the hospital chart.

These costs have real impact for Americans. One RAND Corp. study found that if healthcare costs had risen at the slower rate equal to the Consumer Price Index, an average American family would have had an additional $5,400 more to spend each year on education, entertainment, food and clothing over the past decade. But instead, the average family has spent that money on healthcare. With our healthcare system at this crucial crossroads, we need to take this opportunity and stop the collateral damage.

A slower growth of healthcare cost would mean less burden on the individual family, freeing that family to invest in and live a higher quality of life. And for communities it would free billions of dollars for education, businesses, job creation and future innovation.

The good news is that it can be done. And the blueprint for eliminating waste, lowering the cost and maximizing the value is actively being considered by voices that rise above partisan bickering.

Manoj Jain is an infectious disease specialist in Memphis, Tenn.
Bill Frist is a heart transplant surgeon and former U.S. Senate majority leader.

This article was originally published in Modern Healthcare.

How to Build a Better Health-Care System

(Washington Post, April 17, 2013)

By Tom Daschle, Bill Frist, Pete Domenici, and Alice Rivlin

Tom Daschle, a Democrat and former senator from South Dakota, was Senate majority leader from 2001 to 2003. Bill Frist, a Republican and former senator from Tennessee, was Senate majority leader from 2003 to 2007. Pete Domenici, a Republican and former senator from New Mexico, was chairman or ranking minority member of the Senate Budget Committee from 1981 to 2003. Alice Rivlin is a former director of the Congressional Budget Office. The four co-chair the Bipartisan Policy Center’s Health Care Cost Containment Initiative.

The four of us came together to change the conversation around how to improve health care and constrain cost growth. What we learned is that, until better care is prioritized over more care, our nation will continue to face a problem with health-care costs. The good news is that, through thoughtful policy, health-care practitioners can be encouraged through rewards to focus far more on what is best for their patients and less on the number of tests and procedures they can order. The even better news is that such a health-care vision can not only produce better care but also cost less.

With the Bipartisan Policy Center, we will release a report Thursday with more than 50 recommendations to achieve the critical goal of improving the quality and affordability of care for all Americans while containing high and rising health-care spending. This report is the culmination of nearly a year of work, including stakeholder outreach, thorough research and substantive analytics to quantify the impact of our proposed policies.

Too often we in Washington talk about health care as though it is little more than a line item on a budget table. Those of us who have experienced the best of health care know that is not how care should be delivered or policy crafted in this most personal of issues. Our country can achieve a higher-value health-care system — meaning both higher quality and greater efficiency.

Health-care cost drivers are complex and interwoven, but the most problematic ones we identified are the inefficiencies, misaligned incentives and fragmented care delivery in the current fee-for-service reimbursement system. To address these, we seek to promote coordinated and accountable systems of health-care delivery and payment, building on what has proved successful in the private and public sectors. Organized systems of care emphasize the value of care delivered over the volume of care. These systems are often better able to meet patients’ needs and desires and are able to effectively reimburse providers and practitioners for delivering high-quality care.

In all our proposals, we sought to avoid simple cost-shifting as a means to generate federal budgetary savings, instead promoting transparency and protecting patient choice. We also focused on reforms that will incite transformation across the health-care system, not limited to Medicare. We believe, however, that the power of Medicare can be leveraged to lead the way in transforming U.S. health care.

In brief, our recommendations:

●Preserve the promise of traditional Medicare while adding more choices and protections for beneficiaries, including accountable systems of care and a stronger, more competitive Medicare Advantage program.

●Strengthen and modernize the traditional Medicare benefit, including adding a catastrophic cap, rationalizing cost-sharing and premiums and expanding access to assistance programs for those with low incomes.

●Reform the tax treatment of health insurance to limit the taxfavored treatment of overly expensive insurance products.

●Empower patients by promoting transparency that is meaningful to consumers, families and businesses, and streamline quality reporting.

●Advance the nation’s understanding of potential cost savings from prevention programs, through support for research and innovation on effective strategies to address costly chronic conditions.

●Offer incentives to states to promote policies that will support a more organized, value-driven health-care delivery and payment system, such as supporting medical liability reform and strengthening their primary-care workforce.

All of these policies are designed to improve the quality and value of our nation’s health care. That is where every health-reform effort should start. The savings that we achieved — $560 billion over 10 years in debt and deficit reduction — is the outgrowth of our work, not the goal.

No single set of recommendations can fix the health-care system or the nation’s debt and deficit crisis overnight, but we hope this report can start a constructive, pragmatic dialogue among policymakers and political leaders. By presenting this report to federal, state and private-sector leaders, we hope to promote a collaborative dialogue and a shared understanding of strategies to put our nation’s health system, as well as its economic outlook, on a sounder, healthier and more sustainable path.

This article was originally published in the Washington Post