Fee-for-Service (FFS) in Healthcare: Payment Model Overview and Reform Trends

Payment constitutes a critical component of transactions for goods and services, distinct from supply and demand. Under conditions of stable supply and demand, the payment system serves as a key determinant of transaction volume. A payment system is an agreement negotiated between payers and service providers, designed to regulate service delivery and reimbursement within the healthcare transaction process. Given the well-known complexity of medical services, the healthcare payment system—as an integral part of the medical service transaction process—has long remained a focal point of industry research.

Over the long term, the practice of healthcare service transactions has given rise to payment models such as “retrospective payment,” “prospective payment,” and “unit-based payment.” The “unit-based payment” model can be further subdivided into various forms, including “fee-for-service,” “per diem payment,” “per-visit payment,” and “capitation.” Each healthcare service transaction involves the choice of a specific payment method.

Our buzzword for this issue, “Fee-for-service,” refers to payment per service. So, what exactly does the “pay-per-service” model entail?

What is Fee-for-Service?

“Fee-for-Service” (FFS) is a payment model that categorizes and prices various services separately for individual payment. In the health insurance and healthcare industries, “fee-for-service” generally refers to the practice where physicians and other healthcare providers charge a fee for each service rendered, such as in-person consultations, physical examinations, treatments, or other healthcare services.

In the healthcare services market, patients seek to restore their health by consulting physicians and receiving medical services, aiming to minimize their out-of-pocket expenses. Meanwhile, as service providers, physicians naturally tend toward options that yield higher compensation. In the healthcare sector, fee-for-service payment models incentivize physicians to deliver a greater volume of medical services, because current reimbursement levels are determined by the quantity rather than the quality of services provided. Similarly, when patients are exempt from medical costs or cost-sharing due to health insurance coverage, they become highly willing to accept any medical services perceived as beneficial to their physical and mental well-being.

In the early 1980s, the U.S. Medicare program first adopted a fee-for-service payment model. After such services were delivered, the payment mechanism became a focal point of debate.

“The Pay-Per-Use” Model Faces a Bleak Outlook

In the United States, “fee-for-service” is not an unfamiliar topic for doctors and patients, as it remains the predominant payment mechanism. Healthcare executives have expressed disappointment with this shift in managed care, because “fee-for-service” transforms “complacent, salaried employees” into “profit-driven, productivity-oriented physicians.”

In Japan, the healthcare system’s fee-for-service model is subject to the complex influence of a national pricing mechanism aimed at cost containment;

In Canada, the proportion of medical services offered under a "fee-for-service" payment model underwent a significant shift between 1990 and 2010. For patients under the age of 55, out-of-pocket healthcare expenses continued to decline; in contrast, diagnostic service costs for patients aged 65 and older increased sharply.

In China, fee-for-service payment has led to high healthcare costs, low efficiency, and a steady decline in the quality of medical services, accompanied by a deterioration and erosion of medical ethics. In response, healthcare reforms have begun to realign incentives for healthcare providers. Experiments related to new payment models are underway, with proposals including strengthening the promotion of medical ethics, altering the profit motives of healthcare organizations, and strictly controlling physicians’ pursuit of personal financial gain.

Characteristics of Fee-for-Service

1. Rising Patient Costs
If per-case payment involves negotiating the price for each individual case, the frequency of negotiation will be far higher than that under fee-for-service payment, resulting in substantial costs. Moreover, with continuous inflation, the "per-case payment" model increases patients' medical expenses, imposing a potential financial burden on them. This is because it essentially encourages patients to overutilize unnecessary medical services, leading to inappropriate treatment frequencies or costs.

2. Physicians Prolong the Treatment Process
Studies have shown that in a “fee-for-service” model, compared with capitation or fixed salaries, fee-for-service incentives lead primary care physicians to prolong the treatment process. When physicians cannot bill for a specific service item, the availability of alternative billing options acts as a disincentive, reducing their enthusiasm and motivation to provide that service.

Similarly, in order to generate more revenue, fee-for-service models can incentivize primary care physicians to invest greater effort in radiology services or engage in “physician self-referral.” Physician self-referral refers to the practice whereby doctors refer patients to themselves for additional procedures or services to obtain extra income and financial compensation. For example, an internist may perform electrocardiograms in-house, a surgeon may proactively request to perform a surgery himself, or a physician may recommend an imaging test using equipment that he owns or leases out.



