Fee for Service Has to Go! Bundled Payments, Capitation, etc

Sofia Ramirez

So, here we are, diving into one of the most hotly debated topics in healthcare: the fee-for-service model. It's, uh, it’s been the backbone of the system for decades, but let's be honest here—it’s kind of broken.

David Caldwell

Okay, wait, broken how? Like, you’re talking inefficiencies, or does it hurt patient care?

Sofia Ramirez

Ah, both, actually. Think about it this way: under fee-for-service, practitioners get paid for every service they perform, right? Office visits, tests, procedures—you name it. Now, on the surface, that sounds fair. Work done, payment received. But what happens is, it incentivizes volume over value. Providers are kinda encouraged to focus on quantity over quality.

David Caldwell

Oh, so like, you do more tests—even if they’re not necessary?

Sofia Ramirez

Exactly. And that’s where the system starts to unravel. Imagine, you're running labs or ordering imaging that isn't strictly needed just to generate revenue, while, meanwhile, patients might end up footing the bill for services that aren't improving outcomes.

David Caldwell

Okay, that's... yeah, that's bad. But how do we even begin to fix something so, uh—so baked into the system?

Sofia Ramirez

That’s the big question, isn’t it? And it’s why today, we’re gonna break it all down. We'll talk about why fee-for-service has to go, and—and more importantly, explore real alternatives. Things like bundled payments, capitation, and other models that hope to shift the focus back to better outcomes instead of just—well, a bigger bill.

David Caldwell

Alright. But hang on—can we, uh, acknowledge something real quick? This podcast, it’s not just us hosting, right? It’s all AI-generated. No humans were harmed in the making of this episode?

Sofia Ramirez

Haha. Well, technically, yeah. This podcast is created with help from AI, including—you guessed it—our voices. But everything follows the guidance and editing of Dr. Chad Swanson, an ER physician who’s got that, you know, boots-on-the-ground perspective. He’s the one making sure what we’re saying is accurate and meaningful.

David Caldwell

Okay, yeah, that makes sense. So, kind of like... informal conversations with the world about fixing the healthcare system, huh?

Sofia Ramirez

Exactly. And with that in mind, let’s jump in and really make sense of how we ended up here, with fee-for-service as the default system. It’s an interesting history.

Sofia Ramirez

So, to understand where we go from here, we need to look back at how fee-for-service became the default. Back in the mid-20th century, healthcare was still mostly a private deal between patients and their doctors. Insurance was starting to take root, but it wasn’t widespread yet. Fee-for-service made sense for the time—you paid for the care you got. Straightforward, right? Or, at least, that’s how it seemed.

David Caldwell

Okay, but like, when did it turn from simple to... whatever this is now?

Sofia Ramirez

Great question. Things started to shift with the rise of health insurance. As coverage expanded and more services became reimbursable, the system incentivized providers to do more. And then Medicare and Medicaid came along in the 1960s, turning healthcare into, well, a volume-driven industry. The more procedures you did, the more you got paid—regardless of whether those procedures actually benefited the patient.

David Caldwell

Wow, so it’s not even that old. We're talking, what, 50 or 60 years of this approach?

Sofia Ramirez

Exactly. And during those decades, we’ve seen some clear advantages, to be fair. For starters, fee-for-service made healthcare more accessible in rural and underserved areas initially—providers could count on payment for what they did, so they were motivated to show up. And it’s good at incentivizing innovation, like new procedures and technologies, because there’s always compensation for anything new you bring to the table.

David Caldwell

Okay, that sounds... not terrible? But I feel like you’re about to hit me with the “but.”

Sofia Ramirez

Oh, you know me too well. Here’s the thing: while it created opportunities for innovation, it also led to some, uh, unintended consequences. Providers are rewarded for doing more, not for doing better. The data is pretty stark—about 25% of all healthcare spending in the U.S. is, like, unnecessary or wasteful. That’s at least $600 billion annually, probably much more.

David Caldwell

Wait, wait, hold on. $600 billion? That’s insane—how does that even happen?

Sofia Ramirez

Well, part of it comes from over-testing and over-treatment. Say you come in with a headache. Instead of treating it conservatively, you might get an MRI, a CT scan, and who knows what else. Because the system rewards that behavior. And patients often don’t see the direct costs of these services upfront, so there’s little pushback.

David Caldwell

So, who ends up paying for all this? Like, is it the insurance companies or...?

