Why Do People Care about Healthcare Reform?

We Pay for Quantity, Not Quality

The way we pay for healthcare increases the quantity and price of medical services but not necessarily the quality.

For most of its history, the U.S. healthcare system has paid medical providers by the piece, that is, by the doctor visit, the diagnostic test, the hospital day, etc. This form of payment is known as fee-for-service, and it creates an incentive for providers to earn as much as they can by doing as much as possible. The U.S. healthcare system has also tried a form of payment known as capitation, where providers are paid a fixed amount per person per month to cover whatever services that person may need. Capitation is an important feature of managed care, and it creates an incentive for providers to earn as much as they can by doing as little as possible. Whatever money they do not spend on patient care, they get to keep.

In both cases, the prices we pay for care are set in a marketplace with many payers. Prices are higher in the U.S. than in countries where one big payer—usually that country’s government—can negotiate with providers to bring prices down (Anderson, et al., 2003). Neither fee-for-service nor capitation pays providers for higher quality care. In fact, both fee-for-service’s over-treating and capitation’s under-treating can lead to poor quality care.
Until recently (Sack, 2008), a doctor or hospital that made a patient sicker got paid twice, once for creating the problem by not diagnosing it or treating it early enough and again for fixing it. Capitation was supposed to keep people healthy to avoid the expense of treatment, but managed care companies found easier ways to reduce costs, such as marketing their products to healthier consumers (Klass, 1997).

Paying for high quality care is not as easy as it sounds. Quality can be defined and measured in different ways, and dollar incentives for higher quality have to be carefully designed. Recently, Medicare (Sack, 2008), Medicaid, and some private payers have begun “pay-for-performance” programs that pay providers more or less depending on how well they do certain things, such as controlling diabetic patients’ blood-sugar. It is not yet clear that this version of paying for quality is more effective than creating a provider “culture of quality” or requiring providers to report their performance on quality indicators to the government and the public (Tanenbaum, 2009).

Sources

Anderson, Gerard F., Uwe E. Reinhardt, Peter S. Hussey et al. 2003. It’s the Prices Stupid: Why the United States is So Different from Other Countries. Health Affairs 22(3): 89-105. www.content.healthaffairs.org/cgi/content/abstract/22/3/89.

Sack, Kevin. 2008. Medicare Won’t Pay for Medical Errors. New York Times, September 30. www.nytimes.com/2008/10/01/us/01mistakes.html

Klass, Perri. 1997. Managing Managed Care. New York Times Magazine, October 5. www.nytimes.com/1997/10/05/magazine/managing-managed-care.html?pagewanted=1.

Tanenbaum, S.J. 2009. Pay for Performance in Medicare: Evidentiary Irony and the Politics of Value. Journal of Health Politics, Policy and Law 34(5): 713-742. In press.

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