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New Ways to Pay for Medical Care Can Lower Costs

People often wonder why health care costs so much. Surprisingly, the answer may lie not just in the price of medical care, but also in the way we pay for it.

Our current "system" rewards inefficient, high-cost medicine and penalizes efficient, low-cost health care. Because patients and insurance companies pay for each visit, procedure, prescription and lab test separately, there are built-in incentives for more care without regard to whether it is the right care or is making a difference in patients' health. As a result of the current health care payment structure, many experts believe that 20 to 30 percent of care provided does not add value – or even potentially harms the patient.

The solution? If we can change how we pay for care, prices might stop going up so quickly. Here's how:

What if the health care system was an auto repair shop?

Imagine taking your car in for a small repair and then finding that the final bill includes two batteries, spark plugs and charges for parts inadvertently broken by the mechanics and later fixed. The bill would be five times more than expected because you did not agree to a flat fee to fix the problem, and so each repair meant the mechanic would get paid more. And worst of all, the mechanic might not have even fixed the initial problem. The mechanic has no incentive to keep your car running well in the future because he'll make more money if you have to come back again soon.

Our infrastructure of doctors, hospitals and other health care providers is a lot like this auto shop. Doctors and hospitals get paid based on how much care is delivered, regardless of whether it's good or necessary or whether it cures the problem. In fact, if a doctor or hospital makes a mistake, you pay twice – once for them to make the mistake and once to fix it. There is little coordination across the medical system to ensure that you get the right kind of care.

It's not that health providers are greedy or malicious. Rather, they currently have an incentive to provide more expensive and more frequent care, simply because that's how they get paid. Additionally, doctors and hospitals don't currently have a payment incentive to keep patients healthy or coordinate their care and treatments with other providers. It's a payment system that just doesn't work and isn't always in the best interest of providing value to patients.

A new focus on value

We all know this can't continue. Fortunately, organizations across the U.S. and in Colorado are working on new ways to pay for health care, to reward high-value care and penalize inefficiency. The key is identifying and rewarding value – the quality or result we want, divided by the dollars we spend. If we can improve the quality or lower the costs of health care – or both – value will naturally increase.

Federal health care reform and other state-based efforts encourage these changes.

  • The federal health law requires that Medicare, the health insurance program for the elderly and the disabled run pilot programs that pay a flat fee for a single episode of care. Paying a flat fee is a bit like how your auto shop should charge you now: The mechanic has a responsibility to avoid mistakes and isn't compensated when accidental mistakes do happen.
  • Paying a flat fee for medical care can provide the same incentives, spurring higher quality and better outcomes. When a patient enters into one "episode of care," – a knee replacement or a cataract surgery, for example – Medicare would pay a single price for all related doctor's visits, tests, medical devices and hospital stays. That's because flat fees give doctors and hospitals an incentive to complete procedures efficiently and send patients home quickly.
  • In Colorado, the emergence of Accountable Care Organizations, in which groups of health care providers coordinate to provide care to patients, will result in provider reimbursements being tied to the delivery of care that meets quality and cost benchmarks. Similarly, there have been a number of recent initiatives to ensure that Coloradans have access to a team-based source of care, moving towards rewarding doctors for providing high-quality, patient-centered care that is coordinated for all of their medical, mental and oral health needs.

Colorado's All Payer Claims Database, which was created by state legislators in 2010 and is currently in development, will make available information from private insurance providers in Colorado, as well as Medicaid and Medicare. Such transparency will provide a comprehensive picture of health care costs and utilization in our state, helping to spur analysis of pricing and quality that our health care system currently lacks – and that all of us need to make good decisions about our care.

We've already seen that having access to such information can result in positive changes. In Mesa County, providers and payers have used claims data since 2005 to identify new ways of delivering and paying for health care. The results have included better outcomes and lower costs for Medicare patients than in almost any other part of the country.

If these new ways of paying for care prove effective on a larger scale, health reform efforts can expand this approach and help contain the costs of what you pay for health care in the future.

This blog originally appeared on To find out more about Project Health Colorado – a growing group of organizations and individuals who are interested in discussing and learning more about health care issues and standing together to make health care work better for Coloradans – please visit

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First, it is not always more expensive individually than through an employer. In some places, for some individuals, the opposite is true. Second, most individuals who do not use health insurance very much do not buy individual health insurance policies; most of the buyers use it a lot, so it is expensive. With an employer plan, many of the employees do not use it, so the average price, per person who has it (whether or not they use it) is less. Third, many employers subsidize the cost, so the employee does not pay all of it, and the employer pays a lot.
9/8/2012 2:21:16 PM

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