Sofia Ramirez

Ultimately, it’s us. Employers pay more for insurance coverage, premiums go up, and patients get hit with higher out-of-pocket costs and deductibles. It’s, like, this vicious cycle that keeps spinning. And the worst part? Research shows all this excess spending doesn’t translate to better health outcomes. The U.S. ranks poorly in terms of life expectancy and chronic disease management compared to other developed nations, despite spending way more.

David Caldwell

Okay, yeah, that’s a pretty compelling case for saying this system isn’t working. But if this is what we’ve been doing for decades, why is it so hard to let go?

Sofia Ramirez

Well, because it’s deeply embedded. Hospitals rely on it to stay afloat financially, and providers are used to the stability it offers. It’s predictable, which is a big deal in healthcare. Imagine taking away a system that gives everyone at least some level of certainty—even if that system is flawed. It’s not just a policy change; it’s a cultural shift.

David Caldwell

So basically, fee-for-service is like—you know—this ancient, creaky bridge we all cross every day, and no one wants to tear it down even though it’s falling apart?

Sofia Ramirez

That’s a pretty great metaphor, actually. It’s rickety, it’s outdated, and it’s costing us way too much to maintain. But tearing it down means building something new in its place—and not everyone agrees on what that “something new” should look like.

Sofia Ramirez

So, if fee-for-service is the rickety bridge we’ve been stuck with, what does building a new one look like? One option that’s been gaining traction is Pay for Performance systems. These aim to shift the focus from just providing services to actually improving outcomes. The concept is simple: reward providers financially when they meet certain quality metrics—or penalize them when they don’t.

David Caldwell

So it’s like, I don’t know, a bonus or a penalty system for doctors?

Sofia Ramirez

Exactly. For example, hospitals might get more funding if their patients have better recovery rates or fewer readmissions. It’s a way to encourage accountability, you know? According to a recent study, over 60% of U.S. hospitals are now part of some form of Pay for Performance program.

David Caldwell

60%? Okay, that’s actually a lot more than I expected. But how does this work—like, in practice?

Sofia Ramirez

Good question. Let’s take Medicare’s Hospital Readmissions Reduction Program as an example. This program penalizes hospitals that have higher-than-expected readmission rates within 30 days for conditions like heart failure or pneumonia. It was estimated initially hospitals had reduced readmissions by about, uh, 7% for those conditions. But more recent studies aren't so optimistic, maybe a few percent, if at all.

David Caldwell

a few percent? That sounds... decent, I guess? But is that enough to really make a difference in the big picture?

Sofia Ramirez

Well, that’s kinda the debate. While there are clear successes, studies show mixed results overall. And some critics worry about unintended consequences—like hospitals avoiding certain high-risk patients to protect their metrics. Imagine if a hospital hesitated to admit someone with complex health issues because it might hurt their numbers.

David Caldwell

Yikes. Okay, yeah, that’s not great. So, it sounds like there are real pros and cons here?

Sofia Ramirez

Exactly. On the upside, Pay for Performance programs can drive real improvements where there’s room for easy wins—like better follow-up care or reducing medication errors. But the downside, honestly, is that the programs often rely on metrics that don’t fully capture the complexity of healthcare. You can end up with a system that’s more about meeting targets than truly improving care.

David Caldwell

Okay, so it’s like trying to measure progress with, uh, a ruler that doesn’t quite fit the situation?

Sofia Ramirez

Exactly. And that’s a big criticism—you end up with this mix of genuine improvement and what we call "gaming the system," where providers focus on meeting the metrics rather than the deeper, more nuanced needs of their patients.

Sofia Ramirez

So, speaking of alternatives, let’s shift gears and talk about bundled payments—another model that’s getting a lot of attention lately. Essentially, this approach aims to bundle payments for an entire episode of care. So instead of billing for each individual service, providers get one fixed amount to cover everything related to a particular treatment or condition.

David Caldwell

Okay, hold up—you said “episode of care.” What exactly does that mean?

Sofia Ramirez

Great question. An episode of care is pretty much a defined window of treatment. For example, let’s take a knee replacement. The bundled payment would cover everything—from the initial consultation to the surgery, rehab, and follow-up appointments within a set period, say, 90 days. The idea is to align incentives so that everyone works together to deliver quality care efficiently.

David Caldwell

Oh, so it’s less “pay-per-piece” and more like a package deal?

Sofia Ramirez

Exactly. And that’s where the advantages start to show. First, it reduces the incentive for unnecessary services because the payment is fixed. Providers then have a reason to focus on delivering the best outcomes without overdoing it on the tests, procedures, or—you know—extra charges that add up. There’s also evidence that bundled payments can lower costs overall. A study by CMS, the Centers for Medicare Medicaid Services, found that their bundled payment programs saved an average of 12% per episode for knee and hip replacements.

