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What is Fee-for-Service?

Fee-for-service (FFS) is health care’s most traditional payment model where physicians and healthcare providers are paid by government agencies and insurance companies (third-party payers), or individuals, based on the number of services provided, or the number of procedures ordered. Payments are unbundled, so services are billed and paid for separately. In other words, every time a patient has a doctor’s appointment, a surgical consultation, or a hospital stay, providers bill for each visit, test, procedure, and treatment independently. 

The Fee-for-Service Dilemma

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 model, which continues to bear the blame for out-of-control healthcare spending that accounts for 18% of the United States’ 2017 Gross Domestic Product (GDP). The concept of value-based care relies on the implementation of alternative payment models, e.g., Accountable Care Organizations (ACOs) and Patient-Centered Medical Homes (PCMHs), that reimburse health care providers based on cost-efficiency, coordination, value, and quality, rather than simply the number of services provided.

The current design of the American health care system—how it’s structured and financed—dates back more than 100 years (Pearl), and there have been unsuccessful attempts to “overhaul” it in the past. However, these attempts saw public backlash as health insurance plans were experiencing the negative effects of bundled or capitation payment models associated with Health Maintenance Organizations (HMOs) (see the TXCIN article “The HMO Act of 1973: Objectives Finally Met Through ACOs?” for more details regarding the implementation of HMOs into the United States healthcare system). 

Today, America’s healthcare system is experiencing another attempted overhaul. At a recent March 2018 Federation of American Hospital’s policy conference, Health and Human Services Secretary Alex Azar stated that “there is no turning back to an unsustainable system that pays for procedures rather than value. We want to look at bold measures that will fundamentally reorient how Medicare and Medicaid pay for care and create a true competitive playing field where value is rewarded handsomely” (Dickson). More recently, Azar has asserted that "as healthcare has grown more and more complex, the traditional model of paying doctors based on the volume of procedures they perform, as much of [sic] Medicare does, has made less and less sense" (Luthi).

The concept of value-based care relies on the implementation of alternative payment models, e.g., Accountable Care Organizations (ACOs) and Patient-Centered Medical Homes (PCMHs), that reimburse health care providers based on cost-efficiency, coordination, value, and quality, rather than simply the number of services provided.

The U.S. government, specifically the Centers for Medicare and Medicaid Services (CMS), has a determined focus to “repair” the current healthcare payment system, with plans to transition the healthcare industry to a more value-based reimbursement environment. So what exactly is wrong with the fee-for-service model?

The Fee-for-Service Discussion

Pundits for change recognize the fee-for-service payment model as one of the most significant drivers of rising healthcare costs, contributing to wasteful spending, and lacking any incentives to reward cost-efficient, coordinated, quality care. They argue that this “antiquated,” “excessive-cost” payment system negatively impacts the healthcare system by encouraging over-utilization and fragmentation, where physicians and patients are buffered from the financial implications of unnecessary services and visits, and where primary care physicians “isolate” themselves from next step providers who contribute to ongoing patient care and patient outcomes (see the TXCIN article “Fee-for-Service Health Care: Three Phenomenon Affecting Success” for a deeper study).

There are some, however, who argue that the fee-for-service payment model is not the problem; rather, they point to studies that show that the rising cost of American health care is due primarily to rising prices, and that a properly designed and functioning fee-for-service system would create far lower healthcare expenditures and improved quality of care. Specifically, in his article “What is the Perfect Fee-for-Service System?” Matthew Hahn, MD points out that studies show that administrative costs account for approximately thirty percent of U.S. healthcare expenditures, and of that amount, 62% relates to billing and insurance related expenditures. Hahn also points out that a simplified, streamlined, and far less expensive healthcare billing system could save $350 billion dollars, or 15% of U.S. healthcare expenditures. In addition, Hahn addresses the over-utilization argument by referencing a 2017 Journal of the American Medical Association (JAMA) study that shows that “changes in service utilization [from 1996 to 2013] were not associated with a statistically significant change in spending.” 

Along with controlling pricing for prescription medications, medical testing, and hospital stays, Hahn offers the following solutions:

"The first step towards better care in the U.S. is the removal of the excessive administrative burdens created by the U.S. government (E&M payment coding, HIPAA, MACRA, etc.), and insurance companies (prior authorizations, excessive denials). The next step is to develop usable, affordable EMR systems to replace the unworkable systems used by most physicians today. And finally, to develop supportive, data-driven resources to better identify problem areas in U.S. health care delivery, and to pair that information with clear mechanisms to address the deficiencies."

As the healthcare industry slowly changes from fee-for-service to alternative payment models, the shift may not mark the ‘death’ of fee-for-service, but rather just a reduction of its dominance, where it plays a more suitable, diminished role. Many ACOs already accept bundled payments, or capitated payments, and continue to pay physicians on the basis of productivity, or volume, which is the core of the fee-for-service model. However, this “hybrid” payment structure may only be temporary, as the pressure is mounting to transition completely out of the fee-for-service payment model and into the new era 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.


Dickson, Virgil. “Azar tells hospital execs that HHS still backs value-based care.” ModernHealthcare.com. March 5th, 2018. http://www.modernhealthcare.com/article/20180305/NEWS/180309948

Hahn, Matthew. “What is the perfect fee-for-service system?” KevinMD.com. March 29th, 2018. https://www.kevinmd.com/blog/2018/03/perfect-fee-service-system.html

Luthi, Susannah. “Azar promises continued Medicare billing overhaul, regulatory relief.” ModernHealthcare.com. July 26th, 2018. http://www.modernhealthcare.com/article/20180726/NEWS/180729936

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


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