What Is Fee for Service Healthcare? Plus 2 Ways It Ends Up Hurting Patients

There’s a good chance you’ve heard (or even been part of) a conversation about the best way to deliver and pay for healthcare. You might even describe it as a debate rather than a simple conversation. No matter what you call it, though, it’s nothing new—it’s an issue people have been wrestling with for years.

While there are many different healthcare payment models out there, there are two types that reign supreme in this ongoing debate: fee for service—which has been dominating the U.S. healthcare system for decades—and value based care.

We won’t bury the lead here: At Carrum Health, we stand firmly with the latter—and against fee for service.

Let’s get down to the heart of the matter: Fee-for-service healthcare models ultimately hurt patients. And since the patient is the most important part of this whole equation, that reality shouldn’t sit right with anyone.

In this post, we break down the relevant pain points many patients experience when they receive care in the fee-for-service model and why value based care is a (much) better option.

What is fee for service?

We can’t tell you why the fee-for-service model is so problematic without first explaining what it is. To do that, we’re going to set up a situation you’ve probably experienced firsthand.

Imagine you recently had to go to the hospital. Picture the bill that shows up in your inbox or at your front door. Within the fee-for-service model, that bill is going to look pretty lengthy. Why? Because this model assigns a price to each and every individual procedure or service.

As you know all too well if you’ve undergone testing or treatment for just about any medical situation, those procedures and services can add up quite fast. Surgical supplies, diagnostic tests, IV drugs, medications, a hospital stay, surgeries, and post-surgical care—among other things—are billed and reimbursed as individual items.

To be clear, medical providers deserve to be paid for their time and expertise. But you’re probably starting to see that this system can be quite disadvantageous to patients and payers (like self-insured employers).

Why? Let’s dive in.

Two main ways fee for service hurts patients

1. Patients don’t receive the best care possible

With the fee-for-service model, many patients receive the wrong care or too much care, which can lead to them needing even more care and put unnecessary strain on their bodies (and wallets—but we’ll get to that more below).

• According to a report from Third Way, 34% of knee replacements aren’t actually needed. That means a staggering one in three knee replacement patients are going through a major surgery when they don’t have to. To add insult to injury, knee replacement patients can suffer from infections, blood clots, heart problems, and other health issues. These additional problems require more care…and they also cause more suffering.
• As another example, the medical overuse of opioids—which are included and billed as part of the treatment plan for a variety of injuries and illnesses—led to the deaths of 14,000 people in 2019. The opioid crisis is, of course, a larger epidemic, but the fact that it’s been fueled by doctor-prescribed medications should be a major red flag for anyone concerned about the state of the healthcare industry.

This happens because, in a fee-for-service system, facilities and clinicians are incentivized for each and every pill they prescribe, surgery they perform, and patient appointment (to name a few examples). A physician will receive a higher payout for surgery than they would for referring the patient to physical therapy.

In a system that creates incentives based on volume instead of outcomes, patients are bound to receive substandard care, even from healthcare professionals with the best intentions.

2. Fee for service drives up prices for payers and patients

Based on what you’ve read above, you might already have a pretty good idea of what happens to patients’ and payers’ healthcare costs in a fee-for-service model. To put it simply, they go up.

Four characteristics of the fee-for-service model are responsible for that higher spend.

• A lack of transparency between practitioners and patients about the actual components of any given procedure or diagnosis—not to mention the price tag associated with each.
• The fact that no single practitioner is ultimately held accountable for a patient’s health outcomes or the cost of their care. “It’s like a professional sports team without a coach and general manager,” say Kaitlin Hunter, David Kendall, and Ladan Ahmadi, authors of “The Case Against Fee-for-Service Health Care.” “The clinicians may be the best in the world, but if no one oversees the team, the care is not coordinated and the costs are out of control.”
• The trend toward consolidation in the healthcare industry, which gives hospitals and medical practices the power to charge higher prices for care and services.
• Increasing administrative costs—because someone has to manage all the paperwork (and often disputes) for all those individual line items.

The implications of mounting healthcare costs go deeper than you might think. Finances are a major pressure and concern for many Americans. Too often, individuals have to choose between paying non-negotiable bills—food, rent, gas—and attending to medical issues.

A 2022 KFF Health Care Debt Survey speaks to these realities. Per the results of this survey, 41% of adults reported healthcare debt. Within that group, nearly two-thirds delayed getting necessary medical care, and half did not get a medical test or treatment, even though it was recommended to them by a doctor.

When healthcare costs go up for payers and patients, everyday people find themselves faced with more barriers to the diagnoses and treatments they need. And that’s a huge problem.

And that’s not even touching on the downstream costs that will likely occur when someone doesn’t get the necessary preventive care or help managing chronic conditions.

Value based care: The better alternative

Fee for service is not ideal for patients who want (and deserve) high-quality healthcare that they can also afford. And let’s be honest—what patient doesn’t want that? This model simply doesn’t serve anyone’s best interests.

What model does? Value based care.

Contrary to fee for service, value based care pays providers based on patient health outcomes. Practitioners and hospitals are incentivized to improve patient health and minimize chronic illnesses. This means they can provide more efficient care and stop worrying about how many line items will be included on the relevant bills.

The Council on Health Care Spending and Value reported that all four of the key levers that achieve high-value care—price, volume, mix of services, and growth—are improved by value based payment models.

Everyone’s looking for win-win scenarios. Sadly, these are rare—in life and in major industries like healthcare. Value based care is an exception.

The information contained on this page is for informational purposes only. No material is intended to be a substitute for professional medical advice, diagnosis, or treatment.