The fee-for-service model of healthcare reimbursement pays doctors, hospitals, and other healthcare providers for the number and type of services delivered to patients. The financial conflict of interest associated with this model has been credited as an important factor contributing to high American healthcare costs1 and, by extension, the health insurance premiums resulting from those costs.
“The moral hazard prevalent in all health insurance (from the effect of insurance on decisions to use medical care) is exacerbated by the fee-for-service method of payment that rewards doctors financially for doing more, whether or not the added work benefits the patient.”2
The removal of the fee-for-service model, and by implication its incentive for providers to deliver more care regardless of clinical benefits, has been cited as a tactic to reduce the cost of healthcare in America.3
Given the fee-for-service model’s potential to inflate healthcare utilization and attendant insurance costs, HealthPocket explored health plans where the healthcare providers were part of the same organization that provided the insurance coverage to patients. The integration of insurer and provider within these provider-owned health plans4 holds the promise to deliver more appropriate care to patients and lower insurance costs by eliminating unnecessary tests, surgeries, and other healthcare that inflate overall costs. These plans, while a minority in the market, are growing. Although provider-owned plans cover less than 10% of the entire privately insured market, their membership increased 4% between 2012 and 2013, a higher rate of growth than other plan types.5
In order to provide some quantification of health insurance premium savings through the elimination of the fee-for-service payment model, HealthPocket compared the lowest premiums for provider-owned plans in the Affordable Care Act (a.k.a. “Obamacare”) market to nonprovider-owned plans within twelve counties across the U.S that contained both types of plans.6 The counties analyzed were spread across the eastern, central, and western regions of the U.S. Premiums were based on a 40-year-old individual non-smoker applicant profile.
Contrary to expectations, the cheapest provider-owned health plans were more expensive on average than the cheapest plans not owned by providers. The cheapest provider-owned silver plans in the twelve counties that HealthPocket examined were 12% more expensive overall than the cheapest silver plans not owned by providers. Silver plans accounted for two-thirds of plan selections on the Obamacare marketplaces during the 2015 annual enrollment period.7 Bronze and gold provider-owned plans were 13% more expensive than the cheapest bronze and gold plans not owned by providers.
The following sections illustrate the cost differences observed by each of the four main categories of Obamacare health plans.
The least expensive bronze plan was not a provider-owned plan in 10 of the 12 counties that HealthPocket examined. The biggest premium difference was in Bernalillo County, NM, where the cheapest bronze provider-owned plan was $67.79 more expensive per month than the cheapest bronze plan not owned by a provider. However in Maricopa County, AZ, the least expensive bronze plan was a provider-owned plan, and it was $23.46 cheaper per month than the least expensive bronze plan not owned by a provider.
Lowest Premiums for Provider-Owned vs. Non-Provider-Owned Bronze Plans
|State||County||Lowest Premium for Provider-Owned Bronze Plan||Lowest Premium for Non-Provider-Owned Bronze Plan||Difference Between Premiums|
|VA||Virginia Beach City||$234.33||$218.33||-$16.00|
For silver plans, the most popular health plans in the 2015 Obamacare marketplace, the least expensive provider-owned plans were $27.33 per month more expensive on average than the least expensive plans not owned by providers. The premium difference was higher for gold plans ($39.88), but lower for bronze plans ($24.79).
In 8 of the 12 counties, the cheapest silver plan was not a provider-owned plan. Among those eight counties, Fulton County, GA had the greatest premium difference of $75.32 per month between the cheapest silver provider-owned and non-provider-owned plans. Among the four counties where a provider-owned plan was the cheapest silver plan, Waukesha County, WI was the only county where the monthly premium difference ($25.43) exceeded $10.
Lowest Premiums for Provider-Owned vs. Non-Provider-Owned Silver Plans
|State||County||Lowest Premium for Provider-Owned Silver Plan||Lowest Premium for Non-Provider-Owned Silver Plan||Difference Between Premiums|
|VA||Virginia Beach City||$285.40||$287.03||$1.63|
The cheapest gold plan was a provider-owned plan in only 2 of the 12 counties that HealthPocket examined. In both counties where the cheapest gold plan was a provider-owned plan, the difference between the premiums for the least expensive gold provider-owned and non-provider-owned plans was less than $10 a month. Among the ten counties where the cheapest gold plan was not a provider-owned plan, the greatest premium difference was $127.01 per month in Oklahoma County, OK.
Lowest Premiums for Provider-Owned vs. Non-Provider-Owned Gold Plans
|State||County||Lowest Premium for Provider-Owned Gold Plan||Lowest Premium for Non-Provider-Owned Gold Plan||Difference Between Premiums|
|VA||Virginia Beach City||$360.54||$350.70||-$9.84|
Only 3 of the 12 counties had provider-owned platinum plans, and 10 of the 12 counties had platinum plans not owned by providers. There were just 2 counties that had both provider-owned and non-provider-owned platinum plans: Wayne County, MI and Allegheny County, PA. The cheapest provider-owned platinum plan was $72.34 more expensive than the cheapest platinum plan not owned by a provider in Wayne County, but $33.80 less expensive in Allegheny County.
