incentives (financial, informational, and reputational) with desired outcomes is required to stimulate the needed transformational change in the current health care payment systems.


At present, the care for 88 percent of Medicare beneficiaries, or approximately 35 million individuals, is paid for under fee-for-service systems. The remaining 12 percent of beneficiaries are enrolled in the Medicare Advantage program, under which private plans are paid monthly, risk-adjusted capitated amounts in return for providing Medicare’s benefits to those who choose to enroll in Medicare Advantage (Kaiser Family Foundation, 2005). Medicare’s fee-for-service payment rates and fees are set administratively by the Centers for Medicare and Medicaid Services (CMS) at levels intended to cover the cost of the resources typically required to provide a particular service. The service may be defined narrowly, such as a chest x-ray, or broadly to encompass a bundle of services, such as all the inpatient hospital care associated with a stay of any duration for a heart bypass operation.

Medicare’s rates and fees do not vary with the quality of the service provided. Furthermore, the fee-for-service payment structure generally does not provide reimbursement for health services that are recognized as important contributors to quality, such as comprehensive case management, care coordination, health counseling, and many preventive services that may reduce the need for hospitalization or more expensive future medical procedures. In addition, because of the way payment rates for different services are set relative to one another, new, complex, high-tech interventions tend to be better compensated than procedures involving less intensive service use, less or older technology, and more time with patients (which may be important to quality care) (Ginsburg and Grossman, 2005). Additionally, payment rates and fees do not vary according to the need for a particular service. For example, one study that examined clinical decision making under different payment systems found that expenditures for discretionary services were lower under capitated than under traditional fee-for-service arrangements (Shen et al., 2004). Providers are paid more for doing more and are not penalized when the provided services are of little or no value or, worse yet, negatively affect health outcomes. In some cases, the incentives embodied in fee-for-service payments may encourage the delivery of unnecessary or even harmful services that can raise fundamental concerns about cost and safety (Robinson, 2001).

Since fee-for-service payments offer little direct incentive to improve quality or avoid low-value services, they fall short of fostering goals in the

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