David Caldwell

Wait, 12%? That’s solid. But does that mean patients actually see the difference in their wallets?

Sofia Ramirez

Sometimes, yes. Employers and insurers often pass along savings through lower premiums or reduced co-pays, but it’s not a guarantee. What it does mean, though, is that the overall system gets more efficient. Another success story is the Bundled Payments for Care Improvement initiative—or BPCI—which involved over 1,000 hospitals. They reported not only cost savings but also fewer hospital readmissions and complications during episodes of care.

David Caldwell

Okay, so why aren’t bundled payments everywhere then? It sounds like a no-brainer.

Sofia Ramirez

It does, doesn’t it? But implementing bundled payments is not without its challenges. One big issue is defining those “episodes of care.” Not every patient fits into a neat little box. What happens if someone has complications or additional underlying conditions? These cases can make it tricky to figure out a fair payment.

David Caldwell

So, like, if things get messy—it’s not as straightforward anymore?

Sofia Ramirez

Exactly. And then there's the coordination factor. Bundled payments require a lot of collaboration between providers—surgeons, physical therapists, primary care physicians—all of whom might not even work in the same practice or hospital system. If they fail to communicate effectively, the patient’s care can get fragmented, which goes against the whole point of the model.

David Caldwell

That seems like a logistical nightmare. Like, we’re trying to stitch together a quilt from different patches that might not match.

Sofia Ramirez

Right, and that’s a perfect metaphor. Plus, there’s the question of risk. If costs go over the bundled amount—say, due to unexpected complications—someone has to eat those costs, and not all providers are willing to take that gamble. But honestly, despite these hurdles, bundled payments are expanding rapidly. A RAND Corporation study found that about 20% of all healthcare spending in the U.S. now happens under some form of alternative payment model, including bundled payments. So, while it’s not the default yet, it’s growing.

David Caldwell

Huh. Okay, so it’s like we’re seeing this slow shift, but with a lot of bumps in the road?

Sofia Ramirez

So, building on the idea of alternative payment models, let’s dive into capitation. Unlike bundled payments, this model takes it a step further. Providers are paid a set amount per patient per month—regardless of whether that patient actually needs any services during that time.

David Caldwell

Wait—hold up. You're telling me doctors get paid even if a patient never steps foot in their office?

Sofia Ramirez

Yep, that’s exactly the point. The idea is to incentivize providers to keep patients healthy and out of the office by focusing on preventative care and managing chronic conditions effectively. So instead of paying for every single visit or test, providers get a fixed rate that covers all care for that patient over time.

David Caldwell

Okay, but… doesn’t that kind of, I don’t know, discourage them from actually treating people? Like, what if a provider just pockets the money and, you know, doesn't really do much?

Sofia Ramirez

Good question, and one that critics of capitation have raised. But at its best, capitation encourages long-term investment in patient health. For example, instead of waiting for a diabetic patient to end up in the ER with complications, the provider has a financial incentive to proactively manage their condition. Studies have shown some success with this approach. For instance, Kaiser Permanente, one of the largest healthcare organizations in the U.S., operates mostly under a capitated system. They’ve seen lower rates of hospitalization and better chronic disease management compared to national averages.

David Caldwell

Oh, so there are real-world examples where this actually works. But how common is capitation? Are we talking, like, a niche thing or is it catching on?

Sofia Ramirez

Well, right now, capitation isn’t the dominant model, but it's definitely growing. A report by the Health Care Payment Learning Action Network found that around 8% of U.S. healthcare payments were capitated as of their latest data. That may sound small, but it’s part of a larger shift towards value-based care, which accounts for about 40% of total payments when you include other models like bundled payments or shared savings plans.

David Caldwell

Interesting. But, like, what’s the downside here? I mean, it can’t all be smooth sailing, right?

Sofia Ramirez

No, definitely not. One major issue is risk adjustment. Without it, providers might avoid taking on sicker patients who would cost more to care for but come with the same flat payment. That’s why accurate risk adjustment—a method to balance payments based on the complexity of a provider’s patient population—is critical. Otherwise, you could end up with an unequal system where providers cherry-pick healthier patients.

David Caldwell

Oh, right, so it’s like... balancing the scales. But what about the patients? Doesn’t capitation, uh, kind of put them at risk of being, you know, neglected?

Sofia Ramirez

That’s a fair concern, and it has happened in some cases. If implemented poorly, capitation could lead to under-treatment, where providers cut corners to save costs. That’s why many capitated systems include quality metrics and patient satisfaction surveys to hold providers accountable. In fact, research from the Commonwealth Fund found that systems with capitation tied to performance metrics often report higher patient satisfaction compared to fee-for-service models.

