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Fee-for-Service Health Care: Three Phenomenon Affecting Success

The United States healthcare system is experiencing a major shift in delivery and payment policy to address out-of-control spending and low-quality care. In 2010, the Affordable Care Act (ACA) set in motion a new vision for healthcare delivery and reimbursement—value-based care—aimed at replacing the “broken” traditional fee-for-service (FFS) model. Massive change takes time, yet lawmakers and industry experts are determined to fully replace the fee-for-service model, in part, because many believe that the evolution of medicine has antiquated the model, that third-party payers have encouraged overutilization of the model, and that the model has promoted fragmentation for doctors and patients alike.

Antiquation (Change phenomenon)

Many experts contend that the advances in modern medicine, the complexities of today’s healthcare system, and the healthcare needs of today’s historic, chronically ill patient population have outdated the capacity of the traditional fee-for service (FFS) model. If true, this “phenomenon of change” argument would certainly suggest that a shift to value-based care may be needed. 

Fee-for-service is healthcare’s most traditional payment model where physicians and healthcare providers are reimbursed by government agencies and insurance companies (third-party payers) based on the number of services provided, or the number of procedures ordered. Payments are unbundled, and services are paid for separately, so every time patients have a doctor appointment, a surgical consultation, or a hospital stay, for example, third-party payers are billed for each visit, test, procedure, and treatment provided, even though some would say these may not be needed or supported by evidence-based data. Experts agree that prior to the mid-1960s, the fee-for-service model was sufficient and inflation in health care was trivial; however, significant changes were on the horizon that would challenge the aging fee-for-service model.

Massive change takes time, yet lawmakers and industry experts are determined to fully replace the fee-for-service model, in part, because many believe that the evolution of medicine has compromised the model, that third-party payers have encouraged overutilization of the model, and that the model has promoted fragmentation for doctors and patients alike. 

In 1965, the Medicare and Medicaid Act became one of the most substantial healthcare reform initiatives in U.S. history, and it would have a tremendous effect on the fee-for-service payment model and healthcare in general. President Lyndon B. Johnson signed legislation into law that would establish what we now recognize as the Centers for Medicare and Medicaid Services (CMS). Though Medicare and Medicaid started as basic insurance programs for Americans who did not have health insurance, these programs changed over the years to offer eligibility to a much larger population. Medicare evolved to offer eligibility to the disabled, to people with end-stage renal disease (ESRD) who would require dialysis and/or kidney transplants, and to people 65 or older that selected Medicare coverage. In addition, Medicaid evolved, expanding its eligibility to cover low-income families, pregnant women, people of all ages with disabilities, and people who needed long-term care. In addition to the expansion in eligibility for Medicare and Medicaid, the complexities of medicine changed as well.

As Robert Pearl, MD explains:

The current design of the American healthcare system—how it’s structured and financed—dates back more than 100 years. The model worked well for much of the 20th century because most patient problems were acute in nature. Before the modern era of medicine, doctors could offer their patients little more than straightforward surgeries and a limited supply of relatively inexpensive medications. In that context, the fee-for-service design facilitated easy access to affordable medical care, and rewarded doctors appropriately for taking out an inflamed appendix or prescribing antibiotics for bacterial pneumonia.

In the modern era of medicine, however, new technology, drugs, services and procedures have enabled people to live longer, sometimes requiring multifaceted, long-term care. In 2016, 59 million people were covered under Medicare alone, with benefit payments totaling $675 billion, straining a payment and care delivery system that was designed during a much simpler era with a much lower patient population. Today the fee-for-service model is simply challenged by the sheer number of people that are growing older and sicker, and by the chronically ill who need sustained collaborative care. The patient population numbers, modern medicine, and the complexities of patient conditions and treatments have changed, but the fee-for-service payment model has not.

In 2016, 59 million people were covered under Medicare alone, with benefit payments totaling $675 billion, straining a payment and care delivery system that was designed during a much simpler era with a much lower patient population. 

Overutilization (Third-party payer phenomenon)

In addition to the “change phenomenon” affecting the sustainability of the fee-for-service payment model, some argue that third-party payers in the FFS structure cause overutilization by the physician and the patient, which drives up healthcare costs. The assertion is that doctors and patients are distanced by this “third-party payer phenomenon,” which causes them to ignore cost-efficiency and lose sight of the effect they are having on medical prices. As Richard Amerling, MD explains, “When neither the consumer nor the provider ‘feels’ the cost of the service offered, it promotes overuse of medical services and high levels of spending. Government data show[s] that 48% of health dollars were ‘out of pocket’ in 1960. By 2008, this was down to 12%.” Third-party payers subconsciously release the patient and physician from the financial concern of scheduling too many visits or ordering too many tests or procedures.

Some experts also contend that overutilization is encouraged due to improper price controls, which lower Medicare reimbursements, driving a need for physicians to produce more income by increasing their volume of services. When third-party payers control the price of reimbursements, often lowering them to save themselves money, physicians are forced to increase activity to compensate. This scenario creates a conflict of interest for physicians, perhaps tempting them to order unnecessary tests or procedures.

