Fee for service is the traditional payment model for healthcare services in the United States. This structure allows for providers and physicians to receive payment from insurance companies, government agencies, other third-party providers, and individuals based on what services they offer to a patient seeking care. It also applies to the number of procedures that a patient might order.
Payments are unbundled in the fee for service process, which means each item is billed and paid separately. That means every time a patient comes in for a doctor’s appointment, a consultation, or a hospital admission, the provider will bill for every item independently. It was the primary system of compensation for more than a century in the United States whenever someone required care because of illness or injury.
The Affordable Care Act in 2010 worked to change this structure to value-based care since the fee for service process continues to bear most of the blame for healthcare costs that continue to spiral upward. Healthcare spending is responsible for 18% of the U.S. GDP, which is significantly higher than any other nation. It is often viewed as an antiquated system, but there are some specific pros and cons to consider when looking at this compensation structure.
List of the Pros of Fee for Service
1. Patients always receive access to the care that they require.
When you are seeking medical treatment in the fee for service structures of healthcare, then you can receive full access to whatever care options you require if you can pay for the services. You don’t need to worry about fighting for a referral to see an in-network specialists if your provider or insurance disagree with that sentiment. There is no waiting around to make the appointment either. You don’t even need to wait for approval to receive treatment if you are paying for the services out of your own pocket.
2. You get to decide what kind of treatment you want.
The fee for service structure allows patients to decide where they want to receive care because there are no stipulations in place. If you don’t like your doctor, then you can find a new one. You can decide what kind of treatment you want and who provides it. There are also choices as to when you receive healthcare services and where you wish to have them given.
Healthcare insurance providers, Medicare, and Medicaid can sometimes dictate who you get to see, which offices are available, or what care opportunities are available based on your coverage. Because of the structure of fee for service, you can still opt to go outside of your network to pay for whatever services you feel are necessary to take care of your health.
3. There is an unlimited choice of non-experimental treatments with fee for service.
Some healthcare insurance providers offer a fee for service plan that will give you unlimited choice of your doctors, providers, and hospitals when you need to receive care. This indemnity policy will also give you the option to use all non-experimental treatments that are possible for your illness or injury. The only provision that is in a policy like this is the limit that is on how much the insurer will pay with each service. That means you can have the freedom to visit the most expensive doctor in your community, but then you will be asked to pay the difference between the cost of the service and what your insurance covers.
This stipulation in an indemnity policy is referred to as the Usual Customary and Reasonable (UCR) clause. If you don’t carry health insurance, then you don’t need to worry about it.
4. Fee for service is not responsible for every healthcare cost problem people face.
When you look at the sources of excessive spending in the healthcare system of the United States, it is the administrative costs which have the most significant impact on rates that seem to be spiraling out of control. Up to 25% of the costs that patients face in this system are due to unnecessary or exorbitant administrative costs. The next source of healthcare waste comes from unnecessary care due to over-treatment, which is about 10% of the cost problem. Complications from under-treatment carry a similar burden.
Dr. Stephen Kemble notes for OpEdNews that over-treatment issues are not always the fault of the doctor either. “About 50% of over-treatment is due to unreasonable demands for care by patients, most of which is actually driven by providers. Malpractice costs and defensive medicine are only a few percent at most.” Kemble notes that direct-to-consumer advertising for drugs, hospitals and pharmaceutical bonuses all play a role in the decision to offer services that may not be necessary.
5. Two separate policies can be part of the indemnity coverage package.
When there is a fee for service plan available to individuals or employees, then the participants who select that coverage can choose a service provider or doctor without dealing with a specific network. That means there are fewer issues with limited access while you receive the option to select from two different policies. Basic coverage is the most common option, which helps to pay for normal daily health care. Hospitalization and surgery are sometimes covered under that plan too.
The second policy choice for participants is called Major Medical. It will help to pay for patient costs that occur because of a chronic illness or serious injury.
