Wednesday, April 21, 2010

Fee-for-Service and the Profit Motive

Fee-for-service is frequently and erroneously maligned as the cause of our current health care ills. The denigration of fee-for-service follows from the failure to properly understand the functioning of free market and the beneficial role of the profit motive. Most transactions in our economy are fee-for-service (think of your grocer, plumber, CPA or housing contractor) and are functioning just fine. Free market competition increases quality and efficiency while bringing down prices and costs. The problem we currently face in medicine is the lack of free market competition, not the fee-for-service payment.

Increasing paperwork and administrative hassles, rising health care expenditures, increased demand for and subsequent increased prices of health care goods and services are all consequences of the current 3rd party payment system (in combination with low out-of-pocket costs for patients.) Tax laws since WWII have supported the replacement of medical insurance (catastrophic coverage and high-deductible) with comprehensive pre-paid health care and government entitlement programs---both of which are erroneously referred to as insurance. Understandable attempts on the part of the payer (both insurance companies and government) to control costs and assure quality invariably leads to intrusive bureaucratic management of medical decision-making.

The solution is to neutralize government health care policies and let individuals decide what financial arrangements best meet their needs. Contracts should be enforced, but not designed, by government. Fraud and negligence should be objectively defined and punished. Social engineering through tax policies, government subsidies, entitlement programs and regulations will always have harmful unintended consequences and are an inappropriate use of government force.

Some individuals may find it desirable to receive or provide medical care within an HMO or in a system of capitation—and they should be free to make this choice. Businesses should be free to experiment with health care delivery designs and to compete for patients on price and quality. Fee-for-service is one of many possible valid financial arrangements between physician and patient, and one that demands consistent quality and affordability for a physician to remain in business. As in any other business, the pursuit of long-term profits in medicine requires providing a valued service to one's patients--perhaps even more so in medicine because of the crucial role that trust plays in the doctor-patient relationship.

Fee-for-service is simply one profit-engendering trade arrangement: the physician provides a service for which the patient pays a fee. Profit is simply the money difference between the cost of providing the service and price that is paid for it. In a free market, pursuit of profit is an appropriate motivation for providing excellence--in medicine as in any other economic endeavor. Anyone able to offer a unique or superior service rightly earns the higher profits they voluntarily obtain. When a high profit margin exists, it signals a need for more resources to be directed to that area--not exploitation or gouging. Without free market prices and profits, there are no such signals and no way for resources to be efficiently allocated.

In spite of the fact that the Marxist theory of exploitation has been thoroughly refuted (both in theory and in practice,) our culture retains a suspicion of the profit motive. This is due in part to thinking of our economy as a free market, when in fact it is not free but a mixed economy: a mixture of freedom and central planning--replete with all the special interest influence and political favoritism that central planning promotes. Profits earned in this system are a mixture as well--in part due to voluntary trade of value for value, and in part due to political pull and government coercion.

Fee-for-service in a free market generates justly earned profits. It is the system that promotes win-win transactions and the benevolence of mutually respected individual rights. When externally imposed incentives distort the normal economic relationship of voluntary trade, fee-for-service can lead to an exploitive relationship, but the cause is the artificially imposed incentives, not fee-for-service or the profit motive per se.

So beware of those who disparage fee-for-service, for underlying it is a condemnation of profits, and thus the means of supporting our lives through our productive labor.


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