David Caldwell

Okay, so it’s all about the balance, then. Too much focus on saving money, and patients suffer—but done right, it could actually improve care?

Sofia Ramirez

Exactly. It’s not without its challenges, but when paired with strong oversight and accountability measures, capitation has some real potential. And with the ongoing push toward value-based care, we’re likely to see more experiments and innovations in capitated systems.

Sofia Ramirez

So, building on the idea of capitation, let’s explore another payment model—global budgets. This approach is similar in that it caps revenue, but instead of focusing on individual patients, it sets a total budget for an entire healthcare system or hospital within a fixed timeframe. It doesn’t matter how many patients are treated or services are provided; the revenue is predetermined.

David Caldwell

Wait—hold on. You’re saying hospitals get a set amount of money no matter what? Isn’t that a little risky?

Sofia Ramirez

It can feel counterintuitive, right? But the idea behind global budgets is to incentivize efficiency while controlling costs. Instead of focusing on doing more procedures to make money, like under fee-for-service, providers are encouraged to improve overall population health to stay within the budget. Take Maryland’s All-Payer Model as an example—it’s one of the most well-known programs that uses global budgets.

David Caldwell

Oh yeah, I’ve heard of that one. But how does it work exactly?

Sofia Ramirez

So, Maryland essentially sets a global budget for hospitals across the state, covering all insured patients—Medicare, Medicaid, private insurance, you name it. Hospitals agree to stay within these limits, and if they keep costs down while maintaining quality care, they’re financially rewarded. It’s been in place since 2014, and the results have been pretty impressive. For instance, it’s estimated that the program saved Medicare around $1 billion within the first five years.

David Caldwell

Wait, $1 billion? That’s, uh, that’s pretty huge. But what about the hospitals? Are they actually making this work?

Sofia Ramirez

Yes, overall. In fact, hospitals in Maryland have reported reduced hospital admissions—by about 2% annually—because they’re focusing more on preventing illness and managing chronic diseases effectively. Plus, they’ve improved on quality measures like fewer complications and better patient outcomes. A study also showed slower cost growth compared to the national average.

David Caldwell

Okay, so it’s working, but... what’s the catch? There’s gotta be some downside to this, right?

Sofia Ramirez

There are definitely challenges. For one, global budgets require tight oversight, and if the incentives aren’t structured properly, providers could cut corners or avoid high-cost patients just to stay under the cap. And then there’s the issue of scaling. While Maryland’s model works at the state level, trying to implement something like this nationwide would be way more complicated. Healthcare markets vary so much—what works in Maryland might not work everywhere else.

David Caldwell

Right, like, one size doesn’t fit all, huh?

Sofia Ramirez

Exactly. And there’s the question of buy-in. Hospitals have to fundamentally change the way they plan and deliver care, which can be a big ask. Still, the data is promising. A recent report found that only about 5% of U.S. healthcare spending operates under a global budget model today, but interest is growing, especially as states look for ways to control costs.

David Caldwell

Huh, okay. So it’s like—global budgets could be a game-changer, but they’re not a silver bullet either?

Sofia Ramirez

Exactly. They have the potential to shift the focus back to patient outcomes while keeping costs in check, but only if they’re implemented carefully with strong oversight and accountability measures in place. Hospitals need both the tools and the support to make these systems work. It’s a balance, you know?

Sofia Ramirez

Speaking of balance and accountability, let's talk about incentives in healthcare. It's easy to think of them purely in financial terms—things like pay-for-performance or bonus structures. But the truth is, people are motivated by much more than just money, and that's crucial when designing any system, including global budgets.

David Caldwell

Okay, like what? What other kind of incentives are we talking about here?

Sofia Ramirez

Well, let’s start with something simple like job security. Knowing you have stable employment can be a huge motivator—especially in such an unpredictable field like healthcare. And then there’s schedule flexibility. I mean, the grueling hours for some healthcare workers can lead to burnout, so giving them a manageable schedule is a big deal.

David Caldwell

That makes sense. But is that enough to keep people engaged? Like, juggling long hours and everything else seems... exhausting.

Sofia Ramirez

Exactly, that’s where recognition comes in. Feeling appreciated for your work can go a long way. Simple things like acknowledging a job well done, awards, or even just regular feedback from leadership can be incredibly powerful. And, honestly, I think people sometimes underestimate how deeply recognition impacts morale.

