Buzzword of the Week: Fee-for-Service

Realize it or not, we are all familiar with a fee-for-service system.  We walk into the salon, ask for a hair cut, highlights and an eyebrow wax.  The stylist charges us for each item, we hand over our credit card and walk away with a detailed receipt outlining the purchase.  Traditionally, this “fee-for-service” concept has worked similarly in healthcare.  Recently, this system has come under scrutiny so it’s important NPs and PAs understand the fee-for-service concept and where they stand on the issue.

What is Fee-for-Service?

Fee-for-service is a payment model used in healthcare where each item, such as office visits, tests and procedures, are paid for separately. For example, if a patient visits a doctor for a headache and a CT scan and labs are ordered, the patient pays for each item- the physician fee, the CT scan and the cost of labs.

Once medical services are billed for, they are sent to Medicare or the patient’s insurance company depending on how the patient is insured.  Then, the insurer pays all or a percentage of the bill to the doctor.  The amount paid depends on the contract the healthcare provider has with the particular insurance company.  The patient may be responsible for the remainder of the bill not paid by the insurance company depending on the insurance plan.

The Downfall of the Fee-for-Service Model

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While fee-for-service works well at the hair salon, the healthcare system is quite complicated making paying per item and service complicated.  Under a fee-for-service model, people are incentivized to sell more.  For example, when you visit your hair stylist, she might try to sell you a conditioning treatment or add on a few hair products.  When it comes to hair care, you pay for these expenses on your own.  It is clear what your stylist is asking you to pay and you can easily decide if the add-ons are worth the extra expense.  Things are different in healthcare.

Since heath care services are most often paid for by insurance companies, the patient does not feel the pressure of added cost when it comes to having more tests, procedures and office visits.  For example, when you get a cold a doctor’s visit is usually not necessary- it will go away on it’s own.  However, you may choose to go to the doctor anyway for a cortisone injection to relieve your symptoms.  This unnecessary visit will cost over $100 when considering the cost of the office visit and injection but you are responsible only for your $10 copay, the insurance company pays the rest.  While it sounds convenient to get $100 in services while only personally paying $10, this drives up the cost of healthcare for everyone.

Healthcare providers themselves have come under scrutiny with the fee-for-service model.  Like your hairstylist tries to sell you additional services, healthcare providers do the same.  Healthcare providers are either directly or indirectly paid more for the more tests they order and procedures the perform.  Ordering unnecessary MRI’s and CT scans or performing surgeries rather than opting for more conservative treatment pad healthcare provider’s pocketbooks but isn’t always in the best interest of the patient.  This conflict of interest has caused the fee-for-service payment model to fall out of favor.

Finally, fee-for-service has contributed to the fragmentation of our healthcare system.  With this system, healthcare providers are not compensated to collaborate with other physicians or even spend much time with their patients.  Rather, this model encourages providers to see more and more patients in less time.  The more office visits a provider bills, the more money the provider makes.  Results are not measured in the fee-for-service model, the patient is billed the same regardless of outcome leading to a lack of accountability when it comes to quality of care.

Some Say Fee-for-Service Isn’t the Problem

The fee-for-service model works in most every other transaction we make, so some say it should work in healthcare as well.  Proponents of fee-for-service say it incentivizes providers who work hard.  Providers who see more patients earn more under fee-for-service encouraging them to be efficient in their practice.

Others argue that fee-for-service isn’t responsible for the inflation we see in healthcare, the third party payment system is responsible.  Patients rarely pay the entire cost of their bill, the bill is first sent to the insurance company.  Since patients aren’t the ones actually paying for healthcare services, they use the healthcare system more and don’t evaluate their options as thoroughly before undergoing expensive tests and procedures.  Pricing is unclear in healthcare  leaving patients unaware of the actual costs of their care.

What Does the Future Hold?

Medicare and insurance companies are moving away from the fee-for-service model.  Instead, Medicare is implementing things like core measures which reward providers for adhering to quality of care standards and capitation models in which the insurance company pays a flat, monthly rate per patient to the provider.  Capitation encourages healthcare providers to use resources more effectively in turn cutting healthcare costs.

What do you think about the fee-for-service payment model?


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