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Wednesday, October 03, 2012

fee for service in primary health care-what you get when you mess with prices

 In regard to consumer goods markets most economists accept the superiority of the market versus central planning.Almost all believe the invisible hand works to channel private interest into broad cooperation with gains from trade and from innovation.. (OK, Joe Stiglitz and Paul Krugman might not) and that the price mechanism can coordinate production and consumption and provide the feedback of profit and loss. In most of the consumer markets there is a fee for service or fee for a product arrangement (FFS). Paying the plumber,furnace repair man,car mechanic or barber on a per encounter fee are all routine transactions the propriety or desirability of which are seldom the subject of serious commentary. I realize that there also service contracts in some instances so that every encounter may not generate a separate charge.

  Yet the fee for service arrangement is the target for criticism in regard to health care ( mainly in regard to primary care) and often depicted as one of the reasons for escalating health care costs and decreasing quality.

Some argue that FFA cannot work in health care  because of the marked information asymmetry between physician and patient. But that cannot be a sufficient reason to wish to do away with FFS in medical care as there are many situations in a modern western economy where large information gaps exist. That became an issue probably as soon as property rights and trade allowed for the division of labor.  Getting advice regarding estate planning and tax avoidance is just one. Your furnace repairman tells you the something or other needs replacement and in doing so she knows a lot more about furnace anatomy and physiology than the home owner.

 It has been argued that since the physician is paid on a episode or encounter  based FFS that he will tend to do more than is necessary for good health outcomes because of his incentive to make more money. Certainly that is the direction that the cost vector points just as in a capitulated system the physician has an incentive to limit care to avoid financial loss. Is one method categorically better than the other?And the incentives for more financial gain argument would seem to apply  equally well to many other instances of market transactions.The incentive argument and the information asymmetry argument do not clearly distinguish medical care from other economic transactions based on FFS about which we hear no hue and cry or concerted campaigns for its abolition.

But wait, don't we see primary care docs rushing through a 12 minute patient counter to cram 5 patients into a hour?, Is not FFS in primary patient care rotten or worse and a major reason for deteriorating quality and increasing costs? Is it really FFS or is it a pretense of FFS or a poorly function remnant of a FFS system that once existed and worked pretty well.To be clear,the objection seems to be aimed at primary care FSF.

 Is there something different about FFS  in health care?Yes, FFS in health care and other consumer products or services FFS are as alike as a warm puppy and a hot dog.They sorta sound alike but there are not.

There are at least two reasons why the nominal fee for service (FFS) payment method in health care differs from FFS in most other  retail transactions regarding goods and services

  1) Much of the payment for health care services is with some one else's money2) There are price controls on the fees in the FFS in Medicare and Medicaid.

Much of health care expenditures is paid for by third party payers, either CMS which includes Medicare and Medicaid or health care insurers.In this circumstance patients are buying things with either someone's else's money or the perception that they are paying with someone else's money.

Milton Freedman explains how things are different when one is spending his own money than when he is spending with other people's money. This is such a obvious common sense observation that most of us have verified that nugget of conventional wisdom by observing multiple instances of that circumstance so that a formal econometric study would not be necessary.Just think of eating out on an expense account.See here for Freeman describing how this works.

 But such a formal study was done by MIT economist Amy Finkelstein who demonstrated that health care expenditures increased markedly after senior citizens in the US were enrolled in the Medicare program which in effect made the price the paid for their health care  much lower.When things are cheaper people buy more. Milton Freedman said that one of the two major principles of economics was that demand curves slope downward,an economist's way of saying that people tend to buy more stuff when it is cheaper..See here for my earlier comments on the Finkelstein paper.

This verification of the obvious was incredibly heralded by fellow economists as a major change in thinking about health care spending.Apparently previously no one had noticed that the elderly were spending more on health care now that they had to pay less nor that such a finding would be expected.The American Enterprise Institute economist,Joseph Antos said of the Finkelstein paper that it was path breaking.MIT's Johnathan Gruber,one of the architects of Romney care, said that the report changed the landscape of health care economics.

CMS's price controls came about as the number of medical goods and services that  increased over the last twenty or so  years ( more diagnostic tests,more medications,etc) met up with the increasing demand brought about mainly by the other people's money factor and reaching some tipping point in which the government moved into an effort to control costs.

 Economics 101 texts tell us that price ceilings create shortages,degradation of quality,wasted time and cost of waiting in lines and  mis-allocations of resources.

Advocates of a single payer and central planning in medical care sometimes conflate FFS and the market economy. One cannot deny that the current FFS situation in primary care medicine has much to be desired but it is because the market has been distorted by price controls and the fact that for a large segment of the patient population folks are paying for care with other people's money. Neither of those factors is likely to go away in this country any time soon..Actually both will likely increase.

But there can be a workaround.

Fortunately, at least for now, people can still operate to some degree outside of this system and contract with physicians for primary care with a retainer payment arrangement.Here there is no price control and the patient is not spending other people's money.

The fee for service in primary care medicine is not your father's or grandfather's fee for service.It is not the case that fee for service cannot work with medical care even now. Cases in point are cosmetic surgery and refractive eye surgery and more recently the growing market for retainer medicine.are example of FFSs in regard to medical care working out  reasonably well.

If price controls were placed on retainer medicine retainer fees we would see the same negatives that we see now with primary care with price controls. It's the price controls, stupid.

The economist Russ Roberts of the Hoover Institute said the following in his novel, The Price of Everything.A parable of  Possibility and Prosperity :

"Know that there is no free lunch. Play with prices and you will bring disorder.You will loose the benefits of the flow of knowledge and resources that  prices choreograph without a choreographer."


Michel Accad said...


I wrote a little piece on "information asymmetry" in medicine last year (key words Mayo and laissez-faire will get you there). You may find it of interest; it was picked up by the folks at mises.org also.

You are correct that third-party payment is mostly responsible for healthcare cost inflation, but this is primarily an ideological war. Those on the other side couldn't care less about economics.

There is an Oct 1 NYT article (where else?!) that warns that docs refusing insurance payment will be responsible for decrease access and increased costs, and that patients who see them should check their pockets when leaving the exam room. That tells you the level of interest in understanding the root cause of the problem...

james gaulte said...

Thanks and here is the link to your Mises.org article http://mises.org/daily/5582/The-Mayo-Clinic-and-the-Free-Market for those who might like to read it.You are correct that the advocates of central planning of medicine couldn't care about economics.The leaders at ACP act as if they believe that value is an objective characteristic of a thing and not the subjective "importance that we first attribute to the satisfaction of our needs". Their high value care notion involves experts determining and then comparing QALYs of various methods of care.This alone seems to place their economic knowledge equal to about that found in Europe before the 1870s.