David Caldwell

Okay, but that’s kinda the surface, though, right? I mean, there’s gotta be more beyond just pats on the back and predictable hours.

Sofia Ramirez

Definitely. Things like geography play a role too. People might be motivated to stay in a job or even relocate based on how close they are to family, schools, or just a better quality of life. And let’s not forget about workplace culture—being in an environment where collaboration and respect are prioritized really makes a difference.

David Caldwell

Okay, so basically, creating a space where people actually want to work. Shocker, right?

Sofia Ramirez

Haha, crazy concept, I know. But perhaps the most important motivator is vision. Working for an organization that has a clear, inspiring mission—one that aligns with a worker's personal values—can keep people engaged long-term. Think about it: healthcare is such an emotionally demanding field. People don’t just want to feel like they’re doing tasks; they wanna feel like their work contributes to something bigger.

David Caldwell

Right, like making a meaningful difference in the grand scheme. That kind of stuff sticks with you.

Sofia Ramirez

Exactly. And when organizations prioritize these non-financial incentives, they’re not just improving job satisfaction—they’re also creating conditions for better patient care and outcomes. A happy, motivated staff is much more likely to go above and beyond for patients.

Sofia Ramirez

So, when we think about combining this idea of vision with practical structures like non-financial incentives, it brings us to the way broader system models—like capitation, bundled payments, or global budgets—interact to build what some experts call a learning health system.

David Caldwell

Okay, I’ve heard that term before, but like, what’s the actual definition here? Is this just, uh, another buzzword?

Sofia Ramirez

Fair question. A learning health system is essentially a framework. It’s a system where every part of healthcare—policy, providers, patients, researchers—works together to continuously generate and apply knowledge to improve health outcomes. It’s not locked into one rigid structure; it adapts, learns, and evolves over time.

David Caldwell

Okay, so it’s like, we're putting the system in school to learn how to actually do its job better?

Sofia Ramirez

Haha, yeah, kind of! We actually dedicated an entire episode of this very podcast to this topic, titled, "Rewriting the Rules of Healthcare: What If We Put Health First?The idea is that data from every interaction—every treatment, every patient experience—feeds right back into the system, so it gets smarter and more effective. And it’s not just about technology; it’s about aligning incentives across the board so everyone’s pulling in the same direction. No more conflicting priorities between providers, insurers, and patients.

David Caldwell

Ah, so we're talking about collaboration on, like, a massive scale? I mean, that sounds great on paper, but is it even remotely possible?

Sofia Ramirez

It’s not just possible; we’re starting to see it happen in pockets already. Think about systems like Kaiser Permanente or countries like Denmark where collaborative care models and shared data are driving continuous improvement. But the key piece is incentives. If everyone’s working toward the same vision—better outcomes—we can break free from those misaligned priorities that have plagued healthcare for, well, decades.

David Caldwell

So, is it safe to say that this learning health system thing, it’s the endgame? Like, this is where all these reforms are supposed to lead us?

Sofia Ramirez

Exactly. Think of it as the North Star for transformation. The models we’ve talked about—bundled payments, capitation, global budgets—they’re all steps toward this larger goal of a healthcare system that adapts, learns, and puts people first. It’s big, ambitious, and yeah, it’s not going to happen overnight, but it’s where we need to be heading.

David Caldwell

I like that. It’s kind of... inspiring, you know? Like, it’s not just about fixing what’s broken—it’s about creating something way better.

Sofia Ramirez

Exactly. And every small change, every pilot program, every healthcare worker who buys into this vision—it all adds up. If we can align our incentives with what’s truly best for patients, there’s no limit to what the system can achieve. In fact, even our research, educational, policy, public health, and community systems can and should adapt to create a healthy environment where we can all thrive.

David Caldwell

Okay, so on that note, what’s the takeaway here? Like, if listeners are walking away with one big idea from this whole episode, what should it be?

Sofia Ramirez

I’d say it’s this: fixing healthcare isn’t about choosing one magic solution—it’s about aligning every part of the system with the goal of improving outcomes. When incentives, data, and collaboration all point in the same direction, that’s when real, lasting change happens.

David Caldwell

Well said. Alright, Sofia, as always, this has been fascinating. And honestly, I've learned a ton here.

Sofia Ramirez

Same here, David. These conversations are what keep me optimistic. And hopefully, they’re helping others feel more informed and empowered too.

David Caldwell

Alright, folks, that’s a wrap on this episode of "It’s Time." Thanks for listening—and who knows? Maybe the next revolution in healthcare will start with one of you. Have a great day, everyone.

Sofia Ramirez

Take care, and we’ll see you next time.