The U.S. spends nearly 17% of its GDP on healthcare, more than any other high-income nation. Yet, according to a study by the Commonwealth Fund, the U.S. falls dead last in metrics such as access to care, healthcare outcomes, and efficiency. Some healthcare industry experts say that the U.S. healthcare payment system is a barrier to effective healthcare that should be available to all Americans.
Fortunately, that system is changing. Healthcare leaders and government officials are looking for ways to reduce the cost of care while increasing its effectiveness. Some of those changes have already been put in place, while others may require a significant overhaul of the ways the U.S. pays for healthcare.
What is the structure of the U.S. healthcare payment system?
Traditionally, doctors, hospitals, and other healthcare providers operate under a fee-for-service healthcare payment system. Under the fee-for-service model, each part of a doctor visit or procedure is billed separately. A patient who undergoes an operation is billed by the surgeon, anesthesiologist, and hospital. They receive bills for their room, medications, and medical products. For example, if someone is in a car wreck, they are billed by the ambulance company for transport. They will also be treated in the emergency room and will usually be billed at a higher emergency room rate.
Many experts agree that fee-for-service causes higher healthcare costs. That’s because providers are incentivized to prescribe treatment, order tests, and perform medical procedures.
Who pays for care?
About half of all Americans have health insurance through their jobs or purchased individually, according to the Congressional Budget Office. Another 64 million Americans are insured via Medicare. Policy holders pay premiums, copays, deductibles, and a predetermined percentage of the total bill. Insurance or Medicare pay the rest.
Who determines the fee-for-service rates?
The government establishes the price it will pay per procedure for Medicare patients. Insurance companies and providers negotiate fee schedules. In cases in which patients don’t have coverage, they may be able to negotiate directly with hospitals or doctors.
What happens if patients are uninsured?
According to the U.S. Census Bureau, around 28 million Americans were uninsured as of 2020. Many others are underinsured or ineligible for Medicaid or other government health programs. These patients may not receive care — or may choose not to seek it. They also may be unable to pay their medical bills. Hospitals in low-income communities serve large populations of low-income patients. While Medicaid pays some of the bills, these hospitals have low reimbursement and payment rates for their services. This creates financial hardship for care providers.
How does medical debt impact Americans?
Nearly 20% of all U.S. households have medical debt, according to the U.S. Census Bureau, defining high medical debt burden as debt that exceeds 20% of household annual income. While uninsured and underinsured patients carry high levels of medical debt, even insured patients have trouble paying for medical care. Medical debt is one of the leading causes of bankruptcy in the U.S., and COVID-19 medical care has increased the debt burden for many Americans.
Current healthcare payment models
Healthcare payment models have been designed around fee-for-service. They use different methods to try to keep a lid on rising healthcare costs. Payment models include:
The Centers for Medicare & Medicaid Services
The Centers for Medicare & Medicaid Services (CMS) provides healthcare to about 110 million seniors and low-income individuals and families. Under Medicare, every procedure has a corresponding Medicare code. This code establishes how much the government will reimburse providers for the care of Medicare-eligible patients. Medicare reimbursements are often lower than the negotiated fees that commercial insurers pay. Therefore, some physicians do not accept Medicare patients.
Other government healthcare payment systems include:
- Medicaid: The federal government and state governments fund Medicaid. It provides health coverage to low-income individuals as well as pregnant women, children, the elderly, and people with disabilities.
- CHIP: The Children’s Health Insurance Program serves eligible children whose parents don’t qualify for Medicaid but who can’t afford private insurance.
- TRICARE and CHAMPVA: TRICARE provides coverage for active-duty soldiers (including reserves) and families. CHAMPVA covers veterans.
Private health insurance
According to the U.S. Census Bureau, about 177 million Americans had healthcare coverage through their jobs in 2020. Companies pay most of the premiums, and employees pay the rest (usually deducted from their paychecks). They can choose from a variety of plans: HMO (health maintenance organization), PPO (preferred provider organization), or a combined HDHP (high-deductible health plan) and HSA (health savings account).
Private health insurance is also available through the insurance marketplace under the Affordable Care Act (ACA). Individuals who don’t have insurance through their jobs can sign up for an insurance plan through this marketplace. Other sources of private insurance include COBRA, which allows individuals who have lost their jobs to keep their insurance for 18 months.
Private insurance generally works on a capitation model. Under capitation, the insurer negotiates the amount it will pay a provider for services per patient. The goal of capitation is to keep costs low. Some insurance plans use capitation plans to encourage doctors to provide preventative care and reward them for avoiding expensive treatment.
Concierge services
Concierge healthcare bypasses health insurance for primary care services. Instead, patients pay a monthly fee and receive the same health services they would receive at a traditional doctor's office. The advantages of concierge healthcare include faster access to providers and more personalized services. However, concierge healthcare providers usually don’t handle surgery or serious health emergencies. Patients will still need medical insurance to cover those incidences.
Self-pay
Self-pay is self-explanatory: Patients may prefer to (or have to) pay for services directly rather than through insurance. This is partly because out-of-pocket costs are rising rapidly, increasing 10% in 2021 to about $1,650 per person, reports Fierce Healthcare, based on data from market research firm Kalorama. This trend is prompting many individuals to forgo insurance coverage or skip preventive care visits. Many providers have established self-pay rates; practices that aren’t set up for self-pay may run into roadblocks in trying to treat patients.
