Fee for Service Is Dead. Long Live Fee for Service?

The move toward value-based payment for physicians is unfolding ever so slowly. Some say it is doomed to fail and that fixing the Medicare fee schedule would make more sense.

With all the talk about value-based payment models taking over health care, it would seem the system has already flipped over from its traditional a la carte payment to a prix fixe menu, with providers taking on financial risk for groups of patients.

But the reality appears to be a much slower transition.

The market was still 95% fee for service as of just a few years ago, and the latest surveys show alternative payment models still making up just a small fraction of doctors’ income. Alternative payment models meant to shift doctor pay toward shared savings or capitation—to incentivize higher quality, more efficient care—are still limited to relatively small-scale models.

The ultimate goal of payment reform is to fix a system that is wasteful and loaded with perverse incentives that pay big money for all the wrong things. In a better system, there would be fewer pointless arthroscopic knee surgeries that fix nothing but ring up $3 billion a year, and more dollars available for services that patients want and need, like a quick email consult or a conversation about an elderly parent’s end-of-life wishes.

The question is, how to get there? CMS, Congress, and many private payers are going all-in for value-based payment models, which tend to be paperwork-heavy, carrot-and-stick approaches to motivating physicians.

So why not just do it the easy way—rejigger the Medicare fee schedule so they are paid more for the things that work and less for those that don’t?

Urban Institute fellow Bob Berenson argues for that approach. Medicare’s fee schedule, which measures physician labor by relative value units (RVUs) was for many years the main vehicle for deciding which medical services are valuable. The schedule has some flaws that have produced some unintended consequences. Critics have long complained about the secretive committee of specialty society representatives convened by the American Medical Association (AMA) to establish the relative values of physician services. New procedures and technology get added to the list but never adjusted downward even after doctors perfect techniques and use less effort to carry them out. The result is overpayment for some services—and the overvaluing of specialty care in general to the detriment of primary care.

“A lot of the value-based payment stuff is purely aspirational at this point,” says Robert Berenson of the Urban Institute. “Most doctors are still paid on fee schedules.” Even managed care is dependent on fee schedules.

But there’s not much political interest in fixing the fee schedule now that Congress has gone all-in on MACRA, which will soon be paying doctors based on federally determined quality scores.

“The fee schedule has largely dropped off the radar screens for policymakers,” complains Berenson, who is trying to revive interest in using the schedule as the lever to achieve good outcomes.

Suzanne Delbanco, executive director of Catalyst for Payment Reform, supports movement toward value-based payment but also believes the fee schedule could provide straightforward methods for incentivizing quality care. “If we started to pay less for C-sections and more for vaginal births, you wouldn’t have to do quality measurement,” she says. “It would change overnight.”

Changing the underlying fee schedule might be more direct, Berenson says, but that’s actually the problem. What orthopedic surgeon or anesthesiologist wants to share the wealth with lesser-paid specialties as the AMA’s relative value committee debates how to divvy up a limited resource, the Medicare physician payment budget? The painful political reality of taking money out of one pocket to put it into another has kept the fee schedule intact.

Insurers are reaching out to medical practices to experiment with alternative payment models, and that concerns Suzanne Delbanco of Catalyst for Payment Reform. The health plan–doctor friction helped keep prices down.

“People don’t want to touch it with a 10-foot pole,” says Delbanco. “Nobody wants to think about the winners and the losers, but it’s really going to be critical to think about that stuff and not just get caught up in new bells and whistles.”

Skeptics like Berenson don’t hate all value-based payment concepts—in fact, he thinks the system should move more toward the deep end of that pool, into capitation. It’s just that he doesn’t want the fee schedule to be ignored, as Congress does with the twice-yearly pleas for reforms lobbed over from the nearby offices of the Medicare Payment Advisory Commission (MedPAC). There is some movement toward tweaking the fee schedule to reward conversation-based (rather than procedure-based) care.

“CMS has done one thing very well: They’ve tried to define new codes,” he says, noting the rollout of new coverage in 2017 for behavioral health management and diagnosing dementia. Still, he complains, “they’ve done nothing to revalue codes to deal with misevaluation” of the physician time and effort it takes for various tasks in the RVU process. His favorite example is paying dermatologists for 23 minutes of their time to freeze a skin lesion with liquid nitrogen that actually takes one minute to perform.

Headed to capitation?

MACRA is now the highly influential law of the land that will require about 550,000 physicians in medium-to-large independent practices to start reporting on at least one performance measure by the end of 2017, and more in 2018; the resulting score will determine whether a doctor gets a 4% bonus or 4% penalty in 2019, with higher stakes in later years. Alternatively, they can skip the reporting and gain a 5% bonus by joining an approved alternative payment model.

Value-based payment comes in a wide variety of flavors: ACOs, bundled payments, innumerable variations on pay for performance.

CMS has been playing in this sandbox for several years with models and experiments it expects will involve more than 200,000 physicians in 2018. Private insurers are trying out alternative payment models as well. Still, the vast majority of payment remains fee for service, or a variation on pay for productivity.