6. Fee for service can encourage the maximum number of patient visits.
When there are fewer barriers in place for patients to visit with their doctor, then the quality of care they receive in return improves. Patients typically talk with care providers more often when they have the opportunity to choose who provides care for their family. Because there is ownership in this selection, it can maximize the number of visits that families make with their doctor because it promotes their overall care. Whenever you can be proactive instead of reactive to your healthcare costs, it will typically lower the amount you spend on health and wellness needs throughout the year.
7. It is a flexible care structure that offers fewer limitations.
One of the most significant advantages of the fee for service design is that it offers patients a lot of flexibility when they need care. If their doctor is unable to see them for any reason, then they can schedule an appointment with someone else. This flexibility is employed regardless of the organizational structure, the cost of the indemnity policy, or even the size of the institutions involved in providing services.
Although there can be medical providers who offer a questionable level of care, the fee for service model encourages the best possible care to patients because you can pick and choose providers at leisure.
List of the Cons of Fee for Service
1. Fee for service can result in the denial of care for some people.
If you do not carry a healthcare insurance, are unable to qualify for Medicaid or Medicare, and do not have the funds to pay for the services that a provider offers, then this structure can sometimes permit the refusal of medical services. That is why you will see people going to hospital emergency rooms with simple problems. Care cannot be denied if you visit an ER complaining of a problem, even if that means the hospital provides services for free.
Private providers who treat a specific disease are typically the only ones who deny services outright without a significant financial deposit or evidence of financial health. Hospitals, clinics, and everyday providers will usually operate on a sliding scale cost schedule so that patients can pay an amount they can afford.
2. Indemnity insurance is more expensive than any other coverage plan.
If you have healthcare insurance that covers the fee for service process, then you are paying for one of the most expensive plans that is available right now in the United States. Your budget gets hit in two ways with this type of coverage: you pay more in terms of premium cost and in what you must pay for your out-of-pocket expenses. Not only is there a deductible to consider with this insurance option, there is also co-insurance of up to 30%, and the you might need to pay for what your doctor bills that goes beyond what is considered a UCR charge.
3. There is a lot more paperwork to manage with fee for service.
When you receive healthcare services as a patient at a qualified provider, then you are agreeing to be the party responsible for the payment to the facility, physician, laboratory, and any other caregiver who has billable services. The most frustrating part about this process from an individual perspective is that the care provider will bill your insurance company and you for the full cost of services at the same time. That means it is up to you to determine what portion of the bill that you owe. Failing to make the payment can result in a delinquency that sends the amount over to collections, even if it is the insurance company’s full responsibility to cover the bill.
4. You can sometimes be required to pay for the costs up front.
When you have a fee for service plan or visit a provider who operates on this principle, then you might be asked to pay for all of the services you receive on the day of your visit. Should this disadvantage occur, then it is up to you to file a claim with the insurance provider to receive their portion of the cost back as a check. It may take 30-60 days for a claim to go through the channels, and that assumes you have filled out the paperwork correctly to receive a check in the mail. It is not unusual for claims to stretch out 6-12 months for complex services in this situation because you are responsible for verifying each service billed during your visit.
5. Fee for service options do not usually cover preventative benefits.
When you work with other healthcare insurance plans, then many of the preventative services that you need each year are automatically covered. That means your children can receive an annual physical or well-child appointment, eye exams may be covered, and some policies will even give you two dental visits for teeth cleaning. Vaccinations are also typically covered, as may some generic drugs.
Fee for service does not provide any of these benefits under most circumstances. Even general preventative measures, such as an educational program or an annual physical, are not usually covered with this option. In the times that they are, an extensive copay may be necessary to ensure that you receive the services you need.
6. You may not know what the actual UCR amount will be on any given billing.
When you carry indemnity coverage to handle the fee for service structure of your healthcare needs, then the amount that the provider determines to be UCR may be unpredictable. That means there is uncertainty in how much you will owe with every doctor visit. Some treatments may be deemed as necessary by the medical provider, but then the insurance company has the right to disagree. Under that set of circumstances, you would become responsible for the remaining amount that is due as the billing resolves.
