What is fee-for-service (FFS)?

How fee-for-service works

FFS is the traditional healthcare payment model in the U.S. Per this model, patients pay as follows:

• For every test or procedure provided.
• Every treatment rendered.
• For each visit to the doctor or healthcare organization.
• For each hospitalization.

The FFS model operates through a three-step process:

1. Service provision

A healthcare provider delivers specific services to a patient, such as the following:

• Consultations.
• Tests.
• Treatments.
• Home healthcare.
• General check-up.
• Vaccination.
• Dental care.
• Specialty care (cardiology, neurology, dermatology, etc.).
• Rehabilitation services (physical therapy, occupational therapy, etc.).
• Urgent care.
• Emergency care.

2. Billing

The provider generates an itemized bill for the specific service provided, which is then presented to the payer. If the patient has insurance, the payer might be a private insurance company or a government insurance program like Medicare or Medicaid. If the patient doesn't have insurance, the patient is the payer.

3. Payment

The payer makes the payment to the service provider. Patients with insurance usually need to cover some of the costs, such as copays and deductibles. The insurer pays the remaining amount to the provider after processing the bill and applying relevant coverage rules.

Advantages of fee-for-service

The FFS model provides service flexibility for patients because they can select their preferred providers and choose from a wide range of services and options. Providers can also provide better and more customized services and treatments to patients. Overall, the model allows patients greater autonomy in managing their healthcare and care-related expenses.

FFS is a transparent model. Patients get an itemized bill that clearly shows the services rendered and the cost of each service. The bill enables them to understand their financial liability and to make informed decisions.

Criticisms and drawbacks of fee-for-service

In the FFS model, payments are made based on the quantity of care, rather than its quality. This means that providers are reimbursed for the volume of services rendered, regardless of the impact of those services on patient health outcomes. This can incentivize providers to push a higher volume of services that patients might not actually want or need.

High cost is a related issue with FFS. When providers push too many high-cost treatments, it can escalate healthcare expenses for patients, increase their financial risk, and force them into medical debt or even outright bankruptcy. High expenses can also force patients, particularly those who are uninsured, to forgo some treatments or procedures. This can worsen their health outcomes in the long run.

Another problem with FFS is that it focuses on treatment rather than prevention. Because it disincentivizes preventive care services like health screenings, it might prevent healthcare providers from proactively addressing potential health issues in patients. It also neglects holistic care approaches to manage and optimize a patient's overall health, which can affect patients' health outcomes and reduce their quality of life.

FFS is currently the predominant payment method in the U.S. healthcare system. However, concerns about its lack of focus on the quality of care have caused a shift away from this model to a value-based care (VBC) model. Also, critics maintain that FFS is responsible for creating an unsustainable healthcare system in the U.S. because its inherent financial incentives cause caregivers to focus on increasing the number of billable visits, tests, treatments and procedures instead of providing services that focus on the patient's best interests.

Another drawback of FFS is how it affects healthcare insurance. Premiums for FFS health plans tend to be pricey. Patients might incur high out-of-pocket expenses if they are required to make upfront payments to the healthcare provider.

Fee-for-service vs. value-based care

In the FFS model, the focus is on the quantity of services rendered. In contrast, a VBC system prioritizes service quality over quantity. This means that financial compensation is based on the patient outcomes resulting from the services provided, rather than the number and cost of those services. Also, providers receive a fixed, upfront payment per patient over a certain predefined period.

The VBC system encourages healthcare providers to reduce unnecessary treatments, resulting in lower healthcare expenses for patients. It also gives providers the flexibility to offer preventive care services like immunizations and vaccinations, routine checkups and health screenings. Thus, they can deliver more holistic, patient-centered care, coordinate care delivery with other providers and help patients achieve better health outcomes.

Electronic health records (EHRs) and access to real-time data and insights are making the switch from FFS to VBC possible. The data helps people to choose healthcare services and treatments that statistically work. It also enables providers to predict patient risks and implement tailored interventions to minimize those risks and optimize patient health and safety.

Alternatives to traditional fee-for-service payments

In response to concerns that FFS contributes to over-treatment and ballooning healthcare costs in the U.S., several alternative payment models are under consideration. They include the following:

• Accountable care organizations (ACO), in which groups of healthcare providers agree to share responsibility for coordinating lower-cost, higher-quality care for a group of patients. While ACOs don't entirely move away from the fee-for-service payment model, they usually provide bonuses for keeping healthcare costs down and meeting quality benchmarks.
• Bundled payments, in which an employer negotiates with a provider for a predetermined package of services that will address a particular medical need. Essentially, the fee-for-service becomes a fee for suite-of-services.
• Capitation, in which physicians are paid a flat fee-per-patient over a predefined period. Capitation usually occurs on a monthly or quarterly basis.
• Patient-centered medical home, which focuses on preventive care, patient education and the coordination of bundled services between different healthcare providers.
• Salary, in which payment is not tied to enrollees or the expense of services rendered. Instead, physicians are paid a fixed weekly or monthly fee.

Health plans reimburse providers based on quantity in fee-for-service models, but they prioritize quality in value-based care models. Learn more about the differences between FFS versus VBC.