Fee-for-Service vs. Value-Based Care: What’s the Difference?

If you occasionally find yourself confused by the different reimbursement models out there, you are far from alone. As a healthcare leader, there’s so much to keep up with, and regulations and technology are constantly changing. Just when you’ve grasped one thing, something else is coming along. 

However, in today’s healthcare landscape, it’s important to know how clinicians and organizations are paid for their services so you can understand how they affect you and the industry at large. Understanding these payment models can affect your nursing facility’s profitability and impact patient health outcomes. 

Therefore, to ensure you’re up to speed, we’ll explore two major reimbursement models: fee-for-service vs. value-based care. 

So, let’s get into it! 

What Is Fee-for-Service? 

Fee-for-service, or FFS for short, is a payment model in which physicians, hospitals, skilled nursing facilities, and other healthcare providers are reimbursed for each service they provide. The general idea behind the fee-for-service model is that physicians should be paid for the exact services they furnish, not a fixed or bundled amount, regardless of the services they provide.

Examples of Fee-for-Service

Let’s take a look at an example of this traditional payment system. Suppose a patient goes to a clinic for a routine check-up. In that case, the facility may charge for the consultation, blood work, urine test, vaccine administration, and any other services completed at the visit. 

Here’s another example: a surgeon charges per procedure, in this case, let’s say an appendectomy, and performs the surgery. In that scenario, the patient or their insurance plan would pay the set amount for the procedure. It’s a fairly straightforward approach, as the cost isn’t based on the outcome of the surgery. Providers are simply reimbursed because the procedure was done. 

A Common Approach Today, but Possibly Not Tomorrow

FFS is one of the most common payment models used in the United States healthcare industry, especially for outpatient visits. Even other countries with different healthcare systems than the US, like Germany and Canada, frequently utilize this payment model. However, as data is captured and healthcare gross domestic product (GDP) costs soar, it’s being reconsidered for other, more cost-controlling payment methods. 

Healthcare leaders are strongly evaluating fee-for-service vs. value-based care to determine the best approach moving forward. While there’s been a shift toward the latter, according to the American Medical Association (AMA), 86.4% of physicians reported that their practice still received a portion of their revenue via the fee-for-service model in 2022.

The Advantages and Disadvantages of Fee-for-Service

The FFS model is still a popular approach, but it also has its drawbacks. Here are some of its advantages and disadvantages.

The Positives 

• Established system: Fee-for-service has existed for a long time, so processes like billing and claims already support it. Introducing new payment models requires significant infrastructure changes, especially for skilled nursing facilities. 
• Reinforces patient choice: This model allows patients to select any provider and treatment they want without worrying about pre-existing agreements between the provider and health plan. In short, patients have more control over their health decisions,  which is believed to create an ethical patient-provider bond. 
• Provider autonomy: The FFS model gives medical professionals more control over how they operate their businesses. They can decide what treatment plans and procedures to offer based on patients’ unique needs. 
• Predictable revenue: Providers are reimbursed for every service or procedure they perform, providing a reliable source of income. Plus, the more services they do, the more they’re paid. 

The Negatives

• Outdated payment model: The future of healthcare is very much focused on patient outcomes and reduced costs. Unfortunately, the way FFS works doesn’t support this. 
• Overabundance of care: Fee-for-service often promotes an overabundance of the more expensive types of care providers perform due to financial gain, even when there’s no need. 
• Poor care coordination: Under FFS, providers are less likely to collaborate with other providers as they’re not incentivized to do so. The lack of communication among providers increases the risk of medical errors, service duplication, and more. 
• Increased U.S. spending: In 2022, healthcare spending accounted for 17.3% of the United States Gross Domestic Product (GDP), which is likely partially due to FFS. 
• Underuse of preventive care: Preventive initiatives aren’t prioritized because providers aren’t incentivized to do so. Although, it’s suggested that a 90% delivery rate of primary preventive services could reduce health expenditures by $53.9 billion. 

What Is Value-Based Care?

