Straight Talk: We Don’t Need Payment Reform, We Need a Payment Revolution

By David May, MD, PhD

Controversy over the new Medicare fee schedule has focused on three issues: the adequacy of the conversion factor used to translate resource-based relative value units into fees; the ability of the new payment system to capture differences in work between surgeons and physicians of other specialties; and the allocation of practice expense across services." With that statement, William C. Hsiao, PhD, Daniel L. Dunn, PhD, and Diana K. Verrilli, MS, opened their 1993 article published in the New England Journal of Medicine, "Assessing the Implementation of Physician-Payment Reform."1

Twenty years later, little progress has been made as we continue to experience an array of proposed technical solutions to what is fundamentally the adaptive problem of payment reform. Each solution is designed to improve the system by which medical professionals and hospitals are paid for services rendered.2,3 Most argue for one or the other type of new payment model which already exists in the US health care payment pantheon.

The adaptive issues whose resolution are prerequisite to any substantive solution are usually not discussed. Fundamentally, we must address two questions: What is the monetary cost and value of the services we provide, and is health care a commodity or an entitlement?

Rearranging the Deck Chairs: Shifting incentive in existing payment formats

In spite of protests to the contrary, all payment systems are fee-for-service. Differing payment formats simply reflect who accepts the financial risk and who controls the decision making. For instance:

  • In the traditional fee-for-service format, a la carte purchases are made and the provider is incentivized to do more, while all the financial risk and the decision-making authority are carried by the purchaser.
  • In capitation, the fee is prepaid for potential services required in the future, while the financial risk and decision-making power are held by the service provider, who is incentivized to minimize care.
  • Bundled payment formats represent a hybrid in which services commonly delivered together are bundled, then purchased at the time of need—the financial risk is shared between the purchaser and provider. Outside of an activated bundle, the purchaser maintains decision-making authority; within the bundled service, the service provider assumes decision-making authority and financial risk. The provider is incentivized to do more bundles but minimize the care within bundles.

Variations on these incentives include pay-for-performance, gainsharing, value-based purchasing, the participation in patient-centered medical homes, and accountable care organizations.4,5 None will significantly reduce our health care spending per capita.

In order to allow meaningful change and reduce per capita health care spending, we must come to grips with two primal issues that face us: the value of our services and the question of commodity.

Measuring Value: The core of all transactions

No matter the type of payment format, the purchaser and provider must agree upon the value of the transaction. Value is a somewhat enigmatic entity, determined when the purchaser and the provider have a generally agreed-upon sense of the relative worth of the purchased services in relation to all the other goods and services provided in society. Inherent to all of the value equations is the cost and the expected outcome. Further transparency—that ability of all parties being able to examine and consider the component parts of the transaction—is imperative.

We have great difficulty determining the cost of our most common procedures.6 Similarly, in most situations we have only crude outcomes metrics if any to guide our decision making, rendering it very difficult to determine the value of any transaction.7

As for transparency, a recent report from the Centers for Medicare and Medicaid Services detailing hospital charges for the 100 most common diagnosis-related groups provided a painful public example of our health care pricing opacity.8 Imagine how differently a discussion about PCI would go if the patient were presented a list of prices: the actual physician fee compared to others in the area; the hospitals and their actual fee to rent the cath lab; and each type of stent available and their respective cost.

Is Health Care a Commodity... or Something Else?

The debate as to whether health care is a commodity or entitlement in the United States has raged for more than a century, with complex and shifting ethical, social, and economic forces modifying the discussion over time.9 To achieve any meaningful reduction in US health care expenditures, we need to resolve this argument.

If it's a commodity, capitalistic market forces should determine the cost of care, and rationing of care should be based on ability to afford it. Regulation should encourage quality and price competition, in turn improving value and reducing cost through the development of safety net programs which would cover those not able to afford care. Physician and hospital fees, as well as outcomes, should be publically available for comparative review. Physician ownership of hospitals and imaging centers should not only allowed, but encouraged. Our disconnected insurance payment system should be altered: the patient is responsible for the bill and the insurance reimburses the patient per their contractual policy.

If it's an entitlement provided all citizens, a base level of outcomes-based care should be provided with cost-saving simplification and reduction in administrative fees. Rationing of care should be based on cost to the system and outcomes achieved, not financial capacity of the individual. A global national health care budget should be developed and adhered to no matter the individual impact.

No one will agree fully with either position as adaptive problems do not lend themselves to faux technical solutions. These are difficult, nuanced, culturally-charged problems that require painful frankness and a different type of leadership. They must be addressed if meaningful, sustainable progress is to be achieved.


1. Hsiao WC, Dunn DL, Verilli DK . N Engl J Med. 1993;328:928-33.
2. Schroeder SA, Frist W for the National Commission on Physician Payment Reform. N Engl J Med. 2013;368:2029-32.
3. Schneider EC, Hussey PS, Schnyer C. "Payment Reform: Analysis of Models and Performance Measurement Implications." Santa Monica, California: Rand Corporation, 2011.
4. "Hospital Value-Based Purchasing." Accessed from:
5. The Health Care Incentives Improvement Institute. Accessed from:
6. Rosenthal JA, Lu X, Cram P. JAMA Intern Med. 2013;173(6):427-32.
7. Krumholz HM, Lin Z, Normand SLT. BMJ. 2013;346:620.
8. "Medicare Provider Charge Data: Inpatient." Accessed from:
9. Hoffman B. Am J Public Health. 2003;93:75-85.

David May, MD, PhD, is the current secretary of the ACC's Board of Trustees, and is a managing partner at his private practice, Cardiovascular Specialists, PA.

Keywords: Fee-for-Service Plans, Decision Making, Health Expenditures, Accountable Care Organizations, Centers for Medicare and Medicaid Services, U.S., Hospital Charges, Fee Schedules, Budgets, Patient-Centered Care

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