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Friday, April 30, 2010

Unintended Consequences

There is a robust literature calling into question the payment system’s effects on the delivery of health care. Much of the emphasis of the criticism has been on the present payment system’s incentives to provide more as opposed to better care. There is no question that this is a problem. However, this alone does not begin to capture the how the present system perverts the delivery of healthcare services to patients. In order to really begin to understand how the present insurance based, fee for service program negatively affects the delivery of health care services to patients, we need to look at how and where such a system influences what services are offered, how much they cost, and what incentives exists to move providers to provide a wide range of services at increasing quality and convenience and at lower costs.

What dictates which services are actually available to patients? The present system operates with what amounts to be a set menu of possible services. At the simplest level, there are items which are on the menu and items which are not. In order for items to be on the menu, they need to be included in the list of services which have been assigned a particular CPT code. These codes historically have been controlled by the RUC of the AMA. In order to have a new code created, one needed to undertake a not so trivial process whereby the RUC was formally petitioned, a time consuming and effort intensive process, and one by no means guaranteed of success.  Thus, in a changing health care environment, financial return for innovation is held hostage by limiting what gets on the menu. 

The second level of perverse incentives comes into play with setting of prices for services assigned CPT codes. The fact that some distinct service may exist on the menu does not mean that it is readily available to patients desiring such services. Coverage for a service does not necessarily mean that there will be a provider willing to deliver such services at whatever price is assigned. The major factor which influences availability is how much a physician can actually collect after they render such a service.  This is dictated by an administratively set pricing structure which takes its major cues from the RUC and Medicare which basically accepts the RUC recommendations. This may all change with the proposed implementation of the IPAB. It is not likely to get better. Such schemes using administrative entities to set prices have an extraordinarily consistently bad track record dating back literally thousands of years.

The insurance based fee for service system has had perhaps its most profound effects by creating patient and provider cultures where singular pursuit of self interest is diametrically at odds with common good. From the perspective of the providers, access to large pools of money which can be accessed with minimal concerns about patient sticker shock has created inexorable movement toward high margin practice domains.  Why risk being a trail blazer when you can simply pick something lucrative from a pre-existing menu.

The basically crazy payment structure is almost universally recognized as such within the medical field.  However, to take on the system as a whole ultimately places in jeopardy individual lucrative books of business. No one is sufficiently incentivized to commit economic suicide. It simply makes more sense to keep one’s head down and continue to pursue specific and lucrative rent seeking activities. 


  1. Of course, the payment system is perverse. Physicians order tests without restraint to patients who want excessive care, while someone else pays for it. Any wonder why health care costs keep breaking their own records?

  2. I agree with Dr. Kirsch, this is one reason why radiology benefit managers(RBMs)exist to pre-authorize advanced imaging. Because there is misuse of ordering inappropriate testing by medical providers and pressure from patients to have the best test. There has to be change and it has to start with medical providers and patients.