Fee-For-Service is Pervasive yet Perverse

The FFS payment model was created long ago, during a time when physicians treated less-complex problems and offered only a few inexpensive therapeutic interventions. It worked back then but a significant percentage of patients today have multiple chronic conditions. Meanwhile, the number of complex and very expensive tests, medications and interventions available are practically unlimited.

Economics 101 teaches that as supply goes up, costs should come down. But this tenant doesn’t hold true in medical care – not when the supplier also controls demand.

In health care, doctors can stimulate demand because (a) health insurance blinds most patients to the costs of services and (b) patients often don’t know whether a complex procedure is as necessary as a non-invasive one.

As a result, we have seen a major increase in utilization of complex services over the past 20 years.

That’s a short extract from an important FORBES article, The High Cost Of American Health Care: You Asked For It. Everything in the article is consistent with my understanding of economics and long-held view that the problem with our healthcare system is perverse incentives in the payment model. I highly recommend it.


Perverse incentives for doctors and hospitals are just one thing driving up U.S. health care costs. (Photo credit: Army Medicine)

Private companies in a free-market society are most efficient when there’s vibrant competition on a level playing field, because that competition causes them to improve service & product quality and drive down prices. These private companies, answering to shareholders and driven by profit motives measure success in terms such as Revenue, ROI, Payback Period, Stock Price, etc.

Public entities, on the other hand, measure success differently and over much longer time periods. As a result, they can make more strategic and longer-term investments and fund them with bonds and tax revenues. Instead of profit, their objectives can focus on lifestyle improvements, on nurturing that skilled, healthy and productive workforce, and on infrastructure as the engine of economic growth to benefit all.

Some people see public services as generally having large and inefficient bureaucracies, but the public sector can actually be more cost effective, because there’s no need to make a profit, and their relatively large size is due to the scale of their operations. That’s why I proposed a hybrid model proposed a Hybrid, Public/Private Model of Health Care and argued that the key to health reform is getting the incentives right.