“A lot of the value-based payment stuff is purely aspirational at this point,” Berenson says. “Most doctors are still paid on fee schedules. And medical groups, even if they receive payments in other ways, end up using work RVUs to compensate their physicians. Even in managed care, even in ACOs, even in risk-bearing ACOs, they are still heavily dependent on the fee schedule.” Berenson guesses that just 10% to 20% of doctors are early adopters of new approaches that at least put them on the road to taking financial risk. Enthusiasts of provider payment reform don’t disagree about the glacial progress, but they see it as early days—not an indication that it can’t or won’t work. “The momentum is building, but it’s not like a deafening roar,” says Randolph Gordon, MD, a managing director for Deloitte consulting.

Of course, physician payment models exist along a spectrum, with varying amounts of evidence to support each.

Value-based payment arrangements represent a relatively small source of physician compensation, although 3 in 10 physicians now receive some compensation from value-based arrangements

Do you currently receive compensation from any of the following sources of payment? (More than one answer permitted)

Source: Morris et al., Deloitte University Press, Oct. 20, 2016

The evidence on pay for performance, for instance, is still coming in, but Congress has bought into the concept and built MACRA around it. Berenson is a skeptic, pointing to a 15-country study that found hospital pay for performance had no positive impact. He dislikes the concept, and MACRA along with it, enough to wish that Congress would just kill it.

But pay for performance has plenty of supporters. When asked for evidence, they usually point to one of the leaders in the field, the Integrated Healthcare Association in California, whose extensive pay-for-performance initiative involves about 200 medical practices. Lindsay Erickson, director of pay for performance for IHA, says its work has found traction because it has gone beyond simple payments for hitting a quality goal and moved into shared savings, an arrangement that makes physicians partners in the work and often reinvests savings in improving care.

The Integrated Healthcare Association introduced a shared savings system for doctors, says Lindsay Erickson, director of pay for performance at IHA. It goes beyond doctors simply trying to hit a quality goal.

IHA participants are also ahead of the curve because they already have a set of quality measures agreed upon by IHA’s members. “That’s half the battle with meaningful incentives, a huge piece of the work,” Erickson says.

Sadly for MACRA, the new payment program is saddled with an unwieldy, bewildering array of quality measures participating practices can choose to report on. CMS recently said it would pare down its massive list of measures but it remains too long for a typical physician practice to make sense of, physician advocates complain.

The fact that MACRA is now drawing so much fire from doctors is ironic given that provider groups helped to draft the law. A long list of quality measures was added on purpose, notes Mark Jamilkowski, managing director of health care actuarial services for KPMG. “The idea was to have a lot of quality metrics to provide a lot of flexibility” so doctors could choose to report on the measures likely to make them look good.

And it pays to remember what MACRA replaced—a yearly charade in which Congress deflected a required 20% across-the-board cut. Congress kicked the can up the road for 15 years (the annual sustainable growth rate fix) until finally taking a stand behind value-based payment in 2015.

But does it work?

Deciding whether these new models will produce better efficiency and quality than fee for service remains an open question, even as researchers crunch data furiously to figure it out.

IHA’s Erickson argues the evidence base may be lacking because it’s so hard to tease out what’s actually happening when a practice participates in an experimental payment model, particularly if it represents just a small portion of its income. “Providers are influenced by so many competing demands and requirements that isolating the impact of one initiative by itself is really hard,” she says.

It would be nice if there turned out to be one answer to the question “what works best to pay doctors,” but the experts who spend a lot of time with the data all seem to say “it depends.” It depends on the local marketplace and its competitiveness, it depends on the region of the country and the comfort level with taking risk, it depends on the sophistication and size and ownership and culture of the physician practice. “We believe strongly it will vary by market and players and level of capability, so it’s really about experimenting and evaluating” payment models, says Delbanco. But she’s willing to hazard a guess as to which models will get traction. “The shared-risk concept is one that appeals very much to employers, and there are still things we should be doing to fix fee for service on the relative amounts we pay for things.”

There’s other innovation on pricing too. CalPERS, California’s giant state employee retirement system, has used its clout as payer for 1.4 million retirees’ health care to push down prices for both hospital and physician care. It has put in place a growing assortment of reference-pricing schemes that encourage patients to use less-expensive hospitals and surgeons for common procedures. “Health plan and provider competition, as well as price transparency, have been very effective in reshaping the medical delivery system in the direction of value over volume for CalPERS,” says Kathy Donneson, MD, chief of CalPERS’ health policy and administration division.

Survey after survey suggests that physicians hate —or perhaps worse—don’t even know what MACRA is. They resent the idea that some of the economy’s most highly educated people can be manipulated to do what some bureaucracy wants for a few dollars. The ever-quotable health economist Uwe Reinhardt noted, “The idea that everyone’s professionalism and everyone’s good will has to be bought with tips is bizarre.”