When third-party payers control the price of reimbursements, often lowering them to save themselves money, physicians are forced to increase activity to compensate. 

Furthermore, it’s been argued that the fee-for-service model encourages overutilization because physicians have been conditioned to believe that doing more for the patient is better, while patients have grown accustomed to recognizing their insurance as prepaid medical care. Also, some recognize that physicians are conditioned to protect themselves from litigation by requesting multiple tests and procedures (some of which may be unnecessary) to prevent misdiagnoses, thereby avoiding any possible legal issues in the future.

The third-party phenomenon creates some problematic scenarios within the fee-for-service model, but ultimately, the model does nothing to incentivize physicians to consider cost-efficiency, nor does it incentivize patients to seek care appropriately. The fee-for-service model simply pays for services rendered, which leaves it vulnerable to misuse and overutilization.

Fragmentation (Isolation phenomenon)

Lastly, experts assert that the fee-for-service model creates a fragmented environment for both the patient and the physician. Regarding patient care, the FFS model encourages physicians to remain “isolated” from next step providers contributing to a patient’s care. Because there are no incentives for physicians to collaborate with others in the patient’s continuum of care, the fee-for-service model encourages isolation, or a lack of integration within the medical system. Rushika Furnandopulle gives insight into this “isolation phenomenon” when considering the primary care scenario:

Primary care fee-for-service only pays a doctor for a certain set of discrete activities—largely confined to doctor sick visits—which are tiered by means of an arcane coding system counting very discrete micro tasks, such as how many organ systems a doctor examines, or what questions a doctor asks a patient about the quality of their symptoms. This encourages…the doctor to do most things instead of others on the team (because that is what is paid for). It leads to reactive care (since thinking of a patient not in front of you isn’t paid for) and leads to framing the job as taking care of one patient at a time, like a never-ending series of widgets on an assembly line.

Unlike the value-based, collaborative care environments that feature Accountable Care Organizations (ACOs) as its success model, the FFS environment does nothing to incentivize physicians to collaborate. It simply encourages physicians to isolate themselves, seeing patients as they come in, and billing the insurance company for services rendered. Because of this, many times patients are left confused and frustrated trying to manage their own care paths, moving from primary care physician, to specialist, and then to surgery center in a way that is mostly complicated and unpredictable. In addition, patients may see multiple doctors, specialists, and surgeons who do not communicate with each other, or who do not have the technology to access the same important, patient data. 

Paul B. Ginsburg, PhD asserts that because medicine has been able to prolong the lives of those with chronic diseases, the simple fee-for-service methodology becomes a drawn-out care experience where “fixes” aren’t easily taken care of but ongoing, requiring involvement from multiple specialists over a long period of time. He argues that because medicine has grown complex and chronic, paying numerous providers to work independently in a fee-for-service environment makes little sense.

As policymakers, experts, and government agencies slowly transition the healthcare industry from fee-for-service to value-based care, they are faced with the possible reality that this transition may not mark the ‘death’ of FFS, but rather just a reduction of its dominance, where it plays a more suitable, diminished role. In fact, many organizations accepting bundled payments, or capitated payments, still pay physicians on the basis of productivity, or volume, which is the core of FFS. So even though the fee-for-service model is vulnerable to antiquation, overutilization, and fragmentation, many believe that it will always have its place in modern healthcare, impacting the implementation of value-based care.


North Texas Clinically Integrated Network, Inc. (dba TXCIN) is a non-profit ACO that began in late 2014. A small group of independent physicians aligned to initiate clinical integration and value-based contracting. Partnering with RevelationMD and its state-of-the art information platform, TXCIN has become one of the largest, independent networks of physicians in North Texas.


Anderson, Bill. “A Brief History of Fee for Service.” YourCareEverywhere.com. August 6, 2015.


CMS (a). https://www.cms.gov/About-CMS/Agency-information/History/. Accessed April 5, 2018.

CMS (b). https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html. Accessed April 8, 2018.

Beck, Melinda. “Fee-for-Service vs. value-based care: 6 points of debate raised by health policy experts.” Becker’s Hospital Review. March 25, 2015.


Fernandopulle, Rushika. “Breaking the Fee-for-Service Addiction: Let’s Move to a Comprehensive Primary Care Payment Model.” Health Affairs. August 17, 2015.


Ginsburg, Paul B. and Richard Amerling. “Should the U.S. Move Away from Fee-for-Service Medicine?” Wall Street Journal. March 22, 2015.


Green, Jan. “Fee for Service is Dead. Long Live Fee for Service?” Managed Care. September 6, 2017. https://www.managedcaremag.com/archives/2017/9/fee-service-dead-long-live-fee-service

KFF. “An Overview of Medicare.” Kaiser Family Foundation. November 22, 2017.


Pearl, MD, Robert. “Healthcare’s Dangerous Fee-for-Service Addiction.” Forbes. September 25, 2017.


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