Making Payment Reform in the US Healthcare System Possible

Karen Davis, PhD


December 21, 2007


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Any discussion about reforming the way we pay healthcare providers raises a fundamental question: What do we want out of our health system?

Most of us want a health system that offers the best possible outcomes at an affordable price. But our current fee-for-service system reimburses "inputs" -- hospital stays, physician visits, and procedures -- rather than appropriate care over an episode of illness or the course of a year. Fee for service creates incentives to provide more and more services, even when there may be better, lower-cost ways to treat a condition.

The unfortunate consequences of the system play out clearly in hospitals. Hospital patients want safe and effective care -- and to avoid a repeat stay. But there are no incentives for hospitals to ensure we won't come back through their doors, despite compelling evidence that discharge instructions, home visits, and other follow-up care can help reduce readmissions.

While some patients and physicians worry that moving away from fee for service will lead to the underuse of services, many experts, including those delivering healthcare, support change in the payment system. According to The Commonwealth Fund Health Care Opinion Leaders Survey on Quality and Safety of Care, nearly all respondents believe fundamental payment reform is needed, with nearly half saying pay for performance is an important transitional step.[1] Experiments with pay-for-performance methods are yielding promising results, and a common approach across public programs and private plans would reduce paperwork for doctors and hospitals.

One payment strategy to consider is blended payments, in which payment for hospitals and physicians includes fee-for-service payments, per-patient payments, and performance bonuses. This kind of reform could encourage hospitals to provide transitional care to reduce the risk of rehospitalizations and physician practices to set up their offices as medical homes.[2]

Experimentation with different payment reforms is clearly needed. Medicare and Medicaid should provide leadership, so private insurers will follow suit.[3] We must start testing different approaches now to begin to rein in costs -- and to make sure we are paying for the best available care, not just more services.

That's my opinion. I'm Karen Davis, President of The Commonwealth Fund.




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