Single Payer and Fee for Service

By Bob Gerecke

To have a good health insurance system it is not sufficient simply to go to single payer.  The payment method to providers must also be changed from fee-for-service – which raises health care costs and thus harms the insurance system – to a method of monthly payment for each of the provider’s patients.

Single (government) payer health insurance is more cost-effective than insurance by multiple health insurers, each with its own separate marketing and sales expenses, administrative overhead, bloated executive compensation and shareholder profits.

Fee-for-service is a mortal threat to an insurance system.  It gives providers an economic incentive to justify and perform more services than are medically necessary.  This isn’t an unfounded suspicion.  Several years ago when Congress was developing the Affordable Care Act, I saw reports of two studies which compared physicians’ treatment of Medicare patients under fee-for-service in different economic circumstances.

One study compared two counties, within the same state, having different ratios of doctors to population.  Where the doctors had more patients to care for, they prescribed fewer office visits, tests and treatments per patient.  Where doctors had fewer patients available, they prescribed more tests, etc: for the same medical conditions.  The study showed that in each case, the outcome of the treatment was the same no matter whether more or fewer tests, etc were prescribed.  The doctors with fewer patients appear to have maintained their income by over-treating each Medicare patient.

The other study compared one county where doctors held investments in laboratories and hospitals with another county, within the same state, where they did not.  Doctors in the first county prescribed more lab tests and hospital admissions per Medicare patient than those in the second.  Again that was done for  the same medical conditions and again with equivalent outcomes.  Doctors who could profit from medically unnecessary lab and hospital services did so.

In a single payer system, the public insurer must protect itself from such expensive games in order to keep the system solvent, affordable and publicly supported.  The way to do this is to replace fee-for-service with a monthly payment system in which a health maintenance organization (HMO), medical group or individual physician takes responsibility for the patient’s health in return for a reasonable monthly payment.  This will give the provider an incentive to provide only medically necessary services, and to provide all necessary services in order to prevent the patient from becoming sicker and more expensive.  This will benefit the patient as well as the system’s budget.

In addition, there will be no need to submit a claim for each service, thereby eliminating the headaches and expenses of claim preparation, review, processing and payment, and claim revision and resubmission or billing to the patient when a claim is rejected.

In this type of payment system (payment per capita), the risk to a doctor with a small patient load will be to have one or two extremely expensive patients who will significantly increase the average cost per patient.  Individual physicians will probably be unable to bear this risk alone.  They will band together in medical groups or join HMOs in order to increase the size of their risk pool.  Insurance companies may offer products to compensate medical providers in case of extraordinary costs, as reinsurance companies do for retail insurance companies now, or the State could sell reinsurance at cost.

The risk to the patient in this system is that a dishonest provider may skimp on services and hope for the best.  If the patient becomes seriously ill as a result, the doctor may then follow one of two courses of action.

1.     They may withhold services or provide them in such a way that the patient will die quickly and stop being an economic loss to the provider.

2.     The medical provider may attempt to drive the patient away, so the patient will choose another provider, who will then be stuck with the medical costs resulting from the first provider’s negligence.

One significant disincentive to medical negligence can be to give the patient, patient’s family and successor provider the right to collect damages from the first provider by means of an administrative process which will not involve the expense of hiring attorneys.  The possibility of financial loss or ruin and of suspension or loss of license for failure to pay or for the negligence itself will discourage negligence by a provider.

A successor provider can also be protected by a right to refuse to accept transfer of a patient from another provider, a right to review the patient’s record and examine the patient before accepting him/her, and a right to obtain compensation from a negligent former provider as a condition of acceptance.  If the patient cannot find a new provider, the state will have to assign the patient to a provider selected at random and then perhaps charge the negligent provider (deducting the penalty from future payments) to compensate the successor provider for the patient’s future costly care.  If a doctor who is accepting new patients is required by law to accept anyone, or if the state is not given the power to obtain compensation, then the administrative process mentioned in the previous paragraph will still protect the successor provider if the new patient turns out to have been neglected.

It is likely, though, that providers will be less willing to sacrifice a patient’s health and life for financial reasons than they have been to cheat Medicare (and perhaps other insurers).  The two studies I referenced did not, as I recall, find that the physicians caused medical injury (as distinct from the annoyance and inconvenience of unnecessary services) to their patients while cheating the Medicare program.  In addition, a patient’s family will be aware of the patient’s care and will become concerned if it appears lax.  They will be better able to notice negligence and blow the whistle than they will if the doctor appears to be doing everything possible by over-treating the patient or if the doctor submits claims for services not rendered.  The family can thereby provide volunteer monitoring of under-treatment in a per capita system better than they can of over-treatment or of fraudulent claims in a fee-for-service system.  Under-treatment is likely to be rare, and fraud will be difficult to commit.

One way or another, the single payer system will have to be designed to discourage over- and under-treatment by medical personnel.  A per capita payment, with the safeguards described, rather than fee-for-service will go a long way to achieving that.