Most insurance companies do not offer advice on what qualifies as UCR under any given circumstances. You will only see what becomes available to you under general guidelines at best until you have services rendered. Then the final bill will carry what, if anything, that you will receive in coverage.
7. The out-of-pocket costs are significant in fee for service structures.
Since the passing of the Affordable Care Act in 2010, up to 95% of healthcare providers in the United States are still using fee for service structures to bill for what they provide. Each treatment, procedure, and individual test continues to drive up healthcare costs with little to show for results. Despite Americans spending more on healthcare than any other industrialized country, the U.S. ranks at or near the bottom in almost every measure of comparative quality.
The costs are running out of control for many households because of this structure. For a family of four, the estimated cost of care with insurance will reach almost $27,000 per year. This cost comes from a combination of employer health insurance (which covers about 50%), payroll deductions, and point-of-care expenses that come out of pocket. Healthcare costs rose 4.3% in 2017, even though there was only a 1.9% rise in GDP.
8. Fee for service can reduce the number of face-to-face visits that occur.
Although this healthcare option tries to encourage patients to visit with their doctors more frequently, the cost of doing so becomes problematic for many households. Because individual services are billed immediately, it is not unusual for patients to opt out of a visit to their medical provider because they are unsure if they can afford the cost of care. When this disadvantage occurs, then it can start limiting face-to-face visits because patients decide to coordinate their own care through online research and other methods instead.
This problem can extend to the types of medication that are necessary to treat a condition as well. With prescription drug costs rising exponentially, the added pressure on the budget can cause families to seek out natural alternatives which may not be as effective.
9. There is no accountability to the medical provider.
Although the fee for service system is designed to hold doctors and care professionals accountable for what they provide, the opposite actually occurs. Patients have few ways to dispute the charges on their bill, even if they disagree with the itemized bills they receive. Written complaints over specific line items does not always prevent a bill from being sent to a collection agency. Even if you win the dispute and the item charge is taken away, the impact in your credit of a collection item can increase the costs of other everyday things in life.
Because this disadvantage is so problematic, some people who receive exorbitant bills are turning to social media to shame providers with their expense lines. Reader’s Digest put together a list of 10 wildly overinflated hospital costs that you may not know, and here are a few of their examples.
- $15 for every individual Tylenol that you take, resulting in an average cost of $345 per patient stay.
- $8 for a patient belonging bag so that you can store your personal items in your hospital room.
- $53 for every pair of non-sterile gloves that are used in your treatment – and if you want sterile ones that cost is even higher.
- $10 for the actual plastic cup that is used to distribute your medication.
10. Fee for service does not incentivize providers to pay attention to costly patients.
Because medical providers receive money because they provide individual services to patients, there is no incentive to provide preventative care options. They are encouraged to bring individuals to a care facility for evaluation, even if such a need is unnecessary for the patient’s condition. Interventions such as a phone call that could make a hospital stay (or even a 911 call in the United States) unnecessary don’t receive the same levels of compensation because there isn’t billable productivity involved in that process.
One Final Thought on the Fee for Service Pros and Cons
Alex Azar, who serves as the Secretary of Health and Human Services in the Trump Administration, told the Federation of American Hospitals in 2018 that fee for service was going away for good. “There is no turning back to an unsustainable system that pays for procedures rather than value,” he said. “We want to look at bold measures that will fundamentally reorient how Medicaid and Medicare pay for services, and then create a true competitive playing field where value is rewarded handsomely.
There is no denying the fact that the provision of healthcare services and become a complex issue as the traditional models of compensation do not work with the volume of procedures that are necessary for some patients. That is why a structure which provides reimbursement based on coordination, quality, value, and cost-efficiency looks to be the future of the U.S. healthcare system.
The pros and cons of fee for service are essential to consider so that we do not forget what happened in the past. Charging individual fees can lead to a lot of waste, unnecessary services, and even the potential for an inaccurate diagnosis. Even with the reforms that have taken place, it is important to review every bill from a medical provider line-by-line to ensure the final bill you receive is accurate.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.