The value-based healthcare delivery model is an alternative approach that centers on quality of care rather than volume of care. This method responds to the healthcare industry’s need to address the costs of service in relation to their ability to better a patient’s situation. It has been realized that healthcare shouldn’t take on a quantitative approach but instead a qualitative one. 

With value-based care, healthcare providers and organizations are paid based on the outcomes and quality of services provided. It focuses heavily on preventive care, which might involve suggesting lifestyle changes and working with specialists to better patient outcomes. In turn, this should lead to reduced healthcare costs, as prevention is less expensive than the treatment associated with chronic illness. 

Types of Value-Based Care Models

Currently, there are four types of value-based care payment models:

• Capitation: Introduced in the 1980s, this model reimburses providers a set amount per patient per period of time, regardless of the services provided.  
• Bundles: First tested by the Centers for Medicaid and Medicare Services (CMS) in 2009, this approach pays providers a single payment for all services needed to treat a patient with a particular condition or undergoing a specific service. If providers keep costs under a risk-adjusted target price, they’ll receive a share of savings. Exceeding that price, though, results in penalties.  
• Performance-based: In addition to FFS payments, healthcare organizations can receive financial incentives for meeting quality targets and be penalized for subpar performance.  
• Shared savings and risk-based contracts: With shared savings programs, providers can obtain a portion of the savings if they meet certain cost and quality targets. Otherwise, they are penalized by having to repay the difference. The provider may assume upside and/or downside risks in a risk-based arrangement. 

The Advantages and Disadvantages of Value-Based Care

While there’s a lot of good associated with value-based care, it also comes with some hard-to-ignore concerns. Consider the advantages and disadvantages below.

The Positives 

• Better health outcomes: By taking a proactive approach to care, such as focusing on prevention and comprehensive chronic disease management, patients should experience improved outcomes and satisfaction. 
• Improved care coordination: Providers are incentivized to work together. Collaborative practice between physicians results in decreased error rates, hospitalization costs, and length of stay. 
• Cost-effectiveness: Healthcare costs could be reduced for patients, payers, and providers if patients receive proactive care and decreased unnecessary procedures and tests.  
• Population health: Value-based care incentivizes providers to focus on the entire population’s health, reducing payer costs. 
• Financial rewards: Value-based care programs reward bonuses to practices for continuous, successful improvement. 

The Negatives

• Complex implementation: To collect, analyze, and store data, a robust IT infrastructure and engineering framework are needed. This is required to measure outcomes and deliver care. However, many organizations aren’t prepared to implement this financially or administratively, creating a high barrier to entry. 
• Financial risk: Value-based care is based on performance outcomes, which may vary for organizations and by individual. It’s less predictable than fee-for-service care. 
• Challenges in measuring outcomes: Many metrics in value-based programs are complex and thus require expertise and additional sources.  

The History of Fee-for-Service and Value-Based Care

The Evolution of Fee-for-Service

At its inception, traditional FFS involved the patient paying the provider directly, without the involvement of a health plan. However, when the Great Depression occurred, people no longer had the money to pay for healthcare, which resulted in several hospital closures. 

Blue Cross Blue Shield emerged around the 1930s to help individuals pay for primary care and provide hospitals with a steady income stream. The reimbursement model at the time was called cost plus. 

With this model, physicians were paid based on fees they set themselves, and hospitals were reimbursed a percentage of their actual costs plus a percentage of their working and equity capital. This created a situation where physicians could charge whatever they decided. Much like today, fee-for-service payment rates paid liberally for procedures like surgery and hospitalizations. Hospitals were also encouraged to increase fees so their cost-based income would be higher. 

The Transition to Value-Based Care

The concept of value-based health care came about in 2006. Health economist Uwe Reinhardt referred to it as “a utopian vision” because it’s a method that aligns with the goals of patients, payers, and providers. After realizing that the traditional approach resulted in fragmented and, at times, excessive and unnecessary medical interventions, leaders decided it was time to align competition with patient value. This, in turn, should maximize the cost of every dollar spent on healthcare. 

