The Exec: CFO Kevin Murphy on the 'Fundamental Flaw' in Fee-For-Service Payments

'The fee-for-service model does not create a competitive dynamic in the fees that are charged broadly across the healthcare system,' Murphy says.

There is no denying that healthcare in this country is expensive and often unaffordable, which could lead to the delaying of care, increased medical debt that forces hospitals to take legal action against patients, and many other financial issues that hurt both providers and patients.

So, what is the healthcare industry doing to solve this?

CMS and payers have long been pushing for the adoption of value-based care models in healthcare—this payment model is often viewed as healthcare payment’s 'silver bullet'—but the reality is that hospitals, health systems, and private practices are still using fee-for-service payment models. Results from a 2022 HealthLeaders Value-Based Care Readiness Intelligence Report showed that 112 healthcare executives surveyed said that 64% of their organization’s net patient revenue comes from a fee-for-service model.

HealthLeaders connected with Kevin Murphy, chief financial officer for Vytalize Health, an accountable care organization, who discussed the cons of fee-for-service models and makes a case for greater adoption of value-based care payments.

HealthLeaders: What are the negatives of a fee-for-service model?

Kevin Murphy: There’s a fundamental flaw in fee-for-service, which is that it creates—and I am not impugning doctors here—a perverse incentive of more services means more fees. And how that manifests isn’t just in extra billing so much as it is in unnecessary testing and a drive for practices to focus more on throughput than on results for the patient. The fee-for-service model also does not create a competitive dynamic in the fees that are charged broadly across the healthcare system beyond the primary care practice.

So, for example, the hospitals, the home health companies, and all the ancillary providers on the old system, that is geared toward a focus on optimizing fees.

HL: What makes the value-based care model superior to fee-for-service?

Murphy: The value-based care model turns that upside down. It rewards providers for savings. Being at risk for the care of those patients makes you consider their care very differently and much more proactively and have ongoing involvement. The notion of giving anyone less care doesn't work because they'll get sicker and go to the hospital. So, if you look at the economics, the drivers are crystal clear.

We have doctors, nurses, nurse practitioners, physician's assistants, etc., on our staff and they speak with our practices two or three times a month. Those conversations are about some of the data we've collected on high-risk patients and certain cases on how to manage folks through the healthcare system in the most efficient way. Sometimes it's preventive care, sometimes it’s interventions.

We think about this in terms of savings. We're saving the federal government money, and we're saving people from some trouble. Imagine from the standpoint of the patient and their family, an unnecessary trip to the ER can add some stress or even trauma related to the illness. If you're a heart failure patient and you're very nervous about your condition, and you're having shortness of breath, anyone on any phone call with that as a symptom will tell you to jump in an ambulance and go get checked out and you'll probably be admitted. But that’s a $4,000 or $5,000 ambulance ride and a $50,000 admission. What turns out to be an episode of heartburn can cost hundreds of thousands of dollars. I'm not saying that's always the case, but when you look at thousands of cases, there are enough of those instances where the reason is benign. A few phone calls with the right list of questions and a checkup just a few hours later, can result in something much less stressful for the patient and take some of the cost burden off the system.
 

HL: How would you make the case for greater adoption of the value-based care model?

Murphy: The argument for value-based care starts with quality of care and economics. There is an increasing push from CMS for the adoption of value-based care, and the incentives are quite clear and cannot be separated from the economic side of the equation. Care quality always comes first, ask any doctor why they chose their profession, and they’ll say that providing the best care is why they became doctors. Through value-based care, we can increase doctors’ income by 10%, 20%, and in many cases north of 30%. So, it is a meaningful shift in their practices’ profitability and their personal income to participate in value-based care.