How fee-for-service shapes your doctor's decisions

Clinical case

Jessica is a 67-year-old woman having her very first visit with her new primary care clinician, Dr. Jackson. Jessica is accompanied by her husband, Daniel, and comes in with recent laboratory results from her previous clinician, whom she could no longer see because her clinic stopped accepting Jessica’s insurance, which she receives through Medicare and Medicaid as someone who is dually eligible for both. In clinic, her vitals are normal. Jessica shares that she has a longstanding diagnosis of type 2 diabetes, and that her most recent hemoglobin A1c assessed 4 months ago was elevated. She is also concerned about left knee pain, and her husband wants to talk about changes in Jessica’s memory. The primary care clinician has 30 minutes allotted to see Jessica, who was unfortunately 10 minutes late because of delays connecting with the transportation service provided by Medicaid to bring her to the clinic. The primary care clinician shares that, regrettably, they may not have the time to address all concerns today and suggests focusing instead on highest priority items. Together, the primary care clinician and Jessica decide to focus on reconciling medications, addressing diabetes care, and evaluating knee pain, setting aside other concerns for a future visit.

This situation is common for an initial visit in a primary care practice. In this case, the patient has a preexisting chronic condition, for which disease management is not at guideline-based goals. She has a musculoskeletal complaint and a possibly new or developing memory problem that merit evaluation.

Decisions made by primary care clinicians in these situations are often driven not just by clinical considerations but also considerations driven by health systems factors (e.g., how to triage priorities and focus areas during a visit). Many primary care clinicians see approximately 20 to 25 patients per day and will have fewer than 20 minutes to spend with each patient. Like the patient in this case, many individuals seeking primary care have a combination of new or established medical problems and preventive health needs that merit attention. In addition to directly interacting with patients during visits, primary care clinicians have other demands of their time, including the following:

Responding to electronic messages and phone calls from patients and their caregivers
Reviewing and delivering diagnostic test results
Communicating with a range of other clinicians (e.g., medical or surgical subspecialists, physical and occupational therapists, social workers, and behavioral health specialists) in order to coordinate care
Reaching out to patients who recently visited the hospital or emergency room and require primary care follow-up
Speaking with insurance companies to receive approval for diagnostic testing or therapeutic treatments
Participating in or leading population health, quality improvement, or health equity-focused initiatives

Along with limitations on the time allocated for patient visits, these demands often compel primary care clinicians to triage issues to either address in a given visit or save for follow-up at a later time. This reality is driven in part by systems factors such as the reimbursement system for outpatient care.

Systems factor: reimbursement system for outpatient care

While there are a variety of health care reimbursement methods in the United States, fee-for-service serves as a foundational method for outpatient care. As the name suggests, under fee-for-service, clinicians and their organizations receive payment for each reimbursable service they provide. Because more services lead to more payment, this system can create the incentive for outpatient clinicians and medical care organizations to increase the number of patients seen in the clinic, which can functionally restrict the time available and number of issues that can be addressed per visit.

Both the amount of reimbursement and type of reimbursable services vary by payer, but Medicare policy is widely used as a benchmark or starting point for other payers, such as commercial insurance companies. Therefore, it is important to understand the history of Medicare’s outpatient reimbursement system.

1965 to 1992: customary, prevailing, and reasonable

Medicare has reimbursed clinicians on a fee-for-service basis since the program’s inception in 1965. Initially, this approach was implemented in a “customary, prevailing, and reasonable” manner. Medicare defined customary charge as the median of what a clinician charged for a given service over a predetermined period of time—that is, the typical amount at which clinicians priced their services. Medicare defined prevailing charge as a percentage (initially 90 percent, later 75 percent) of average customary charges across clinicians in a geographic area. Reasonable charge was defined as the lowest of three types of

charges: a clinician’s actual charge, the clinician’s customary charge, or the prevailing charge in the area of the clinician’s practice. Ultimately, Medicare reimbursed clinicians based on reasonable charges. Several features defined this customary, prevailing, and reasonable reimbursement method:

Payment based on charges. The customary, prevailing, and reasonable method paid clinicians based on what they chose to charge. Because charges could vary widely, this approach created the potential for high charges to lead to large reimbursement amounts.

