Predicting the End of Fee-for-Service Medicine

Predicting the End of Fee-for-Service Medicine

HOW DISRUPTIVE WILL THE END OF FEE-FOR-SERVICE MEDICINE be to the lab testing industry? I ask this question because we are about to leave the era of fee-for-service (FFS) medicine and move into the era of value-based and bundled reimbursement.

Since World War II, FFS has been the overwhelmingly dominant payment model for the healthcare system in the United States. Yes, there is Medicare’s Diagnostic-Related Groups (DRGs) for Medicare Part A services (introduced in 1983) as a different payment model. And don’t forget, during the 1990s, we were all guinea pigs in healthcare’s short-lived experiment with capitated, full-risk payment arrangements during the heyday of the closed-panel HMOs.

Now we are at the birth of a new era for rewarding providers. Employers, private health insurers, and officials managing the Medicare and Medicaid programs are all telling hospitals, physicians, laboratories, and others the same thing: you will soon be paid in a way that recognizes the better outcomes you deliver to patients and factors in your contribution to reducing the overall cost of healthcare.

This is a radical development and I don’t believe that most pathologists and laboratory administrators have thought about what life will look like as the proportion of their labs’ revenues that comes from fee-for-service shrinks and the proportion of revenues that is due to value-based and bundled reimbursement increases. Yet it is important to consider this issue.

On this point, the question that I ponder is how labs will organize themselves differently to meet the needs of customers who pay them with a value-based reimbursement or ask them to provide lab testing services as part of bundled reimbursement scheme.

For example, FFS reimbursement encourages consolidation of lab test volumes because a greater volume of tests means lower average cost per test. That maximizes the lab’s profit when the lab is paid on a fee-for-service basis. So, when FFS goes away and value-based reimbursement takes its place, will it be more important for a lab to be nearer to the patient and the physician—despite the lack of economies of scale that drive down the average cost per test?

This is just one example of how evolving reimbursement models for medical lab testing may encourage labs to organize themselves in new ways. For that reason, lab testing may look quite different in 10 years than it does today.

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