Value-Based Care and Fee-For-Service: What’s the Difference?

July 25, 2023 - In an effort to improve care quality and lower costs, the healthcare industry has been working on shifting from fee-for-service to value-based care delivery. The two models differ in the way providers are reimbursed for the care they provide by rewarding them service-by-service or based on overall quality and patient outcomes.

In the following article, HealthPayerIntelligence breaks down the inner workings and the key differences between the two delivery systems.

Fee-for-service

In a fee-for-service payment model, health plans reimburse providers for each service they provide to patients, regardless of the outcome.

This is the status quo in healthcare coverage. Providers may enjoy more control over their salaries and schedules in fee-for-service models, according to the American Medical Association (AMA). They also might find that the simplicity of fee-for-service reimbursement gives them more flexibility in styles of medical practice and work effort. 

Fee-for-service health plans typically have no provider networks and no referral requirements, but members may face higher costs. Some fee-for-service plans are preferred provider organizations (PPOs). In non-PPO plans, members can receive care by visiting a doctor or hospital of their choice. In PPO plans, out-of-pocket costs may be lower for those who see a listed PPO provider.

Members with fee-for-service plans may be required to provide upfront payments for care and then submit claims for reimbursement.

The payment model is most commonly associated with traditional Medicare. Traditional Medicare, also called Medicare fee-for-service, includes hospital insurance through Medicare Part A and medical insurance through Medicare Part B. Beneficiaries pay a monthly Part B premium and have a 20 percent coinsurance for Part B services after meeting their deductible.

Payment rates for providers who participate in Medicare are determined by prospective payment systems, which establish reimbursement rates based on a fixed amount. Prospective payment systems differ by provider type, with CMS releasing new ones each year.

Although the healthcare industry is used to fee-for-service, the reimbursement model creates barriers to quality care, hinders care coordination, and spurs high healthcare costs. This system may promote overutilization and incentivize providers to deliver excessive treatments, as their payment relies on the quantity of care rather than the quality. 

As a result, health plans and other stakeholders have started shifting to value-based payment models.

Value-based care

Unlike fee-for-service, value-based care models reimburse providers based on the quality of the care they deliver. Value-based care programs aim to hold providers more accountable for patient health outcomes by offering financial incentives. The approach centers around the triple aim of improving population health management, reducing healthcare costs, and improving the healthcare experience.

Health plans operating under value-based care models use quality measures to determine provider reimbursement. Common utilization measures include emergency department use, hospital readmissions, average length of stay, and prescription drug utilization.

Health plans often use the National Committee for Quality Assurance’s (NCQA) Healthcare Effectiveness Data and Information Set (HEDIS) to measure care quality. HEDIS measures shed light on the effectiveness of care, availability of care, and service utilization.

CMS also offers several models that incentivize different quality measures. For example, the Hospital Readmissions Reduction Program (HRRP) uses the excess readmission ratio to assess hospital performance. Hospitals receive financial penalties in the form of payment reductions if their all-cause 30-day readmission rates exceed the average among hospitals with similar patients.

Value-based models can have upside-only risk, meaning providers can benefit financially from meeting or exceeding quality and cost targets. Other models, like HRRP, include downside risk where providers are penalized for not meeting targets. Models with both upside and downside risk, known as two-sided risk, may lead to better outcomes, according to past research.

Medicare Advantage

Whereas traditional Medicare uses a fee-for-service model, Medicare Advantage is built on a value-based system. Medicare Advantage plans are offered by private companies and often include prescription drug coverage and supplemental benefits in addition to covering all traditional Medicare benefits.

Medicare Advantage plans operate under a capitation model in which they receive a set per-member per-month payment for beneficiaries’ care. Under this risk-based contract, plans agree to assume the full risk of providing care for beneficiaries with the payments they receive. This arrangement aims to give the plans flexibility to improve care delivery.

Through the value-based insurance design (VBID) model, CMS tests various Medicare Advantage service delivery and payment approaches to lower costs and improve care quality. Plans participating in the model can use different strategies to target specific beneficiary populations, such as those with chronic conditions or dual-eligible beneficiaries.

In calendar year 2024, plans must participate in the Wellness and Health Care Planning component of the VBID model. Medicare Advantage plans can also test the VBID Flexibilities component, Part C and Part D Rewards and Incentives (RI) Programs, and the Hospice Benefit Component. CMS extended the Medicare Advantage VBID model to run until 2030.

The future of value-based care

CMS aims to have every traditional Medicare beneficiary in a value-based care relationship by 2030.

In 2021, 59.5 percent of healthcare payments were tied to value and quality, while the remaining 40.5 percent were from fee-for-service models, according to data from the Health Care Payment Learning and Action Network (HCP LAN).

Value-based care has attracted the attention of private equity firms. Data from McKinsey & Company found that private capital investments in value-based care companies grew more than four times between 2019 and 2021.

The management consulting company predicted that value-based care growth will continue accelerating across all health plans. By 2027, value-based models will include 5 to 10 million Affordable Care Act plan members, 10 to 15 million Medicare fee-for-service beneficiaries, 20 to 25 million Medicaid beneficiaries, 25 to 30 million Medicare Advantage beneficiaries, and 70 to 80 million commercially insured members.

Present challenges across the healthcare system fuel efforts to realize those projections around value-based care uptake. More accessible and financially rewarding models may encourage participation and benefit vulnerable or rural populations at a time when care disparities and poor patient outcomes are rampant.