In 2010, the Affordable Care Act (ACA) was signed into law, which included numerous initiatives promoting value-based care. By 2015, the Medicare Access and CHIP Reauthorization Act (MACRA) created the Quality Payment Program (QPP). QPP incentivizes providers to prioritize value and quality through Alternative Payment Models and the Merit-Based Incentive Payment System. Then, in 2018, CMS launched the Primary Care Initiative, designed to prioritize quality, patient-centered primary care. 

Value-based care is central to the healthcare industry today, and appears poised to be a major factor tomorrow, although fee-for-service is still the most common reimbursement method. 

The Future of Fee-for-Service vs Value-Based Care

As you can see, a lot has changed in the last several years. So what might the future of these healthcare models look like? Will one phase out and the other dominate as technology evolves and regulations change? Right now, it certainly appears so.

Below, we’ll discuss our thoughts so skilled nursing facility leaders have an idea of what to expect. 

Improved Price Transparency

In some industries, pricing is very transparent. However, it’s common for healthcare prices to be distorted, primarily due to health insurance. The American Journal of Medicine explained that with healthcare, “prices are based on anticipated volumes, the insurance mix of patients who obtain the services, and the discount expectations of the patients’ insurers.” Instead of unit costs affecting price, like in other markets, deductibles, differing benefits packages, coinsurance, and more drive market behavior. 

While all of this can get confusing, thankfully, the price transparency landscape is evolving. The federal government is pursuing consumer price transparency, and many private insurers are beginning to develop transparency tools for their members.

As suggested by Forbes, pricing transparency is intended to promote the shift towards value-based care.” The value-based care modality enhances price transparency by focusing on the total cost of care instead of the number of services, as is the case with fee-for-service. Ultimately, this creates more value for the patient. 

Reduced Total Expenditures

Some industries want to expand the market to boost consumer expenditures, but the opposite is true with health services. The healthcare industry intends to constrain the market to reduce total expenditures, which is why we’re trying to tackle the growing GDP on health spending. However, this can’t be done with the current fee-for-service model. 

Value-based care is seen as a ​​way to tackle this issue, with the New England Journal of Medicine claiming it promises to greatly reduce overall healthcare costs. The AMA also reinforces this by stating that the underlying principle of value-based care is to decrease the cost of care for a population of patients while trying to improve outcomes. 

Leveraging Technology to Manage Patient Health 

Scaling value-based care initiatives requires payers and providers to have a solid health information technology system. Therefore, we anticipate seeing an increased adoption of technology, as companies will need it to gather data and assess quality metrics. When used correctly, technology will not only lead to improved patient outcomes but also performance-based bonuses. 

In fiscal year 2026, CMS is expanding its SNF Value-Based Payment Program to evaluate performance on multiple quality measures. As a result, skilled nursing facilities will need to ensure they have the right tools in place to improve care and boost incentives. 

Regarding artificial intelligence (AI), an interview shared by The American Journal of Managed Care mentioned that AI can significantly enhance value-based care. Some examples include: 

• Predictive analytics. AI could analyze extensive amounts of data to predict events like readmissions and disease outbreaks. Right now, AI-powered wound imaging platforms can perform both wound imaging and analysis based on a database of millions of wound images. This is vital, as pressure injuries are prevalent in skilled nursing facilities. 
• Personalized treatment plans. AI could customize treatment plans based on a patient’s data, lifestyle, and more, which may improve patient adherence. 
• Operational efficiency. Research suggests that administrative spending accounts for 15% to 30% of healthcare spending. AI can help streamline tasks like billing and scheduling, resulting in decreased operational costs.

Where we currently stand, it doesn’t appear that the fee-for-service model fully aligns with AI-clinical services. 

Skilled Nursing Facilities and Payment Models

When it comes to fee-for-service vs. value-based care, the future of healthcare involves the latter. Financial incentives can impact clinician decisions, which ultimately affect patient outcomes and safety. With that being the case, why not use a payment model designed to bring order and align with everyone’s goals? 

If you’re a leader at a skilled nursing facility, make sure you stay current on the latest trends and technology so your organization can stay ahead of the competition.