Fee-for-service vs. value-based care, explained (2024)

Paying providers for their services may seem simple on the surface, but it’s actually extremely complex. Enter two of the most commonly heard phrases in healthcare: “fee-for-service” and “value-based care,” two models insurers use to decide how much to pay providers.

Under a fee-for-service model, providers are paid for each individual service they perform, like a blood test or an X-ray, according to Jennifer Clawson, partner and director of value-based health systems at Boston Consulting Group. A service is provided, and the doctor gets a fixed fee for providing it. Simple enough.

The value-based care model is a bit more complicated, as there are many types of value-based payments. What makes them “value-based” is that payers take patient outcomes into consideration, aka they consider the relative value.

“The core of value-based care is ultimately, ‘How do I get a better outcome for less money?’” said Sam Hendler, managing director at private equity firm Thomas H. Lee Partners.

One type of value-based payment is called a bundled payment, Clawson said. Say you have a heart condition and need to get a stent put in. There are usually several providers involved in that process, including a primary care doctor, cardiac surgeon, and anesthesiologist. An insurer gives the health system a set amount of money to cover everyone involved in the procedure, and the health system decides how to divvy it up.

Another type of value-based payment is called capitation, and there are multiple types of capitation payments. It’s sort of like a bundled payment, but instead of insurers paying a set amount per procedure, they’re paying a set amount to cover an entire population of patients with a specific disease, like diabetes.

When it comes to the US healthcare system adopting value-based payment models, Hendler says we’re only “in the second inning.”