Healthcare Tech Lessons: Fee for Service vs. Managed Care

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Today, when a patient goes to their primary care physician with a health problem, they are referred to a specialist, generally in a hospital setting, and given a number of treatments.  The hospital then bills the insurance company or government for each of these treatments (this is what's called fee for service).  The hospital then pays the physician a salary or an incentive-based payment.  One of the reasons that the government is trying to shift the healthcare payment model away from fee for service (and towards manged care) is that it provides an incentive for providers to over-prescribe various treatments -- e.g. more treatments = more money.  

As we shift towards a managed care model, when a patient contracts an illness, the insurance company or government will pay a healthcare organization (what will be called an Accountable Care Organization, or ACO) a fixed lump sum.  This lump sum will then be split between all of the providers that provided treatment.

This change and its effects have been talked about at length.  But here are two effects that may not be so obvious:

  1. It could put the Primary Care Physician (PCP) in the driver's seat.  Because the PCP generally has the best relationship with the patient, they could be the conduit for all healthcare payments. The savvy PCPs will setup their own Accountable Care Organizations where they take the payment directly from the insurance company or the government.  From there, they can dole out the appropriate share of the money to the specialists and hospitals.  Having physicians pay hospitals instead of hospitals paying physicians would radically change the power structure in healthcare as we know it.
  2. In a managed care environment, there's an enormous incentive to keep costs down.  Because providers are going to receive the same lump sum payment for an affliction, regardless of how many prodedures they perform, the only way for them to profit is to lower their expense base.  As a result, to increase efficiencies, we may begin to see hospitals have floors that are designated to afflictions, rather than specialties.  That is, instead of having a radiology or dermatology or cardiology wing, there may be a diabetes or heart disease or lyme disease wing.  That would be a radical change in the way hospitals are run and costs are managed.

We can't underestimate the disruptive effects that are coming as a result of payment reform.