Health Care Financing: Fee-For-Service Payment Model


The fee-for-service payment model is a well-established and recognized way of organizing payments for healthcare services that are still in use today. Despite being a synergy of previously introduced models aimed at simplicity and transparency, it currently favors the number of services over their quality, which is unacceptable in health care. For this reason, value- and outcome-based models have been suggested as alternatives to address the issues associated with the fee-for-service model.

We will write a
custom essay
specifically for you

for only $16.05 $11/page
308 certified writers online
Learn More

Payment Models Leading to Fee-For-Service

The current fee-for-service payment model was influenced by several historical factors and formed as a conjuncture of several payment models. Arguably, it was influenced most prominently by the private insurance and reimbursement models which emerged during the second half of the twentieth century. The first of these was the Blue Cross concept, which offered direct payment for the hospital costs. While the model did not cover patient rationing, it proved to be popular and effective enough to restore the bed occupancy and minimize hospital deficits (McGuire, Newhouse, & Sinaiko, 2011).

Its defining feature was the direct delivery of payment to patients without using third-party payers. In the second half of the century, when the quality and level of medical technology improved exponentially, the commercial insurance was introduced to the field, which prompted the payment model to incorporate the healthcare costs into the employee compensation plans. This change, in turn, has triggered the abandonment of the community rating system and wide adoption of the individualized ratings. Thus, the new model became seemingly cost-effective overall but increased the gap in accessibility for the less financially capable individuals. This eventually led to the reaction in the form of Medicare and Medicaid programs, which altered the payment model by introducing additional compensations for healthcare workers based on customary and reasonable charges and government regulations. While all of the mentioned variations of the payment model were aimed at addressing the existing issues of accessibility and cost, the resulting fee-for-service model was complicated with conflicting incentives from insurers.

Comparison to Other Types of Business Models

Since the goals of the health care industry differ from the majority of businesses, most of the well-established business payment models demonstrate only a limited degree of applicability to the field (Carlson, Lim, & Meier, 2011). For instance, while publicity and promotion are recognized as a necessary component of healthcare, the advertisement model is only applied on a small scale in healthcare. For similar reasons, the Bait and Hook model is entirely unacceptable. While the monopolization associated with it is a potential source of revenue, such an approach is unethical and thus cannot be adopted.

Besides, the adoption of such models necessitates the increase of cost of services, which means that the gap in accessibility will likely be bigger than the current one associated with the fee-for-service model. On the other hand, the tendency to decrease costs by minimizing the profit margin is consistent with some of the payment models used by other businesses. For instance, the low-cost model is similar in that it aims at minimizing the cost of the core services. Another model that is somewhat comparable to the fee-for-service one is known as “pay as you go.” It is founded on a promise of payment for the service based on the fact of consumption. Both models use the simplest metrics which consider the occurrence of using the service and assign payment based on it.

Factors Influencing the Shift toward Outcome and Value-based Models

Despite its approachability and simplicity, the fee-for-service model has been a subject of criticism in recent years. The first factor responsible for this is the focus on quantity rather than quality. Since the patient is paying for each separate procedure, the healthcare organization has no reason to decrease the number of steps the more elements are included in the treatment process, the more profitable the process becomes (and, by extension, the more costly it becomes for the customer) (Kunic & Jackson, 2013). Another factor is the lack of support for preventive care. While it is recognized as a better alternative for patients, it is not profitable for the healthcare provider. The third factor is the lack of quality of care and improved outcomes (Serra, Serneels, & Barr, 2011).

The tools and methods of measuring quality are scarce and do not influence the reimbursement of the provider, which undermines their motivation. Finally, fee-for-service encourages individual specialists to multiply the number of involved parties, which poses a serious challenge for the administrative department (Berwick & Hackbarth, 2012). On the other hand, value- and outcome-based models prioritize the quality of customer care. The services are constantly reviewed and evaluated, and the organizations are rewarded for achieving high standards and penalized for failing to comply. The penalties for recurring hospitalization address the second factor and further improve the focus on a positive outcome. The Accountable Care Organizations (ACOs), proposed as a part of the value-based model, are tasked with gathering information, seeking the optimal treatment plan, and organizing the flow in a way that minimizes expenses since the excess of the bundled payment is used as an incentive (Berwick, 2011). This means that the administrative aspect is streamlined, and the fourth factor is addressed.

Get your
100% original paper
on any topic

done in as little as
3 hours
Learn More


Berwick, D. M. (2011). Launching accountable care organizations—the proposed rule for the Medicare Shared Savings Program. New England Journal of Medicine, 364(16), 32-39.

Berwick, D. M., & Hackbarth, A. D. (2012). Eliminating waste in US health care. JAMA, 307(14), 1513-1516.

Carlson, M. D., Lim, B., & Meier, D. E. (2011). Strategies and innovative models for delivering palliative care in nursing homes. Journal of the American Medical Directors Association, 12(2), 91-98.

Kunic, R. J., & Jackson, D. (2013). Transforming nursing practice: Barriers and solutions. AORN journal, 98(3), 235-248.

McGuire, T. G., Newhouse, J. P., & Sinaiko, A. D. (2011). An economic history of Medicare Part C. Milbank Quarterly, 89(2), 289-332.

Serra, D., Serneels, P., & Barr, A. (2011). Intrinsic motivations and the non-profit health sector: Evidence from Ethiopia. Personality and Individual Differences, 51(3), 309-314.

Print Сite this

Cite this paper

Select style


StudyCorgi. (2020, December 21). Health Care Financing: Fee-For-Service Payment Model. Retrieved from

Work Cited

"Health Care Financing: Fee-For-Service Payment Model." StudyCorgi, 21 Dec. 2020,

1. StudyCorgi. "Health Care Financing: Fee-For-Service Payment Model." December 21, 2020.


StudyCorgi. "Health Care Financing: Fee-For-Service Payment Model." December 21, 2020.


StudyCorgi. 2020. "Health Care Financing: Fee-For-Service Payment Model." December 21, 2020.


StudyCorgi. (2020) 'Health Care Financing: Fee-For-Service Payment Model'. 21 December.

This paper was written and submitted to our database by a student to assist your with your own studies. You are free to use it to write your own assignment, however you must reference it properly.

If you are the original creator of this paper and no longer wish to have it published on StudyCorgi, request the removal.