The results of the provider-owned health plan premium investigation illustrate the sobering reality that the best intentions in reforming American healthcare do not necessarily produce the cost-savings imagined. Despite their theoretical promise of reducing expenses by eliminating the waste associated with the fee-for-service model, a cross-country analysis found that far from being the least expensive health plans, the provider-owned health plans without a fee-for-service model were, in fact, more expensive on average than their nonprovider-owned counterparts.
A mitigating factor in this analysis is that there are more nonprovider-owned health plans than provider-owned health plans. However, were the fee-for-service model a consistently large component of healthcare costs across health plans, it would be reasonable to expect premium advantages among provider-owned health plans even at their current market representation.
The study findings are not an endorsement of the fee-for-service model but, rather, the findings call into question whether the elimination of the fee-for-service model would be sufficient to produce large reductions in health insurance costs on a nationwide basis. HealthPocket agrees with the premise that the fee-for-service model carries an incentive for healthcare providers to provide overtreatment of patients just as HealthPocket agrees that the capitation model of reimbursement carries with it an incentive for undertreatment of patients.8 In both cases, the actualization of the incentive is affected by a plurality of other factors.
With respect to provider-owned health plans, the lack of premium advantage does not call into question the value of the model altogether. Provider-owned plans have a reputation for higher quality in the Medicare market. For example, provider-owned plans and integrated delivery networks together account for most of the Medicare Advantage plans with the highest CMS quality ratings of 5 stars.9
HealthPocket compared premiums for 40-year-old individual non-smokers purchasing provider-owned Obamacare plans versus Obamacare plans not owned by providers in twelve counties with both types of plans:
|VA||Virginia Beach City|
Premiums were compared for bronze, silver, gold, and platinum plans on the Obamacare marketplace at healthcare.gov, but not every county offered both provider-owned and non-provider-owned platinum plans. Catastrophic Obamacare plans were not included in the analysis, nor were Medicaid or Medicare plans. Premium subsidies were not included since they depend on the enrollee’s household income. Premiums for 2015 healthcare.gov plans are from the 2015 QHP Individual Market Medical Landscape files for the FFM states, Oregon, and New Mexico.
This analysis was written by Kev Coleman, Head of Research & Data at HealthPocket and Dr. Jesse Geneson, data scientist at HealthPocket, with data collection and analysis performed by Dr. Geneson. Correspondence regarding this study can be directed to Mr. Coleman at email@example.com.
1 Bipartisan Policy Center Staff. “What Is Driving US Health Care Spending?” Bipartisan Policy Center (September 2012). http://www.rwjf.org/content/dam/farm/reports/issue_briefs/2012/rwjf401339 Last accessed August 3, 2015. “Certainly, the potential for conflict of interest exists in the fee-for-service, indemnity insurance-based system. By virtue of his authority and knowledge and the trusting consent of his patient, the fee-for-service physician generally makes the decisions to use the medical services that he himself provides and is paid for. Potential for abuse is apparent.” R.A. Berenson. “Capitation and conflict of interest.” Health Affairs, 5. no.1. (1986). p.143. http://content.healthaffairs.org/content/5/1/141.full.pdf Last accessed August 3, 2015. See also https://hbr.org/2010/04/what-drives-high-health-care-costs-and-how-to-fight-back.
2 Standford Graduate School of Business Staff. “Integrated Systems Improve Medical Care and Control Costs.” Stanford Graduate School of Business. (September 1, 2005). https://www.gsb.stanford.edu/insights/integrated-systems-improve-medical-care-control-costs Last accessed August 3, 2015.
3 Jeff Levin Scherz. “What Drives High Health Care Costs–and How to Fight Back.” Harvard Business Review. (April 2010). https://hbr.org/2010/04/what-drives-high-health-care-costs-and-how-to-fight-back. Last accessed August 3, 2015.
4 Kelly Gooch. “10 things to know about provider-sponsored health plans.” Becker’s Hospital Review. (December 3, 2014). http://www.beckershospitalreview.com/finance/10-things-to-know-about-provider-sponsored-health-plans.html Last accessed August 3, 2015.
6 There were 741 non-provider-owned plans and 247 provider-owned plans in the twelve counties that HealthPocket examined.
7 Health Insurance Marketplaces 2015 Open Enrollment Period: March Enrollment Report. ASPE Issue Brief. (March 10, 2015). http://aspe.hhs.gov/sites/default/files/pdf/83656/ib_2015mar_enrollment.pdf Last accessed August 3, 2015.
8 Capitation is a model of healthcare payment where “a doctor, medical group, hospital or integrated health system receives a certain flat fee every month for taking care of an individual enrolled in a managed health care plan, regardless of the cost of that individual's care.” Mark Hagland. “How Does Your Doctor Get Paid? The Controversy Over Capitation.” PBS.org. http://www.pbs.org/wgbh/pages/frontline/shows/doctor/care/capitation.html Last accessed August 3, 2015. Hagland’s article also notes the potential conflict of interest associated with capitation.
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