Which suggests that a more sophisticated approach that appeals to physicians’ motivations for being in medicine will work better than simplistic carrot-and-stick schemes. Influential physician Don Berwick has argued for a new “moral era” in reimbursement, putting most clinicians on salary and ending all of the measurement and financial incentives except for the largest medical groups. Still, pay for performance seems to be gaining ground, albeit with some adjustments. For instance, IHA has learned that pay for performance is most successful when the organization works closely with its physician clients to learn what motivates them. There is no single approach to compensating physicians, Erickson says, and working with a practice’s specific culture and preferences engages doctors so they are more open to quality improvement projects and receiving feedback on their own performance.

Physicians who feel they are engaged in decision making in their organizations, whether it’s a large medical practice or a health system, are more likely to participate in value-based payment models, according to a 2017 survey by Bain and Co. But that engagement may be lacking in some health systems that have been part of the recent buying spree of physician practices and have not had time to focus on the care and feeding of their new physicians, says Bain partner Josh Weisbrod. “You have physicians saying, ‘Hey, I went from being the king or queen of my castle, and now I’ve surrendered that but I don’t feel aligned’” with the priorities of the new organization, he says. “‘And now you’re going to ask me to go along with a new payment model?’ That’s where you get some of the pushback and frustration.”

Just reporting on a few measures is not the same thing as managing a patient’s care in a comprehensive way, says Jeffrey LeBenger, MD, who runs a large physician practice in New Jersey.

Physicians also want to know they are making change that matters, not just ticking a box for a bureaucrat. Jeffrey LeBenger, MD, runs a large and growing multispecialty practice in northern and central New Jersey that has embraced the elements of modern care; it was an early adopter of an electronic health record and carefully tracks physician performance, manages its patients in all settings with a broad-based, integrated model, and works with payers to take on risk with a shared savings model. Just reporting on a few measures is not as meaningful, LeBenger says, as truly managing patients’ care in a comprehensive way. “It’s ingrained in our group,” he says of the now 750-member Summit Medical Group. “We all want to perform at high standards and with high quality.”

Summit works closely with an insurer partner to move into capitation; health plans are increasingly reaching out to medical practices to try out alternative payment models. To work best, the partners have to share data on patient status to track performance, requiring at least an amiable relationship. The trend raises interesting questions about the traditional friction between doctors and health plans. From an employer point of view, Delbanco says, she’s not sure she wants to see the two adversaries play too nicely together because that friction is what keeps prices under control.

That kind of talk irks KPMG’s Jamilkowski, who believes employers benefit when all the players work together to improve quality and efficiency. “When you get to the negotiating table you can have effective collaboration between the insurance company and provider that results in zero increase if it’s done correctly. That’s better cost savings than if they are trying to beat each other up.”

Shifting practice ownership

The success of financial incentives to adjust physician behavior will also be affected by the trend toward hospitals and health systems buying doctors’ practices. The AMA in May reported an important milestone: fewer than half of U.S. physicians (47%) now own a stake in their own practices; still, the trend appears to be a slow and gradual one. A little more than half (55.8%) of physicians work in a practice owned by physicians and just 7.4% of physicians are hospital employees (although that is up from 5.6% in 2012). The trend is expected to accelerate as practices face up to the reporting realities of MACRA; surveys indicate a significant proportion of doctors still don’t fully understand their obligations under the law midway through its first year of implementation. Practices that are overwhelmed with the cost and complexity of complying may just sell out to a nearby hospital system.

Distribution of physicians by ownership status

Source: American Medical Association, “Updated Data on Physician Practice Arrangements: Physician Ownership Drops Below 50 Percent,” 2017

Staying independent is going out of style and is largely a concern of older doctors, says Steve Look, head of recruiting for the Medicus Firm in Texas. Eight of 10 young physicians working with the recruiter take employment contracts with hospitals that offer security and regular hours.

Once doctors are employed, their contracts are usually the traditional salary plus bonus, with the bonus largely based on volume. Quality performance is starting to become a factor in employment contracts, Look says, but still makes up just 10% or 20% of the bonus. Once employed, physicians are largely obligated to follow the approach the hospital takes, which could be a traditional volume-based approach or something more integrated and progressive.

Meanwhile, independent physician practices are still grappling with how to take performance-based bonuses and risk-based arrangements and distribute the carrots or the sticks among the physicians. They run into problems with figuring out which physician is responsible for which patient—particularly hard for patients with multiple chronic illnesses—and who is assigned to which alternative payment model when the practice has dozens of payer contracts all with different methods of payment and incentivizing.

The pay-for-value movement is also slowed by the rural nature of large parts of the U.S., where more practices are small and can’t spread the risk of expensive patients. Fee for service may never die in sparsely populated rural America, experts say. And in the rest of the country, alternatives are likely to take many years to take root. “Physician contracts—you don’t change those on a dime,” notes Deloitte’s Gordon.

Jan Greene, an experienced health care journalist based in northern California, is a regular contributor to Managed Care. A former daily newspaper reporter, she now writes about health policy for a number of national publications.