In the United States, there are two healthcare payment systems. Namely, value-based vs. fee-for-service care. Value-based care made up about 60% of healthcare payments in 2021, and fee-for-service care made up about 40% of healthcare payments that same year.
These two systems are polar opposites, with competing goals and motives. Over the last decade, value-based care has become more and more popular as healthcare delivery is restructured in the United States.
All premeds and medical students must be familiar with these terms, as many physicians believe the debate between these two models will determine the future of the American healthcare system.
So, what is value-based care, and how is it used in US healthcare? We’ll also explore the key differences between value-based and fee-for-service care, including costs, popularity, and the long-term impact on both physicians and patients.
What Is Fee-for-Service Care?
Fee-for-service care is the old-school, traditional model of healthcare payments, founded during the American Great Depression. Put simply, fee-for-service care is a practice where payments are made directly based on the amount of service patients receive, regardless of the quality of those services.
The model heavily rewards patient volume as physicians are allowed to bill the patient’s insurance for every single office visit, lab test, or procedure they perform. Fee-for-service care is more common among private practices, although there are some hospitals that still continue to follow this payment model.
This model encourages physicians to see as many patients as they possibly can, as more patients seen means more money generated. Inherently, if physicians are financially motivated to see as many patients as possible, this helps ensure there are shorter wait times. In a country with a growing physician shortage, especially in primary care positions, encouraging physicians to see as many patients as possible is a strategy to ensure the public is healthy.
However, critics of this healthcare model often argue that fee-for-service care unethically incentivizes physicians to focus on quantity over quality. Another common criticism is that fraud is more likely to occur as there is a financial motive to perform as many tests and procedures as possible, even if those tests are medically unnecessary.
Compared to value-based care, fee-for-service care is a remarkably simple model. So, what is value-based care?
What Is Value-Based Care?
Since the 1960s, there has been a movement to focus on the quality of medical care, paving the path for value-based care. Some hospitals adopted this healthcare delivery model to focus on achieving better patient health outcomes without unnecessary costs to either the hospital or the patient.
It works like this: Instead of reimbursing physicians for each individual service they render, value-based care ties reimbursement to the quality and effectiveness of the care provided. It’s important to note that the amount a hospital or physician is reimbursed is based on the number of RVUs their service generates.
How hospitals and Medicaid determine the quality and effectiveness of care provided is where value-based care gets complex. Most often, they use something called “patient quality measures.”
There are countless measures hospitals can use to objectively determine the quality of their care. To give an example centered around chronic kidney disease (CKD), the hospital could assess quality by looking at the number of CKD patients on dialysis, how long CKD patients are on dialysis, the percent of dialysis patients who eventually receive a kidney transplant, how long the patient’s transplant kidney survives, etc.
The possible quality measurements are limitless, and these quality measurements are often combined to assess overall patient outcomes. Because quality measurements are extremely difficult to weigh together and can take years to collect accurately, many hospitals have come up with creative ways to ensure they are paid for their services closer to real time. Two common methods are “capitated reimbursements” and “bundled payments.”
Capitation reimbursements are when patients pay a fixed amount of money in advance every month, regardless of how many services they use. For example, a patient could sign a contract saying they will pay $300 per month for access to the physician, regardless of whether they get $300 worth of care back. Of course, this also means if the patient uses more than $300 worth of services that month, they are not charged for the extra amount. If this sounds like insurance to you, well, that’s because it basically is.
However, bundled payments are more intriguing. Bundled payments are when a patient pays for a large number of visits and services they received in one lump sum. The classic example of this method being implemented is when a person is pregnant.
As you might be aware, pregnant people will have many fetal check up appointments, might need to start taking medications to promote better embryological development, and, of course, deliver the baby after nine long months. After the baby is born, the mother will receive “a lump sum bill” for all of the services they used while they were pregnant.
Because the hospital is able to bundle these many costs together, they sometimes provide discounts to patients, similar to how Costco offers discount pricing on bulked goods. Furthermore, because the hospital is bundling all of the fetus’s prenatal care together, the hospital is inherently motivated to ensure the mother is as healthy as possible to help minimize the chances of complex births. The hospital does this so it can save money while providing the same high-value care.
Value-based care is much more complex than fee-for-service care, but it does have a few strengths that fee-for-service care does not. For instance, value-based care excels at reducing unnecessary services provided, creates physician accountability to ensure patient satisfaction goals are met, and has a great incentive for preventative healthcare.
However, value-based care is difficult to implement because patient outcomes can be tough to measure accurately, and it comes with a more stressful, error-prone billing process. But the biggest criticism of value-based care is that rural and smaller hospital systems will naturally have worse outcomes, as they lack the resources necessary to meet national patient outcome benchmarks. If they can’t meet those standards, they receive less federal funding, making it even more challenging for them to reach patient outcome goals.
If implemented inappropriately, value-based care could lead to a vicious cycle of the top hospital systems receiving the lion’s share of federal funding and smaller programs not receiving the resources they need to offer high-value care.
Value-Based vs. Fee-for-Service Care
Let’s compare the differences between these two payment models side by side.
| Aspect | Fee-for-Service Healthcare | Value-Based Healthcare |
|---|---|---|
| Payment Model | Providers are paid for each service rendered, regardless of outcome or quality. | Providers are reimbursed based on the quality and effectiveness of care provided, with incentives tied to patient outcomes. |
| Physician Behavior | May incentivize unnecessary tests, procedures, or treatments. | Encourages providers to prioritize preventive care, chronic disease management, and patient engagement. |
| Cost Control | Can lead to higher healthcare costs due to overutilization. | Aims to control costs by improving efficiency and focusing on preventive care. |
| Long-Term Impact | May contribute to unsustainable healthcare spending and variable quality of care. | Intended to improve overall population health and reduce healthcare spending in the long-term by emphasizing prevention and value. |
Could the US Transition to a Value-Based Care System?
This is the million dollar question on every physician and hospital administator’s mind. However, the trend is clear.
Value-based care can be equally profitable and is better for patients, but it’s an exceptionally complicated process. Nonetheless, there is a strong national push to reduce healthcare spending by stopping unnecessary tests and procedures from being performed. To achieve this goal, many experts predict the US will slowly transition to a value-based care system in the coming years and decades, leaving the traditional fee-for-service model in the past.
If you would like to know more about how these changes are being implemented, there are dozens of national organizations that focus on creating this change. The best example is Choosing Wisely, an international organization that has helped pass legislation to encourage more and more hospitals to switch to value-based care models.
The Future of US Healthcare
The United States healthcare system is slowly replacing its traditional fee-for-service care model with value-based care. These healthcare payment decisions will greatly impact everyone, regardless if you are the one providing care or receiving it.
And as a future physician, it’s vital you know the differences between these two models, as it will have a massive influence on how you practice medicine!
If you have more questions about how much money doctors make or how to reduce your debt after medical school, check out our other financial articles: Why Are So Many Doctors Broke? Is It Worth the Debt? and How Much Do Doctors Make? (Specialty Breakdown).
