Is Fee-for-Service Medicine the Root of the Problem?

Since 2008, health insurance inflation outpaced wage growth 2 to 1, and many healthcare professionals think “fee-for-service” medicine is to blame.

Fee-for-service (FFS) is a payment model wherein health systems are paid for the quantity of services rendered. Every service is itemized and paid for a la carte. Dissenters of the model say it perverses economic incentives and is, in part, to blame for the over-medicalization of Americans. 

In other words, health systems are not incentivized to keep their customers healthy; they’re incentivised to order more tests, more medications, and more surgeries.

But wait, isn’t FFS everywhere in our economy? The cup of coffee you bought this morning was a FFS interaction. The car wash you went to last month? FFS. How about the contractor you paid to paint your house? FFS.  

So what makes FFS so bad in healthcare? The moral hazard created by our insurance-based system. Since most costs are initially paid for by employers and governments via insurance premiums, Americans are happy to go along with their doctor’s recommendations for more and more treatments.

In future posts, we’ll explore the pros and cons of alternative payment models coming to the fore. Until these models go mainstream, a healthy dose of consumerism will be needed to keep healthcare inflation in check.