What is Fee for Service?

Posted by: Alok Prasad

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Fee for Service (FFS) - Definition & Meaning

Fee for service (also known as 'FFS') is a payment method wherein physicians and other healthcare providers are paid separately for each unbundled service. In health care, it introduces an inherent incentive for providers to lay emphasis on the quantity of care (office visits, procedures, tests, treatments, etc.) rather than quality of care.

Value and healthcare have always had a love-hate affair with each other. The formula for hitting that sweet spot between health care costs and quality of care (i.e., health care expenditures vs value-based care) isn’t a simple function or just an equation, that is, “do this and you get that.”

What has added complexity to the otherwise simple arithmetic are the realities of bottom-line profitability, accountable care, government oversight, third-party payment models, and even a lifestyle payback physicians expect for their investment of time and tuition costs. Providing health care in a capitalistic model, to say the least, has become very murky, with many small considerations accruing to produce big changes, creating fires that those who write the checks have to put out.

Where There’s Friction, There’s Smoke (Putting Out the Fires in Health Care)

Beginning of FFS Model

FFS model, the most traditional payment model in health care, began with a simple bartering scheme. Doctors would visit patients at home and the proverbial “little black bag” constituted what would become today’s modern hospital. Whether it was money or a chicken that traded hands for a doctor’s services was irrelevant—each got what he or she needed: the patient treatment—such as it was—and the doctor, what was needed for day-to-day living needs.

Fee-for-Service Advantages and Disadvantages

The ethic for paying the doctor was simply, “Pay the doctor first.” For the patient, such was the value of the care received and taking precautions for the uncertainty of when it might be needed next. Thus, FFS consisted of a simple arrangement of an unbundled physician reimbursement based on the number of services provided. It was simple and straightforward. Then, medicine changed.

Last century, doctors charged what they felt their services were worth to them and patients paid them. The costs were part of a simple bartering formula until medical science improved health care quality. Before 1950, total human knowledge was doubling every 100 years; after 1950, that doubling time was reduced to 50 years. Today it is every few months, so the little black bag no longer sufficed. True health care—true health care quality—could no longer fit into that bag but required an entity that reflected the total medical knowledge: hospitals with sophisticated equipment. Similarly, a simple fee or chicken would no longer suffice for the health care quality delivered.

Health care costs rose, proportionate with the knowledge base involved. Surgery was no longer your grandfather’s surgery and doctors could no longer know everything: generalists bred specialists and specialists bred subspecialists; lab tests went beyond the microscope slide into the realm of electrons, molecular receptors, and unique antigen-antibody manipulation; and genetics impacted all of these. FFS made itself unaffordable since it was based on volume of service and that volume, consistent with the knowledge-doubling curve, accrued to the point of making unbundled reimbursements either unaffordable or unfeasible. The disadvantage of FFS was that it was too simple for the complicated health care that had out-matured it, and this fueled a fire of rising costs that needed tending.

The Advancement of Modern Health Care Always Comes With Rising Health Care Costs

Each innovation brings added cost for any care model, health plan, or health insurance care model. New technology makes being state-of-the-art expensive; healthcare expenditures rise due to the complexity of that technology and the R&D costs of bringing it to patient.

As health care improves, the demographic of those who benefit the most becomes larger:

  • The elderly
  • Patients with previously fatal diseases now living with them as chronic conditions (diabetes, HIV infection, hypertension, cardiac disease, pulmonary disease, etc.)
  • Women (better pregnancy outcomes, viability of lower premature gestational ages)
  • Those saved from the mortality and morbidity statistics by preventative screening, improved diagnostics, and medical prophylaxis)

These are patients with problems, and they remain in the cost formulas longer than they did a generation ago.

FFS Model (Fee-for-Service Model) Gives Way to the Value-based Plans

Trading the black bag for a hospital escorted traditional health care providers into corporate medicine. As the value (and complexity) of care increased, so did a call for revising payment models, medical billing, and reimbursement. This was inevitable when budgets were forced to cover what house call patients could no longer afford. For those who could utilize pooled risks (insurance companies) and for the those who could not (buoyed by the protection of Medicare and Medicaid), another level of prudent oversight emerged—government. There was no shortage of thinktanks to solve the challenge of making quality care affordable for those who pay for it.

