One of the most notable features about American healtcare is the use of fee-for-service as a payment model. In return for a consultation with a physician, outpatient procedure or hospitalisation, the insurer (or patient) pays for the individual services.

‘The incentives are reversed. To make money, providers have to do what’s necessary for less than the contracted amount with the payer’

As fee-for-service operates on an individual service basis, the incentives for doctors to make more money are relatively straightforward − especially if a physician is the equivalent of a single-handed GP or private specialist − the more billable activity, the higher the payment. 

For example, given the choice between “watchful waiting” for prostate problems and performing an invasive procedure, it’s easy to see how the physical intervention could win.

Yet other payment models do exist. One ongoing debate is a desire to reduce costs by realigning financial incentives. There are lots of options, notably − and at the other end of the spectrum from fee-for-service − what’s called “global capitation”. In this payment model, the payer agrees in a contract with the provider a price for healthcare activity for a population of patients over a period of time.

The incentives are reversed. To make money, providers have to do what’s necessary for less than the contracted amount with the payer. The risk of paying out for unknown or high claims shifts from payers to providers, who now bear the brunt of the risk. 

Incentives for providers

Simply reducing activity is likely to face several challenges, as − in addition to the ethical responsibilities − performance measurement and the litigation culture would probably catch up with providers who deliberately underperformed.

‘If people are healthier at their first contact with the healthcare system, there is a possibility they could have lower future healthcare costs’

What capitation therefore does is offer an incentive for providers to improve efficiency and make financial savings through significant process reform. This could include: streamlining referrals, reducing unnecessary tests through use of electronic healthcare records, and allowing evidence based medicine to dictate which investigations and interventions are really clinically beneficial. There are also middle-ground financial reform options, such as bundled payments and shared savings. 

It should be noted that in some sectors there is cultural aversion to capitated style models, perhaps because of the use of fee-for-service in many other walks of life in the US, and the concern that it might interfere with physicians’ decision making.  

A further extension of the capitated model becomes even more interesting when seen in the context of improving public health for an entire geographical area.  Especially in rural areas with consolidated healthcare markets, capitated contracts could incentivise enlightened providers to improve health and wellbeing in an entire geographical population.

Under a capitated contract, reducing the population’s risk of future ill health as early as possible could become financially attractive in the long term, on the basis that all the people in any given area are likely to become patients with that organisation at some point.

Deep-lying isssues

If people are healthier upon their first contact with the healthcare system, there is a possibility they could have lower future healthcare costs. Seeing someone with impaired glucose tolerance is far preferable to meeting them for the first time with advanced diabetes in need of an amputation.

‘The situation in urban areas is more complex as any one organisation has less control over the population’

However, two things impede this possibility. First, profit in healthcare thinks in the short term. Second, patients tend to move around and long-term savings may not be realised by the organisation making the initial public health investment. 

The situation in urban areas is more complex as any one organisation has less control over the population. It’s sometimes hard to say who people will seek care from next.

When I first came to the US, I thought simply extending insurance coverage to uncovered sections of the population would offer the best opportunity for improving the public’s health. Six months later, while immersed in a highly complex multi-payer, multi-provider system, I’ve seen how deep the issues go. 

Payment reform for healthcare delivery is one area for possible improvement of healthcare, and to my surprise maybe for public health too. It is something I had not thought about extensively prior to my Harkness Fellowship.

The 2012-13 Harkness Fellows write exclusively for HSJ and the Nuffield Trust blog.

Topics