3. Third-Party Platform Payment

The fundamental functions of third parties are information dissemination and enforcement. Regulation by third-party platforms can help prevent physicians from withholding services during treatment to prolong the duration of care. When medical bills are processed by a third-party payment platform on a fee-for-service basis, neither patients nor physicians need to consider the cost differences associated with completing treatment early versus extending its duration. It can be argued that third-party regulation may reduce transaction costs within the healthcare market itself; however, it can also introduce additional administrative costs if the third party fails to maintain neutrality and impartiality.

Third-party payment methods can encourage patients to accept services, because “when people do not consider the cost of an ideal product or service, they will use more.”

4. Higher Risks in Private Healthcare

When the government and third-party payment platforms reduce the reimbursement rates for patients’ medical expenses, private practitioners and small groups are particularly vulnerable to impact.

Raising healthcare management standards would incur substantial costs and tax burdens, such as those associated with purchasing and using expensive electronic health record (EHR) systems; vigilance is essential when government agencies begin to identify and prosecute Medicare fraud and abuse.

Reforms and Outlook on Payment Methods

“Fee-for-service” payment models increase costs and reduce the efficiency of integrated care; consequently, a series of healthcare reforms have sought to challenge or diminish its dominance by shifting toward alternative models such as “bundled payments” or “capitation.” Under capitation, physicians are inclined to reduce medical procedures, even including those that are clinically necessary, because they do not receive additional income for increased workload.

1. Electronic referrals with compensation provided
When specialists diagnose patients by evaluating medical data (such as laboratory test results or images) rather than seeing them in person, electronic referrals often improve the quality of healthcare and reduce the cost of disease treatment. However, in the current “fee-for-service” environment, the loss of income for specialists poses a significant barrier to the adoption and widespread use of electronic referrals. This barrier can only be overcome if health plans provide certain compensation for the time specialists spend handling electronic referrals.

2. Exploring Alternative Practice Models
In most real-world scenarios, to maintain revenue, healthcare institutions need to see more patients and increase treatment procedures and extend treatment times through a “fee-for-service” model. A growing number of physicians are seeking alternative practice models as better solutions. In addition to value-based reimbursement models, such as pay-for-performance programs and accountable care organizations (ACOs), there are also concierge medicine models and direct primary care models. When patients have easier access to their physicians and doctors spend more time with them, communication between doctors and patients becomes smoother, leading to more effective treatment. Consequently, the reliance on imaging, testing, and other medical services by physicians to boost income will correspondingly decrease.

3. Patient-Participatory Payment
For a long time, the role of patients in healthcare has been overlooked. Physicians have dominated the medical landscape, with patients merely receiving treatment passively. However, growing evidence from practice demonstrates that patient engagement can improve healthcare quality and reduce costs. For instance, when patients upload their health data, they effectively perform substantial data entry work for the creation of electronic health records (EHRs). Many patients can identify omissions in their medical records, constituting a form of free quality improvement. Furthermore, behaviors such as smoking, diet, and exercise—which are under patients’ control—can significantly influence treatment outcomes. In response, an innovative payment model known as “pay-for-patient-engagement” has emerged.



To foster patient engagement, it is essential to maintain a strong physician-patient relationship. Many hospitals have incorporated physician-patient communication as a standard component of medical record documentation and included it in their hospital quality assessment systems. Payment for participation refers to the direct compensation provided to physicians based on the time, effort, and level of care expended, with patient involvement, including post-discharge monitoring, analysis, and intervention.

The pay-for-participation model encourages physicians to proactively communicate with patients beyond clinical settings and maintain long-term attention to their daily lives. This approach integrates patient engagement with physician compensation, thereby not only strengthening the doctor-patient relationship but also facilitating the generation of patient data. With the widespread adoption of smartphones and advancements in mobile sensing technologies, various mobile devices and “app-enabled portals” serve as highly effective means to enhance medical engagement between doctors and patients.

4. The Rise of Integrated Care
“The fee-for-service” model is an obstacle to coordinated care or integrated care—take the Mayo Clinic as an example—it rewards individual clinicians for providing separate treatments.

Integrated care, as a novel organizational framework, is regarded as an improvement upon decentralized healthcare management. As a global trend in healthcare reform, integrated care focuses on delivering more coordinated and secure medical treatment processes and services. Fee-for-service models do not provide additional compensation to healthcare providers even when patient treatment costs are substantial. Patients can benefit from the convenience and advantages of other interventions, such as accessing emergency medical services or arranging hospital admissions via telephone calls.

If the model shifts from “fee-for-service” to “integrated care,” general practitioners will have even less autonomy. If patients no longer use the “fee-for-service” approach, they may face restrictions in choosing their physicians.

Author | Chen Kun

Edited by | Huang Jia