Fee-For-Service (FFS) vs Value-Based Healthcare (VBC)​

Fee-For-Service (FFS) vs Value-Based Healthcare (VBC).

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Written by Dan Hardle
ABM President & CEO, Principal Broker
Nov. 1, 2022 5 min. read

Fee-for-service healthcare.

Fee-for-service healthcare is the traditional model that has been used since the current approach to healthcare administration was developed. It’s a straightforward method of tracking, quantifying, and paying for care provided to insured patients. Services have specific costs associated with them. After a provider renders a service, the insurer ultimately pays the provider based on previously agreed-upon rules.

This approach has some significant advantages, including the ease with which services can be billed and reimbursed. Although healthcare billing is often a complex affair, this approach makes payment for basic services, at least, relatively simple. The established nature of fee-for-service healthcare is also a positive. The system is familiar to everyone with experience in the healthcare world, which means there’s a widespread level of comfort that can make navigating the process easier.


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However, there are also some notable drawbacks to the fee-for-service model. One of the most notable is the lack of differentiation in terms of healthcare and patient outcomes. Providers are reimbursed only based on the provision of service, which removes the quality of the care rendered from the equation. It also doesn’t consider the cost efficiencies provided by a higher standard of care. A patient who makes repeated visits tied to an easily diagnosed, addressed, and managed medical issue incurs a much more significant cost than a patient who has the same issue addressed during a small number of visits. When the only condition for payment is the provision or absence of providing care, there’s no way to incentivize providers to make operational improvements or offer higher-quality care.

Value-based healthcare.

Value-based healthcare takes a qualitative approach to the care providers render to patients. In a value-based healthcare program, providers are paid based on outcomes. It incentivizes healthcare providers to create care situations where there are few or no complications. It also supports positive results for patients, such as a higher emphasis on education of at-risk populations and provision of preventative care. One of the major goals of value-based healthcare is to reduce the incidence and worsening of chronic medical conditions, which creates major benefits for payers, providers, and patients alike.

This approach to healthcare helps address some of the more significant drawbacks seen in the fee-for-service model. The model is structured to reduce costs for everyone involved, anticipating and incentivizing preventative efforts in a way that the fee-for-service model can’t easily accomplish. It also encourages information sharing between different facilities and providers when appropriate, creating stronger and more connected support networks for patients.

Value-based healthcare is most strongly associated with Medicaid and Medicare, but a more general shift toward this model throughout the industry is a growing possibility. Although 100-percent, universal application of value-based care is by no means imminent, it’s primed to become more common in the near future.

Risk Adjustment Factors (RAF), Medicare SGR, & Alternative Payment Models (APM). What do they all mean?

Back in 2014, Congress reached agreement in principle on legislation that would move Medicare’s payment of physicians and other clinicians away from fee-for-service (FFS), which pays based on the volume and intensity of services they provide. Instead, Medicare would begin paying clinicians for providing better care, keeping patients healthy, and lowering overall costs – a “pay for value” approach. The bill also would end the sustainable growth rate (SGR) formula that has been ineffective in limiting physician spending growth or supporting better care.  Because the SGR is merely a system of budget controls, it does nothing to give individuals or physician groups any incentives for performing more efficiently. Regardless of how poorly or how well physicians may do on quality or efficiency of care, they are nonetheless subject to the aggregate cut.This legislation represents a once-in-a-generation opportunity for Medicare to move away from volume-based payment to value-based payment and better support clinician-led efforts to improve care.

The best way to understand the differences between these two forms of planning, providing, and paying for care is to look at their similarities. Fee-for-service and value-based healthcare are both currently in use in the healthcare industry. These two models are recognized by providers, individual physicians, nurses, support staff and administrators, private insurance companies, and federal programs such as Medicare and Medicaid.

What is Risk Adjustment Factor (RAF)?

CMS requires health plans to report ICD-10 diagnosis codes related to each MA member. Certain chronic medical conditions, like heart disease or diabetes, are grouped into Hierarchical Condition Category (HCCs) codes. These HCCs are added, along with the fixed factors, by CMS to create a RAF score for each member. 

RAF is the CMS payment methodology that allows for:

  • Fair and accurate payments to MA health plans
  • Payments made based on a member’s health status, which results in a higher payment for members who are sicker and require more complex care

APM / SGR overview.

An Alternative Payment Model (APM) is a new payment approach to paying for medical care that holds providers accountable for achieving specific quality performance goals in an efficient manner. In turn, group practices participating in an APM receive added incentive payments to achieve those goals. 

APMs can apply to a specific clinical condition, a care episode, or a patient population. APMs utilize reimbursement methods that are different from traditional fee-for-service payments, but an APM may also retain elements of fee-for-service payments as part of its reimbursement structure. 

In general, the aim of an APM is to achieve better quality care or patient outcomes without increasing spending. Thus, model design, implementation, and success all center around improving patient outcomes while paying adequately for necessary services. There is no single approach to APMs that will work for all practices or specialties. Different specialties are responsible for different types of care and thus there is no one-size-fits all approach to APM design.

How are STAR ratings determined?

CMS uses many tools to determine a health plans STAR rating: 

  • The Healthcare Effectiveness Data and Information Set (HEDIS) – a set of clinical performance measures
  • The Consumer Assessment of Healthcare Providers and Systems (CAHPS) – a survey sent out by CMS to randomly selected MA members
  • The Health Outcomes Survey (HOS) – a survey sent to randomly selected MA members that assesses the health status of members 
  • Pharmacy Quality Alliance (PQA) – produces a set of pharmacy related clinical performance measures often based on a prescription drug events (PDE)
  • CMS administrative data  (Admin)– data related to member satisfaction and disenrollment, plans’ appeals processes and audit results, and customer service scores

How does Medicare Advantage fit in?

Medicare Advantage (MA) plans are value-based. The government gives MA carriers a fixed amount of money per person they insure. This is called a capitation fee, after the word “capita”, referring to “per head”. The plans can spend this money however they want as long as their members have quality health outcomes. One way MA plans do this is by taking more control of what services you can use and when. For example, unlike Medigap plans or Original Medicare, MA plans require you to see in-network doctors rather than any doctor you like. Many also require your primary physician to refer you to a specialist. You can’t go straight to one.

The value based nature of Medicare Advantage plans allows some of them to be zero premium. Some of them even pay part of your Part B premium. This can be appealing to folks looking to save money today, but remember that insurance is all about paying less today to decrease the chances of paying a lot more tomorrow.

As a Health Insurance Broker representing Medicare Advantage Carriers, you have a unique opportunity to work alongside provider groups who have already and those who have yet to buy into the value based care model. 

Stay tuned for next week’s BLOG post on how to work and engage with provider groups in a grassroots marketing environment.

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