The current health policy fad is “value-based payment” — blaming high health care cost on fee-for-service and overutilization of care and instead, offering upfront payment per member, or capitation, as an incentive to reduce utilization and control costs.

This analysis is contradicted by Hawaii’s experience. Hawaii’s Prepaid Health Care Act has included an employer mandate since 1974, with the broadest coverage of the population, richest commercial insurance benefits, lowest patient cost-sharing, and among the lowest insurance premiums in the country. And we had the lowest per-capita Medicare spending in 2009, when everyone was paid with fee-for-service.

But since widespread imposition of “value-based payment,” encouraged by the Affordable Care Act and aggressively implemented by HMSA and MedQUEST, health insurance premiums have more than doubled. By 2019 our per-capita Medicare spending had climbed from lowest up to 9th-lowest and rising. And many Hawaii doctors are quitting practice or exiting the state, leaving a severe and worsening doctor shortage and worsening access to care.

Capitation requires defined “members” to enable payment per-member, whether the payee is a health plan, such as a Medicare Advantage (MA) or Medicaid managed care plan, or an organized group of doctors or doctors and hospitals paid as an Accountable Care Organization (ACO). In any case, the performance of a capitated plan depends heavily on which “members” it captures.

Many studies claim to show that MA plans and ACOs can reduce Medicare spending and demonstrate improved quality measures. BUT, the savings for Medicare are quite small, and if the administrative costs for the MA plan or ACO are included, capitation always costs more than fee-for-service.

And very few studies account for the ability of capitated plans to capture healthier “members” and avoid or eject sicker, more expensive ones. If the pool of “members” in a plan or ACO is healthier than average, then of course cost will be lower and quality measures will be higher because the members were healthier to begin with, without any improvement in care.

Upfront payment with capitation introduces perverse incentives to capture the healthy and avoid the sick; to up-code to game the risk adjustment formula; and to skimp on care, necessary and unnecessary alike. And capitation of health plans creates major opportunities for profiteering, fraud and abuse in health care.

The poster child for these problems with “value-based payment” is Medicare Advantage. The Medicare Payment Advisory Commission has concluded that MA plans are overpaid by 22% compared to if the same beneficiaries were in traditional fee-for-service Medicare. Studies show MA plans do capture healthier-than-average members and up-code, often to the point of fraud, and they skimp on care, including denial of necessary care.

MA is the most profitable line of business for health insurance companies, far outstripping commercial insurance. It is rapidly draining the Medicare trust fund, threatening insolvency in less than a decade.

MA plans often restrict beneficiary choice with narrow and “ghost” networks of doctors not actually available to plan members. Doctors complain of excessive time wasted on prior authorizations. And worse, when for-profit insurance companies and private equity firms buy up physician practices and secure “value-based” government contracts with Medicare and Medicaid, they then seek return on investment by pressuring doctors to compromise patient care to serve their corporate owner’s financial goals, driving an epidemic of “moral injury” and burnout.

“Value-based payment” carries much higher administrative costs than fee-for-service, so capitated plans can be profitable only by gaming the payment formula to be overpaid and/or by denying care. This is no way to achieve real value in health care.

Dr. Stephen Kemble is a retired psychiatrist; in 2011, he was appointed to the now-inactive Hawaii Health Authority, charged with designing a universal health care system for Hawaii residents.