working toward a plan that would encourage flat “global payments” to networks of providers for keeping patients well, replacing the fee-for-service system that creates incentives for excessive care by paying for each visit and procedure. …

[Massachusetts health reform in 2006] did little to slow the growth of health costs that already were among the highest in the nation. A state report last year found that per capita health spending in Massachusetts was 15 percent above the national average. And from 2007 to 2009, private health insurance premiums rose between 5 and 10 percent annually …

It’s not fee-for-service that creates incentives for excessive care. As John Goodman explains, fee-for-service works fine for lawyers and restaurants, as well as countless other services. The problem is that, as Goodman writes:

what is it that makes health care different? There are three things: (1) third-party payment of the bill, (2) rationing by time and not money, and (3) an inability on the part of providers to repackage and reprice their services.

Bottom line: The fundamental problem in health care is not that we are using too much of one payment mechanism and too little of another. The problem is that the person who benefits from the service is not the same as the person who pays the bill.

Read his whole post: Is Fee-for-Service Payment the Problem?

Some excerpts from the article:

Four years after Massachusetts embarked on the nation’s most ambitious health care overhaul, Gov. Deval Patrick and legislative leaders are stepping up efforts to rein in spiraling insurance costs. …

The next big goal, supporters say, is to find a way to slow surging premiums while maintaining or improving the delivery of health care services. …

One way to head in that direction, supporters say, is to gradually move away from a system that pays doctors and hospitals for the number and type of tests and procedures they deliver and instead rewards them for maintaining the overall health of their patients.

This is wrong.  Fee-for-service medicine, which the above sentence refers to, is not the problem. The problem is that the person paying the fee (health insurance company, Medicare, Medicaid) is not the same person receiving the service: the patient.  As John Goodman of the National Center for Policy Analysis writes:

The fundamental problem in health care is not that we are using too much of one payment mechanism and too little of another. The problem is that the person who benefits from the service is not the same as the person who pays the bill.

The AP article continues:

“We don’t want to break the system we have, but we want to bring the costs down,” said Senate President Therese Murray, D-Plymouth, who has championed payment overhaul. “It is complicated. If you move one little piece, something pops up somewhere else.”

Therese Murray illustrates the fatal conceit of government planners, as Hayek describes in the quote at the start of this post.

More from the AP article:

Some insurers are already moving toward a global payment system.

Just this week, Blue Cross Blue Shield of Massachusetts and doctors at Beth Israel Deaconess Medical Center in Boston signed a “alternative quality contract” designed to lower costs by paying doctors and hospitals for the quality, not the quantity, of the care they provide, including helping patients control their diabetes and lowering their risk of heart attacks.

This sounds rather vague.  Patients, being the recipients of care, have a different notion of quality than the insurance company, which pays for it.  One way to make patients more invested finding the best care is to have medical insurance emulate other types of insurance. As John Goodman writes in A Radically Different Approach to Health Insurance:

For bypass surgery, a hip or knee replacement and many other routine, but expensive, procedures, health insurance could emulate the kind of insurance most people have for their homes and automobiles. As I explained in “Designing Ideal Health Insurance,” the insurance plan might commit a sum of money (say the expected cost at an efficient center-of-excellence facility) and let the patient have the choice of providers and facilities — paying additional sums from an HSA.

A medical home emphasizes teamwork among physicians. Primary care doctors coordinate patient care among specialists, but they don’t act as gatekeepers. Patients have relatively unrestricted access to care.

Electronic medical records provide easy access to information, helping doctors spot redundant services and monitor patients with chronic problems to make sure they follow proper treatments. Physicians and patients alike can track the results of care. The goal is to cut costs while boosting quality of care.

Sounds good, right? But,

“It becomes more bureaucracy than health care,” said Greg Scandlen, an independent health care consultant. “Congress got together and said, wouldn’t it be great if we could create something that could lower costs and improve quality, and they called it a medical home. Politicians come up with swell terminology for something that won’t work and that we’ll spend a lot of money on.”

Hogberg reviews research on the effectiveness of medical homes in improving quality and decreasing costs – the results are mixed.

Don’t forget the big picture: regardless of their merit, politicians should not tell doctors how to run their practices and how to relate to their patients.  As Michael Cannon at Cato has noted, government already does this:

Rather than allow a level playing field for all payment systems, so that competition forces them all to improve, government tips the scales toward fee-for-service. Medicare is the largest purchaser of medical services in the U.S., and it operates largely on a fee-for-service basis. According to former Medicare chief Thomas Scully, “in many markets Medicare and Medicaid comprise over 65 percent of the payments to hospitals, and more than 80 percent in some physician specialties.” No wonder a recent New England Journal of Medicine study found that only 1.5 percent of non-federal hospitals use a comprehensive EMR system. Name any quality innovation that might save money by avoiding unnecessary services — EMRs, bar-code scanners for prescription drugs, surgery checklists. Medicare blocks them all. The Left bemoans the resulting quality problems, yet is desperately trying to subject even more of the market to the very stagnation Medicare introduces. Massachusetts, with its commission to develop a single payment system for its entire health-care sector, is diving head first into the cement. It makes no difference if government chooses a different payment system than Medicare’s. The problem isn’t the particular payment system, but the lack of competition from other systems.

(IBD article via FIRM)

Rather than allow a level playing field for all payment systems, so that competition forces them all to improve, government tips the scales toward fee-for-service.  Medicare is the largest purchaser of medical services in the U.S., and it operates largely on a fee-for-service basis.