Fee for Service: How Long Will It Be Around?

Kenneth J. Terry, MA


October 14, 2011

In This Article

New Payment Models: Do They Help?

The obvious alternative to fee for service is capitation, in which physicians are paid a flat monthly amount to provide some or all care to each patient, whether they seek care or not.

But in the late 1990s, physicians and consumers decisively rejected capitation on the grounds that it motivated doctors to skimp on care and made it difficult for patients to gain access to specialists. Today, capitation survives mainly in California and a few other managed-care hotspots.

The new payment models, like capitation, involve budgeting. But they combine that with quality measures to ensure that doctors aren't cutting corners on care. All of these systems pay doctors fee for service, although those fees and/or bonuses may go up or down with performance. The overall goal is to induce physicians to provide high-quality, cost-efficient care.

Here's a brief summary of these payment models, all of which are either being piloted or will soon be tested by Medicare and/or private health plans.

Bundled Payment

Unlike case rates, which apply only to individual procedures, bundled payments cover care provided across care settings and over specific time periods.

In Medicare's Bundled Payment Initiative, which is already underway, the Centers for Medicare and Medicaid Services (CMS) will bundle payments for a hospitalization, for postdischarge care for 30 days, or for the inpatient stay plus postdischarge care for 30 or 90 days, depending on which option a provider or group of providers chooses.

Physicians who participate in these arrangements will be paid fee for service and will share in the savings if total costs are less than the budget. Their payment will be reduced, however, if costs exceed the budget. Under a fourth option, CMS will prepay the hospital for an episode of hospitalization, and the facility will divide the prepaid amount with physicians and other providers.

Episodic Payment

In addition to bundled payment, other forms of episodic payment are being considered. For example, several large healthcare systems are piloting Prometheus Payment, which rewards physicians for practicing efficiently and avoiding complications.

Physicians are paid fee for service for performing a portion of an evidence-based guideline, and their payments are debited against a care team's budget for an episode of care. (The episodes may be built either around procedures or around chronic disease care for an extended time period.) If the care team avoids complications, the physicians share in the savings from averted emergency department visits and hospitalizations. They can also get bonuses for meeting quality goals.

Accountable Care Organizations

Accountable Care Organizations (ACOs) are groups of doctors and hospitals that agree to coordinate patient care across care settings and to deliver seamless, high-quality care. If they meet certain criteria, ACOs will be eligible to participate in a Medicare shared-savings program, starting in 2012.

CMS offers ACOs 2 options for reimbursement, both contingent on the providers meeting CMS' quality benchmarks: 1) share any savings they produce with Medicare for the first 2 years, and share in both surpluses and losses in the third year, or 2) take upside and downside financial risk for all 3 years. Physicians will be paid fee for service at the current Medicare rates; but, under option 2, their payments will be adjusted downward if the ACO goes over budget.

Global Prepayment

Some health insurers are testing new approaches to "global capitation," in which all care provided to patients -- including professional and hospital services -- is prepaid. For example, Blue Cross Blue Shield of Massachusetts offers an "alternative quality contract" that combines global capitation with quality bonuses.

A dozen large healthcare organizations have accepted this contract so far. The Blues plan pays physicians fee for service, and those payments, along with hospital and other costs, are reconciled against the budget at the end of the year. In groups with salaried physicians, however, the fee-for-service payments are only an accounting device. For example, at Atrius Health, which includes six physician groups in eastern Massachusetts, physicians continue to receive salaries and production bonuses that are not affected by the alternative quality contract budget.


Comments on Medscape are moderated and should be professional in tone and on topic. You must declare any conflicts of interest related to your comments and responses. Please see our Commenting Guide for further information. We reserve the right to remove posts at our sole discretion.
Post as: