How Do the 3 Healthcare Payment Models Work?
The healthcare payment models your facility uses on a regular basis have a direct influence on your patients’ experience and the financial health of your organization. Many facilities use a combination of methods, making it difficult to keep track of how payments in healthcare actually work. Furthermore, a national push to improve healthcare and control medical inflation has led to increasing diversity in payment models. While reform programs have paved the way for new healthcare payment methods that incentivize quality, rather than quantity, the new models can also cause confusion for providers.
To help you understand this landscape, we’ll break down the core types of payment models and describe the pros and cons of each one. We’ll also discuss the most common alternative payment models that some organizations are turning to as a means of gaining financial viability and providing a better experience for their patients. It’s important for all members of the healthcare team to learn about payment processing so that they can make informed decisions about care delivery, serve as guides for patients, and contribute to organizational success.
The 3 Core Types of Payment Models in Healthcare
While various federal programs and incentives affect reimbursement rates for providers, there are generally three core healthcare payment models that can be used either alone or in combination. We’ll outline how each of these models work:
- Fee-For-Service (FFS)
- Capitation
- Episode-Based
1. Fee-for-Service (FFS) Model
Fee-for-service is one of the oldest and most traditional payment models in healthcare. Under this model, providers are reimbursed a flat fee for each type of service they provide. This means that patients get billed for every single medical test or procedure they receive when they visit a health facility.
| Providers have more autonomy over which services to provide and bill for.
Patients have more flexibility in the providers they can see and their treatment options. Billing for individual services can lead to higher revenue for facilities. |
Providers are rewarded for service quantity, regardless of the patient’s outcome.
Providers may be incentivized to deliver medically unnecessary services or avoid referrals. Patients under an FFS model can face rapidly increasing medical costs. |
2. Capitation Model
Capitation is one of the alternative payment models in healthcare created to move providers away from traditional fee-for-service. Under this model, a fixed amount of money for each patient is paid to providers in advance, for a set time period (typically, one month).
A certain percentage of these healthcare payments is also withheld until the end of the fiscal year. This amount is paid back to the provider if the health insurer makes enough profit, or withheld to cover deficit costs.
Unlike the FFS model, providers that sign a capitation agreement are required to provide a specific list of services, which is usually decided by the health plan. It’s also common for providers to receive payments to cover the cost of referrals.
| Providers are incentivized to limit unnecessary services, which helps control costs.
The costs for patients, providers, and insurers are more predictable. Capitation simplifies administrative billing, since services aren’t reimbursed individually. |
Patients and providers are more restricted in the services they can receive/provide.
Providers may be incentivized to take on healthier and less time-consuming patients. Providers may try to save on service costs to the point of compromising care. |
3. Episode-Based Model
Under the episode-based healthcare payment model, a bundled fee is provided to facilities up front for an entire episode of care. An episode is more specifically defined as a specific diagnosis and the services needed to treat that diagnosis over a period of time.
For example, if a patient receives cardiac bypass surgery, a health plan wouldn’t pay separate fees to the primary provider, anesthesiologist, and surgeon. They would instead provide a single payment to cover all the estimated costs of treating the patient’s condition. This model, and other healthcare payment solutions like it, represent the larger trend toward value-based care.
| Providers are incentivized to coordinate care delivery with other health professionals.
This fosters more accountability to effectively and efficiently treat an “episode.” Reimbursements are often tied to patient outcomes, which can help improve quality. |
Defining the boundaries of an episode can sometimes be unclear and complicated.
To avoid exceeding payments, providers may choose to only see healthier patients. The predicted costs of care may not be accurate due to unforeseen medical events. |
Other Types of Payment Systems
You may have heard of other healthcare payment systems that aren’t classified as core models. This is because these systems can’t exist alone, and they typically work alongside one of the three primary healthcare payment models discussed above. We’ll provide an overview of these supplementary systems below.
Pay for Performance (P4P)
Pay for performance in healthcare is an incentive-based program used to improve the quality of services provided. Certain health payers, particularly Medicare and Medicaid, apply this by reducing or increasing fee-for-service payments to providers based on a set of quality measures.
Shared Savings
Some health plans implement a shared savings program, which compares annual care costs to a facility’s historical performance. Providers either receive a bonus or pay a penalty at the end of the year, depending on whether they meet cost targets calculated by a health plan. This healthcare payment method offers providers incentive for investing in preventative care and chronic disease management.
Retainer-Based Payment
Retainer practices refer to when providers charge a “membership” type monthly fee to cover a range of services that may not fall under traditional health plans. To collect this fee, the patient is charged directly. This healthcare payment solution, sometimes referred to as concierge care, is typically used by primary care providers seeking to foster long-term relationships with patients. It’s not typically used for acute services such as emergency medicine or surgery.
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