#7 Provider Reimbursement: The Two Extremes

Now that we have covered how enrollees pay insurers, let’s take a closer look at how insurers reimburse providers.  The two methods are at opposite ends of the spectrum: fee-for-service (FFS) and capitation.

With fee-for-service, the provider gets paid a fixed, agreed amount for each individual service. In this plan, the insurance company is burdened with all of the financial risk, while the provider has none.  Although the provider cannot change or decide their own fee, they can always increase the volume of services to get paid more.  In this type of payment program, the patient can see any doctor of their choice, with the ability to receive any service as long as the doctor agrees to it.  However, due to both the possibility of making more money by raising the amount of services, and the lack of incentive to control the quality of patient care, the doctor can be tempted to issue unnecessary procedures.  The cost per service for Medicare is currently determined by the Resource Based Relative Value Scale (RBRVS), which takes into consideration the time the service takes, the difficulty and training needed, as well as the geographic location. While private insurers aren’t necessarily required to use this scale, most tend to follow the lead of Medicare.

In the other method, capitation, the insurer pays the provider a fixed amount each month, regardless of how many times they provided a service. This greatly reduces the financial risk for insurers, and increases it for the provider.  However, it also means the provider doesn’t have to be micromanaged by the insurer.  The patient now has the opportunity to receive more integrated care, as it is paid all at once. This could also cause underutilization of services, since the fewer the resources the providers use on care, the more the providers get to keep for themselves.  This means that it is critical to establish the capitation amount precisely: pay too much and the insurer wastes funds, but pay too little and the providers skimp on care.

Although these two models represent two extremes, most modern payment systems have a combination of both fee-for-service and capitation, providing a more balanced plan.