Fee-For-Service (FFS) Payment

Fee-for-service (FFS) payment is the way that professionals in the United States have historically been paid. In the industrial sector, it would be called piecework. The professional develops a fee schedule with a unit price for each service provided and then bills the patient or insurer[Page 210] according to that schedule for each specific service delivered. The provider does not necessarily receive all that is billed, because the insurer may command a percentage discount or substitute a negotiated fee schedule, or the provider may not be able to collect the full amount from the patient. The key attribute of FFS is that the payment to the provider increases whenever more procedures and services are performed and billed.

Alternatives to FFS payment in the United States and elsewhere include capitation and salaried employment by the government or HMOs, as well as mixtures of all three forms. Capitation involves a flat periodic payment for providing coverage whether or not the services are demanded. Government employment provides one's primary compensation in countries with a tax-supported universal health service. In most countries with a government health service, however, physician income lags behind comparable professional incomes and does not support a middle-class standard of living for the doctor's family. Therefore, physicians often have fee-paying private patients on the side in order to maintain a reasonable standard of living, regardless of whether or not such practices are legal.

The advantage of fee-for-service payment is that it provides an incentive to see as many patients as one likes or has available. The downside is that it can encourage overutilization in terms of visits, admissions, and procedures. Because physicians tend to perform mostly reimbursed services, their efforts become focused on acute illness and not on prevention. (Note, however, that that has been a function of what insurers chose to pay for, not necessarily an intrinsic characteristic of fee-for-service delivery.) The downside of capitation or tax-supported salaries is that there is little or no financial incentive for increased productivity. The upside of capitation is that it bypasses all the paperwork and debate over the appropriate payment for each visit or procedure. Because there are variable costs to the provider of giving a service, capitation may motivate underutilization of care. In government-provided health care, the paperwork for each visit is less important, but public-sector accountability requirements usually impose heavy paperwork requirements anyway.

These three methods of payment also vary in terms of who carries the risks. In the FFS system, the insurer is at risk for service costs that exceed expectations. The income of the provider continues to rise as more and more services are delivered. In the capitation system, the provider is at risk for any unexpected costs, and with salaried providers the government or HMO is at risk. What one sees in the United States is a hybrid system that is mostly FFS but has additional features that spread or limit the risk. Both primary insurers and capitation providers (including HMOs) may purchase stop-loss insurance for catastrophic cases. Providers may take on the mixture of FFS and capitation contracts with insurers and health maintenance organizations that represent their relative willingness to accept risk and their negotiating power in the marketplace. Increasingly the risks are shifted to the patients and their families by rising copayments tied to the services provided and by deductibles that make some initial portion of one's annual claims the patient's responsibility. Governments reduce their risks either by budget constraints, paying only so long as the appropriation has not been consumed, or by ratcheting down their substitute fee schedules to match the budgeted amount against the demand for services. Insurers reduce their risks under both FFS and capitation by underwriting decisions that exclude or increase premiums for high-risk patients and by dropping high-cost providers.

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