May, 29, 2020

Is COVID-19 the End of Fee-for-Service Payment?

Dan Meuse, State Health and Value Strategies

The coronavirus pandemic of 2020 has created a seemingly paradoxical scenario for the finances of health care providers. While states were rushing to build field hospitals to prepare for a surge of COVID-19 patients, traditional revenue streams for providers completely dried up: elective procedures were suspended and social distancing protocols limited the number of patients in office settings[1]. A recent survey suggested that nearly 70 percent of patients are concerned about contracting COVID-19 if they visit their doctor for a non-COVID-19 care needs[2]. The Coronavirus Aid, Relief, and Economic Stability Act (CARES Act)[3] and its follow-up legislation[4] allocated a total of $175 billion in a provider relief fund to support health care providers that faced financial hardship due to the pandemic, but that is already proving not to be enough to support providers struggling with declining revenues due to changes in health care utilization. In essence, a public health crisis became a health care crisis, as COVID-19 revealed the faults in the way necessary and critical health care services are paid for in America.

Academic and health policy experts have long derided fee-for-service, wherein a health care provider is paid for each service that is rendered. Economists argue that fee-for-service is inefficient and incentivizes providers to do more (tests, procedures, visits) than necessary to increase revenue. The model rewards the most expensive interventions, at the cost of preventive care, behavioral health services and disease management. Population health experts argue that fee-for-service payments fail to account for the low-cost but necessary care to manage chronic diseases. Payers (employers and insurance companies) argue that fee-for-service encourages a siloed health care system and is unable to support coordination across providers necessary to support health at the most efficient cost and in a way that supports the needs of patients.

The combination of these arguments, supplemented by pressures from federal and state policymakers, has initiated a shift away from pure fee-for-service. Clearly, though, the shift has been neither fast nor meaningful enough to protect providers when their visits were interrupted by stay-at-home orders and social distancing. States have the opportunity now to both support their essential provider systems and move away from an inefficient payment system that fails to meet the needs of patients. While COVID-19 has resulted in tragic loss of life, the pandemic caused people to work in ways and adopt solutions that heretofore were thought impossible. It may also provide the spark needed to break the reliance on an antiquated payment system.

There are multiple payment constructs that could meet the goal of a stronger health care system. The Health Care Payment Learning and Action Network (HCP-LAN) published a commonly used framework[5] to understand payment models. Category 4 models represent Population-Based Payment – systems that do away with fee-for-service and move to payment models that cover large groups of patients. While these can be considered the “gold standard” of payment models, most providers are not in a position to immediately transition to these more advanced models. However, stepwise moves away from fee-for-service through prospective care coordination payments[6] could accelerate readiness for providers.

Moving to a system that pays providers for a population of patients, rather than for the individual services provided, would avoid the revenue shortage that providers are facing because of COVID-19. In fact, population-based payment models may provide a greater level of predictability for provider revenues in a way that could encourage longer term planning. Evidence from global budgets for hospitals in Maryland[7] and Pennsylvania[8] suggests this precise outcome. And as states scramble to get funds to critical providers[9] like pediatricians, OB-GYNs and family physicians, the looming threat of a second wave of COVID-19 shutdowns could shrink the available networks of providers to an unsustainable level. States have the tools to protect the critical health networks that keep their residents healthy and the coronavirus crisis may finally tip the balance toward change.