Medical overuse and why fee for service must go

It should not be a surprise to anyone why medical overuse occurs. The traditional and politicized discounted fee for service reimbursement system rewards volume-based healthcare for high-margin diagnostic and therapeutic tests/procedures on behalf of large suppliers and tempts both physicians and management into a "follow the money" strategy to optimize revenues at a time of climbing overhead costs and declining margins. The inevitable consequence is the overuse of high-margin services and underuse of low/no-margin services. Unfortunately, this imbalance comes with a significant cost.

  • High per capita healthcare costs with lackluster healthcare outcomes: Our per capita healthcare expenditures are almost double that of any other industrialized nation, and our healthcare outcomes, such as life expectancy or maternal-fetal mortality, are approximately 37th. Some estimate that most Americans spend half of their lifetime healthcare expenditures in the last year of their lives without any significant measurable benefit in life expectancy or quality-adjusted life years.
  • Significant waste: The United States wastes more than $750 billion (out of a $2.8 trillion system) in over-utilization, inefficiencies, excessive management, and lack of healthcare prevention and maintenance, according to a 2012 report from the Institute of Medicine.


  • Significant non-value-added variation: Clinical variation is rampant (up to one-hundred fold) and is based upon incentives that do not always lead to optimal outcomes. Fee for service incentives may lead to inappropriate overutilization of diagnostic tests like CT Scans, ultrasounds or the inappropriate performance of procedures. For instance, St. Mary’s Hospital in West Palm Beach, Florida, recently closed its pediatric cardiac surgery service because of a reported risk/severity adjusted mortality rate double that of “best practice” services due to inadequate surgery volume.
  • Unsustainable costs: Large U.S. employers’ healthcare costs have risen more than 28 percent in the past five years, hence why the Leapfrog Group and other corporate coalitions are driving healthcare transformation. The average American family’s healthcare costs have risen to almost 25 percent of disposable income from out-of-pocket expenses that have resulted in more than 2,000,000 personal bankruptcies annually--making it the leading cause of such filings in our country.
  • Wrong incentives=wrong care: Thirty to 50 percent of what providers do is medically unnecessary and 50 percent of what they should do (e.g. preventive healthcare services) has no reimbursement tied to it, according to a 2003 New England Journal of Medicine study; hence the mismatch between what we spend and what we get.

The significant opportunity is to change the reimbursement system from pay for volume to pay for value, and this is what is causing disruptive innovation such as non-physicians, ambulatory services, retail medicine outlets and e-health platforms/solutions to provide affordable accessible alternatives to a healthcare system with legacy incentives that are not tied to outcomes.

What will finally lead to appropriate utilization of healthcare services is a reimbursement system that is aligned with optimizing healthcare outcomes for populations, such as quality-adjusted life years. This requires some form of capitation (per member per month) incentivized for quality, safety, service and cost-effectiveness. Such a reimbursement model requires the following changes in our healthcare system:

  • Standardization of best practice high-volume, low-risk care with clinical pathways and algorithms: For instance, the use of the World Health Organization’s Safe Surgery Checklist has led to a decline of surgical morbidity by 45 percent and a decline in surgical mortality by 55 percent, according to Atul Gawande’s “The Checklist Manifesto.”
  • Widespread use of palliative care and disease management for high-cost, high-risk clinical conditions: Many studies have demonstrated that the early implementation of palliative care through multidisciplinary teams reduces costs by more than 30 percent and extends quality-adjusted life years significantly.
  • Widespread use of post-acute care programs that significantly reduce hospital readmissions, emergency department visits and physician office visits: Such programs—such as one employed by St. Luke’s Healthcare System, Boise, Idaho--have decreased readmission rates by up to 85 percent and reduced ED visits by up to 65 percent.
  • Clinical/Business predictive analytics that enable early interventions for those individuals most likely to require high-risk, high-cost healthcare services: Many large corporate healthcare plans and large healthcare systems, such as the Mayo Clinic, use this technology to benefit both beneficiaries and system alike.

These innovations will enable healthcare organizations and aligned physicians to benefit from high-quality/, low-cost clinical outcomes in a capitated environment, while these initiatives would be self-defeating in fee-for-service or even a shared savings/bundled payment program.

Fee for service must go and be replaced by some form of incentivized capitation so that we can eliminate the overutilization of non-value-added healthcare services and replace them with value-added preventive healthcare services that will finally align the purpose of our healthcare system with those for whom we serve.

Jonathan H. Burroughs, M.D., is president and CEO of The Burroughs Healthcare Consulting Network. He's also a certified physician executive and a fellow of the American College of Physician Executives and the American College of Healthcare Executives.