Fee-for-Service

Traditionally, fee-for-service is a payment structure in which healthcare providers are paid a specified amount for each service they provide, including office visits, diagnostic tests, and medical procedures. Indemnity refers to insured individuals directly paying healthcare providers for a service, submitting bills to their insurance company, and then subsequently being reimbursed or indemnified for incurred costs. While fee-for-service and indemnity have inherently different meanings, the two terms are now often used interchangeably.

Fee-for-service or traditional indemnity health insurance plans typically allow patients the freedom to choose any physician or hospital as well as allow patients to self-refer to specialists. This is unlike most forms of managed care in which patients choose a primary care physician from a panel of doctors their health plan has contracted with to provide services. This physician then manages his or her patient's care by coordinating services and making appropriate specialist referrals. With fee-for-service plans, freedom of choice and flexibility come at a significant price. Insured individuals must pay a monthly fee or premium to their insurance company, an annual deductible, and coinsurance in which, for example, a patient pays 20 percent of his or her healthcare bill and the insurer pays 80 percent. Most fee-for-service plans do, however, have a cap or limit on how much an individual has to pay in out-of-pocket expenses for the year. Once this cap is reached, the insurance company pays for all subsequent costs.

There are undoubtedly advantages as well as disadvantages to the fee-for-service payment structure. Under fee-for-service plans, insured patients are at liberty to choose any physician, specialist, or hospital they wish. In addition, they do not require pre-authorization for services or referrals for specialist care. It has been argued that fee-for-service systems provide superior customer service—patient access to healthcare providers is prompt and direct. In addition, fee-for-service systems preserve physician autonomy. Physicians are left alone to decide what care their patients should receive and what prices should be charged. Despite such advantages, fee-for-service coverage also has apparent disadvantages. The financial burden in fee-for-service systems is high. Patients have higher monthly premiums as well as higher out-of-pocket expenditures. In addition, coverage only pays for reasonable and customary medical expenses. If healthcare providers charge more than the defined average in their area, patients must pay the difference. Fee-for-service systems also carry a significant paperwork burden. Patients or their healthcare providers must file claims for every insurance company reimbursement. Finally, it has been suggested that fee-for-service structures create perverse incentives for physicians. Physicians have a financial incentive to overtreat their patients because they are paid for every service they provide. In addition, physicians profit from sicker patients needing more services and this inherently creates a disincentive for preventive care and health promotion.

Advocates for fee-for-service and managed care systems are currently divided. However, both sides would undoubtedly agree that, as American Medical Association economist Carol Kane notes, “hopefully, as markets evolve and as we continue to learn about payment mechanisms, we will tend toward those arrangements where physicians are fairly and appropriately compensated for focusing on patient needs.”

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