Payment that varied across clinicians and geographies. By reimbursing clinicians based on either actual charges, customary charges, or prevailing charges, the customary, prevailing, and reasonable method created the possibility of variation. In particular, the lowest of the three charge types—and, in turn, reimbursement—could vary across different services, clinicians, and geographies.

Ultimately, the customary, prevailing, and reasonable method contributed to increases in health care spending over time. By the 1980s, these issues prompted policymakers to reform the reimbursement method. The result was the creation of the Medicare Physician Fee Schedule.

1992 to present: the relative value unit and Medicare physician fee schedule

Implemented in 1992, the fee schedule was largely inspired by work led by William Hsiao and published in 1988. The study examined services and procedures of four specialties: family medicine, general surgery, internal medicine, and thoracic and cardiovascular surgery. Researchers assigned resource-based relative values to different services based on the estimated resources required to provide them—that is, assigning value to each service based on what it required of clinicians to provide it. These relative values were based on several inputs, including physician work, opportunity cost of specialty training, and relative practice costs for each specialty.

Researchers then simulated potential changes in reimbursement by applying this resource-based relative value scale to Medicare data, stipulating that overall Medicare spending remain the same. Under this simulation, initially, procedure-heavy specialties experienced reimbursement decreases (e.g., a 40 percent decrease for ophthalmologists), while other specialties initially experienced increases (e.g., a 60 percent increase for family medicine clinicians).

Medicare adopted a modified version of this relative value scale in creating its physician fee schedule. The fee schedule catalogued services using a set of codes called Current Procedural Terminology (CPT) codes. Each code was assigned a relative value, counted in relative value units (RVUs), intended to represent the effort and resources required to provide a given service. While Medicare has adjusted methods for calculating RVUs over time, the general approach has remained consistent. Under the current approach, the RVU consists of three components:

Work. The work RVU accounts for approximately 55 percent of the RVU and is intended to include the time and intensity required to complete a service.

The time component consists of the time spent before (e.g., training and preparation), during, and after delivering the service itself. Intensity is meant to capture the degree of technical skill, physical effort, clinical judgment, or stress related to the service being provided.

Practice expense. The practice expense RVU accounts for approximately 41 percent of the RVU. It is meant to capture the resources needed to provide a service, such as the labor of clinician staff and equipment.

Malpractice. This component accounts for approximately 4 percent of the RVU and is intended to account for a physician’s required malpractice insurance expenses.

RVUs are converted to reimbursement dollars via two additional steps: applying a geographic adjustment that accounts for the cost of living and wages as well as a conversion factor that translates RVU into dollar units.

Ultimately, the RVU system is based on a straightforward concept: payment should be service-specific and predicated on clinician effort, practice expense, and malpractice. While time has led to changes in codes (what codes are created, discontinued, or modified) and RVUs (how much clinicians are paid for different codes), as well as alternative reimbursement methods (e.g., Medicare Advantage, value-based payment models), the RVU-based fee schedule method remains firmly in place within Medicare at present.

While other payers have based their outpatient care reimbursement approach on Medicare’s, it is important to note that reimbursement amounts differ across payers. Commercial payers have historically reimbursed clinicians, on average, 40 percent more than Medicare for physician services, while Medicaid reimbursement rates are, on average, 30 percent less than Medicare rates.

Back to the clinical case

The patient in this case has a number of medical concerns, including type 2 diabetes, knee pain, and memory challenges. Each of these concerns is important for her health, longevity, and quality of life, and each merits attention. However, each concern also potentially requires a number of immediate, follow-up, and ongoing steps to coordinate care. Because of the dynamics created by fee-for-service reimbursement, it is infeasible for a clinician to address all facets of each issue facing the patient. Instead, the prevailing fee-for-service reimbursement method in outpatient care can place time and scope constraints on this patient’s visit with her primary care clinician.

Takeaways

Historically, the predominant form of reimbursement in U.S. health care has been fee-for-service, a system in which clinicians receive a payment for each eligible service provided.
One potential consequence of a fee-for-service reimbursement system for outpatient care is incentives to increase reimbursement by restricting patient visits to short periods of time in order to see larger numbers of patients.

Jonathan Staloff is a family physician. Joseph H. Joo and Joshua Liao are internal medicine physicians. They are the authors of Reshaping Health Systems: What Drives Health Care and How You Can Change It.