Viewpoint: What is so bad about Fee-For-Service?

"By undermining the direct physician/patient relationship, bureaucrats have created the very moral hazards they supposedly try to cure"

What is so bad about Fee-For-Service?

I don’t recall the first time I heard that Fee-for-Service (FFS) was bad. As an entrepreneur, FFS seemed to be a perfect description of a traded value-for-value transaction between a business and its customers. Fee-For-Service (or Fee-For-Product), to most business owners and customers, describes paying for exactly what you receive. A transparent price is set by a company, either by pre-determination, or by estimate, and the customer agrees to pay directly for the service and/or product he/she agrees to receive. In the rest of the economy, FFS is how we purchase almost every product or service.

However, if you are affiliated with health care, you may believe Fee-For-Service is evil. A National Institute of Health Library article about Fee-for-Service describes it as “an evil practice leading to overprovision, inefficiency and uncontrollable health expenditures … FFS encourages physicians to deliver more and unnecessary services to maximize their income.” (1). 

So, why is Fee-for-Service considered “evil” in health care?

The term “Fee-for-service” first appeared in the 1926 Health Insurance Act. The Act was primarily concerned with dispensing of medicines. Fee-For-Service was used to describe a basic unit of payment, based on the fee a physician charged the patient for a day’s dosage of medication. 

The present health care system in the United States bears little resemblance to 1926. The once transparent, agreed-upon fees between patient and physician have all but disappeared. Today, payment is no longer agreed to by the patient and the physician. Payment is primarily negotiated between insurers and other payers and not available for patients to see. The rates are not determined by real world market forces, but by formula or by funding levels. Even worse, fees and payments are constrained by coding guidelines and rules such as CPT and ICD-10. Bureaucrats working for such government agencies as HCFA, COBRA, FDA, DHHS, Medicare, and Medicaid, etc. continue to replace freedom in medicine with complex and unintelligible statistical models attempting to determine the “true medical needs” of present and future generations of Americans (2), and the prices for them.  

Many health policy intellectuals have continually sounded the alarm that medicine suffers from “market failure,” and does not adhere to the same laws of economics as other sectors of our society. This is often accepted without question. It is believed that only through government intervention can health care become optimized to meet the needs of society. In 1963, Nobel Prize winner Kenneth Arrow reinforced this view when he wrote “Uncertainty and the Welfare Economics of Medical Care.” As time has shown, the problem with Arrow’s theory is that idealized competitive models don’t hold up well under real world conditions. 

Said simply, “The hardest thing in the world to understand is that people operating separately, through their joint relations with one another, through market transactions, can achieve a greater degree of efficiency and of output than can a single central planner.”

― Milton Friedman

By undermining the direct physician/patient relationship, bureaucrats have created the very moral hazards they supposedly try to cure; the moral hazard described by the term Fee-For-Service, which has been corrupted by the third-party payer relationship. 

Conclusion: 

1. The true nature of Fee-For-Service is both good, and moral. Unencumbered by third party intervention, Fee-For-Service describes the physician-patient relationship as one that is based on the principle of mutually beneficial exchange of value between the physician and patient. For Fee-for-Service to be moral, the physician must be able to act independently and freely, to exercise his/her best judgment and to keep his/her professional moral code. Likewise, the patient must have the freedom to independently seek out and pay a physician, in accordance with his/her best judgment. This is the moral foundation of health care, and the principal of the free market definition of FFS, the principle of trading value for value.
2. Entrepreneurship is our best hope to restore the true nature of Fee-For-Service. A core function of entrepreneurship is to work in an uncertain world. Entrepreneurs must make judgments and decisions while dealing with incomplete information and limited resources. Entrepreneurs do not follow top-down models and government benchmarks; they pit their abilities against real-world customer data and market forces they uniquely experience.

Today, medicine within “the system” has so many flaws that some physicians and patients are looking to entrepreneurial solutions to reset health care. Direct Primary Care is one such option. Direct pay specialty care and direct pay surgical care are others. These entrepreneurial practices hold the promise of restoring the integrity of the physician-patient relationship and improving the quality and availability of health care for all Americans. As we remove the moral hazards created by third-party payers, we may find Fee-For-Service in medicine can be both good medical practice and moral.

1. Int J Health Policy Manag.2015 Feb; 4(2): 57–59. Published online 2015 Feb 6.doi:10.15171/ijhpm.2015.26
2. “The New Health Planners,” The Intellectual Activist, volume I, number 19, August 1, 1980.

Healthcare Viewpoints is a monthly series featuring original columns from Montana healthcare leaders focused on addressing the challenges presented by our broken healthcare system. The opinions of guest authors do not necessarily represent the policy positions of the Frontier Institute.