Additional Information

FEE-FOR-SERVICE

In a fee-for-service payment model, health plans reimburse providers for each service they provide to patients, regardless of the outcome.

This is the status quo in healthcare coverage. Providers may enjoy more control over their salaries and schedules in fee-for-service models, according to the American Medical Association (AMA). They also might find that the simplicity of fee-for-service reimbursement gives them more flexibility in styles of medical practice and work effort.

Fee-for-service health plans typically have no provider networks and no referral requirements, but members may face higher costs. Some fee-for-service plans are preferred provider organizations (PPOs). In non-PPO plans, members can receive care by visiting a doctor or hospital of their choice. In PPO plans, out-of-pocket costs may be lower for those who see a listed PPO provider.

Members with fee-for-service plans may be required to provide upfront payments for care and then submit claims for reimbursement.

The payment model is most commonly associated with traditional Medicare. Traditional Medicare, also called Medicare fee-for-service, includes hospital insurance through Medicare Part A and medical insurance through Medicare Part B. Beneficiaries pay a monthly Part B premium and have a 20 percent coinsurance for Part B services after meeting their deductible.

Payment rates for providers who participate in Medicare are determined by prospective payment systems , which establish reimbursement rates based on a fixed amount. Prospective payment systems differ by provider type, with CMS releasing new ones each year.

Although the healthcare industry is used to fee-for-service, the reimbursement model creates barriers to quality care, hinders care coordination, and spurs high healthcare costs. This system may promote overutilization and incentivize providers to deliver excessive treatments, as their payment relies on the quantity of care rather than the quality.

As a result, health plans and other stakeholders have started shifting to value-based payment models.

VALUE-BASED CARE

Unlike fee-for-service, value-based care models reimburse providers based on the quality of the care they deliver. Value-based care programs aim to hold providers more accountable for patient health outcomes by offering financial incentives. The approach centers around the triple aim of improving population health management, reducing healthcare costs, and improving the healthcare experience.

Health plans operating under value-based care models use quality measures to determine provider reimbursement. Common utilization measures include emergency department use, hospital readmissions, average length of stay, and prescription drug utilization.

Health plans often use the National Committee for Quality Assurance’s (NCQA) Healthcare Effectiveness Data and Information Set (HEDIS) to measure care quality. HEDIS measures shed light on the effectiveness of care, availability of care, and service utilization.

CMS also offers several models that incentivize different quality measures. For example, the Hospital Readmissions Reduction Program (HRRP) uses the excess readmission ratio to assess hospital performance. Hospitals receive financial penalties in the form of payment reductions if their all-cause 30-day readmission rates exceed the average among hospitals with similar patients.

Value-based models can have upside-only risk, meaning providers can benefit financially from meeting or exceeding quality and cost targets. Other models, like HRRP, include downside risk where providers are penalized for not meeting targets. Models with both upside and downside risk, known as two-sided risk, may lead to better outcomes, according to past research.