Value-based Health Care: the Rise of Integrated Care and Other Care Models

Doing things more cheaply (and better) has ushered in new concepts for trial-and-error that have come out of the fiscal need to keep delivering quality care quality while keeping care costs down. This is a continuing uphill battle because of the doubling of knowledge problem (which is actually a good problem). Added to this algorithm is the academic mandate for health care whose efficacy is based on evidence-based medicine. Thus, not only were payment models required to be financially realistic, they also had to give “good medicine” their blessing. This meant value, and from this philosophy came several species of care that are reimbursed for the quality and value they deliver, not volume. Legislatively, laws according to the HMO Act of 1973 and most recently, the Affordable Care Act, have made impacts on the catching-of-one’s-own-tail scenario that the “Affordable” and the “Care” concepts have jammed together:

Accountable Care Organization (ACO)

This is the team approach, with coordination care to reduce redundancy and waste while improving recovery time and the completeness of that recovery. In a way, the patient’s care came under the surveillance of an air traffic control tower.


This is another flavor of the ACO, coordination of care by a primary care physician leading and coordinating care such care.

Pay-for-Performance model

This model introduces benchmark measures that meet certain quality and performance goals which become the basis for incentive payments. Such benchmarks include completeness of wellness and treatment protocols, lower hospital readmission rate, and utilization review that rewards home health, skilled nursing facilities, and other cost-saving physician extenders.

Bundled Payment model

This is the child of the older “diagnostic related group” (DRG), which bundles all costs for reimbursement based on a single consideration (usually the diagnosis or the therapy for same).

Shared Risk Programs

Physicians in these programs form groups to manage the health of a population, with savings shared by the providers.

The Push-back From Health Care Providers: the Health Care Provider Uprising

Best Practices

Although benchmark requirements, state-of-the-art equipment, and evidence-based medicine has improved medical care, the trial-and-error continues in the marketplace. Unfortunately, insurance pre-certifications and prior authorizations that encompass “best practices” add additional employees to implement them and follow-up on any gaps. Increasing the level of a standard of care also makes a practitioner more vulnerable to legal action (i.e., malpractice lawsuits) for breaches in the current standards. Worse, compliance depends on clerical procedures, often under the auspices of minimum wage employees with limited education compared to the actual practitioners. The bottom line for all health care providers, whether in a fee-for-service model or one of the current models that has arisen, is that overhead keeps rising but reimbursements keep falling. The arithmetic portends poorly for a provider’s successful business.

Health Care Providers Contribute to the Health Care Quality and Costs

Just as the necessity of cost containment in an ever-improving science (modern medicine) became an imperative, leading to the demise of the fee-for-service model, the necessity of remaining viable in the market place has been the mother of invention for individual practitioners. Using the failing business model cited last paragraph, he or she either had to lower overhead, increase reimbursements, or both:

Use of Physician-Extenders

As medical boards relaxed criteria for who could do what, this has allowed physicians to take advantage of less expensive providers to increase volume with less overhead.

Cash-only practices

These physicians or physician groups decline to accept any third-party payer, e.g., private insurance, group employee plans, VA, Medicare, or Medicaid. Downside: only the most elite specialists in a unique niche sub-specialty can afford this type of practice, impervious to market forces.

Large groups

Physicians share common expenses to bring down overhead. However, this is the only advantage, since reimbursements remain at the mercy of market forces (competitive insurance companies—competitive in their premiums, reducing their own income, those losses passed on to the physicians, hospitals, and other providers).  Downside: the provider is no longer autonomous.

Concierge practices

Concierge Practices are subscription-based practices in which the provider(s) limit(s) the number of lives in his/her/their patient base and provide care which is inclusive with the monthly or yearly subscription. This is a variation of the cash-only model. Downside: it may be difficult to initiate, as patients traditionally resent paying extra for those things for which they’re already paying.

Hospitalist practice

The hospitalist provider is an employee of a hospital, doing shift work, which also improves quality of life outside of work, eliminates overhead and all clerical annoyances, makes a good income, and includes benefits (retirement, insurance, etc.). Downside: the provider must adhere to the company’s rigid time off and vacation allowances, be compliant with scheduling, submit to the hierarchy of authority (often non-medical persons), and take no part in budgetary decisions (new equipment, etc.).

Conclusion: There Will Be No “Final” Model Coming

Medical care has come a long way since house calls with a black bag. Modern medical innovation and evidence-based medicine have seen large institutions arise, along with the fiscal responsibilities that came with them. The final model is a myth, for there is no final model. The fee-for-service model has been squeezed out by other models, but the medical arena is a living, breathing—even evolving—enterprise as vibrant as the marketplace forces it to be.


Topics: Medical Billing, Fee For Service, Provider/Physician

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