NUR 621 Differentiate between fee for service, capitation, and episode-based payment

NUR 621 Differentiate between fee for service, capitation, and episode-based payment

NUR 621 Differentiate between fee for service, capitation, and episode-based payment

Fee-for-service (FFS) directly pays Medicaid participating physicians, clinics, hospitals, and providers a fee for each service rendered (Kaiser Family Foundation, n.d.). The FFS payment model rewards volume despite a patient’s health outcomes or quality of care (Kaiser Family Foundation, n.d.). Some disadvantages of the FFS payment model are fragmented care due to lack of care coordination, care gaps, duplicate services, and high out-of-pocket costs. Many consumers favor the FFS payment method due to the ability to choose providers without restrictions despite the high costs associated with the same (Penner, 2017). Individuals still widely use FFS, and many providers also favor this payment method.

Capitation is a healthcare payment system that pays a fixed amount per patient for a prescribed period by an insurer or physician association to the provider or hospital rendering services (Torrey, 2020). This financing model is a risk-sharing method for the cost of care from the payer to the provider (Penner, 2017). With capitation, a provider may be penalized for the use of services that value more than the fixed payment obtained or, on the other hand, may make a profit if the patient or consumer uses fewer services. If the patient or consumer does not use services, the provider still gets the fixed fee. One advantage to clients is that duplication of services is usually avoided, but a disadvantage is that providers may decrease time spent with one client.

Episode-based payments, also known as bundled payments, were created by the Center for Medicare and Medicaid Services (CMS) and came about with the Affordable Care Act to improve patient outcomes at a reduced cost to Medicare (Forrest, 2018). With this payment method, “the total allowable remittance for a patient’s sequence of care relating to a single episode of the medical event is predetermined instead of separate compensation for each service and provider along the way” (Forrest, 2018). Unlike FFS service payment, episode-based payments reward value over volume of care, and providers receive incentives when high-quality, cost-effective care is delivered.


Forrest, B. (2018). Episode-based payments explained.

Kaiser Family Foundation. (n.d.). Medicaid delivery system and payment reform: A guide to key terms and concepts

Penner, S. J. (2017). Economics and Financial Management for Nurses and Nurse Leaders (3rd ed.). Springer Publishing Company. ISBN: 978-0-8261-6001-0

Torrey, T. (2020). How healthcare capitation payment systems work, Very Well Health.

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In healthcare, there are many different payment models that healthcare organizations may follow. Capitation is the prepayment for the care of populations. It resolves issues of third party transactions between provider and patient by realigning incentives. This model rewards providers that promote population wellness and only providing services that are medically necessary. In capitation, physicians must report and monitor the costly procedures they utilize and verify their medical necessity. Improvements in population health must be shown and targets reached within the health of the population served. Payment plans vary depending on the population being served and are negotiated previously for a specific time period. In this model, financial risk is shifted from patient to provider because while they can keep the surplus of funds if they perform under the budget they are not reimbursed for any excess costs if they aren’t able to control costs to keep them under the budget. Sharing the risk in this model helps to keep providers aware of healthcare costs for their patients (Penner, 2016, p. 79).

Epidsode based payment is the payment or reimbursement for a single episode of care. This relates to a single diagnosis and all the care provided from disease onset to the recovery. This is also called a bundled payment and helps to control the cost of care by providing flat fees or reimbursement for a specific diagnosis. An agreement between providers and payers to share the risk is prevalent in this type of reimbursement. Negotiated incentives are given to providers to help reduce the costs. Application of evidence based practice, quality indicators, quality improvement initiatives, and care coordination must be present as well as overall patient centered care and patient engagement (Penner, 2016, p. 84). Creating patient centered homes to decrease costs is a plus while the risk of having a preset amount of money for a certain diagnosis is the issue. This could potentially put providers at risk if complications arise for not getting reimbursement for such issues and would lose money.

Fee for service (FFS) payments are retrospective payments used with providers bill payers using an itemized list of charges. They are then reimbursed based on the volume of patients or services provided. The FFS system can make consumers insensitive to healthcare costs. They may also seek services that may not be necessary or billed at higher costs because they are specialists. Providers may be insenstive to costs as well since they are reimbursed based on volume they aren’t as worried about unnecessary costs or procedures as much as seeing more patients (Penner, 2016, p. 57). The positive is that consumers are able to request procedures and specialist appointments creating flexibility.

Penner, S. J., RN, , MN, , MPA, , DrPH, , & CNL, . (2016). Economics and financial management for nurses and nurse leaders (3rd ed.). Springer Publishing Company.

The fee-for-service payment is a payment model that involves services being paid individually. This type of service provides encourages physicians to provide more healthcare treatments because the individual treatment payment is based on the quality treatment provided rather than the quality of care provided to the patient. The healthcare provider bills using an itemized list and is reimbursed based on patients or services (Penner, 2017). The fee-for-service is based on the premise that both provider and patient are conscientious or the healthcare services that are truly needed. Unfortunately, individuals who use the fee for service model payment system seem too careless how many healthcare treatments or services are being used because they know that the claim will be paid when submitted. Sometimes some of the treatments being ordered are unnecessary and a waste of resources and money. This plan also allows the consumer to choose specialists where treatment is accessible without the need to show the need of the specialty care. The same problem with waste can occur with physicians overusing the system by ordering unnecessary treatments. Because the model is based on volume-based payment system the reimbursement will be greater based on the number of patient and services that were provided (Penner, 2017).

The capitation payment model is very different from the fee-for-service payment model. The capitation payment model consists of physicians getting reimbursed on a set amount per patient and not based on the volume of treatments provided or volume of patients. This payment system is dealing with managed care plans. It is considered a financial strategy that is prepaid revenue considered a fixed payment or global budgeting (Penner, 2017). Healthcare providers that belong to managed care plans can negotiate and calculate their capitation reimbursement period which will also include the members for the capitation period that will pay in advance (Penner, 2017). The capitation rate is also based on the members age and sex. The capitation model of financing is a system of risk sharing or exporting risk where the provider is sharing the financial risk (Penner, 2017). The managed care provider must be able to control the expense costs to ensure that the capitation payment received does not exceed the capitation budget. This type of payment system encourages physicians to be conscientious about what treatments or procedures patients are receiving. Those physicians that abuse this system are penalized because managed care providers share the costs of unnecessary treatments.

Episode-based payment model is also called a retrospective payment model. This type of payment model is based on the expected costs for the healthcare services have been provided (Penner, 2017). Retrospective payment is the same as fee-for-service and one of the oldest payment systems in healthcare. The history of the payment system involves physicians charging fees for services that were provided to patients. Change-base reimbursement is a retrospective payment approach where the provider bills the payer for all the services that were provided to the patient. The payor will evaluate the itemized bill submitted and determine if payment will be provided or denied. Generally, providers will be paid for the services rendered. (Penner, 2017).


Penner, S. J. (2017). Economics and financial management for nurses and nurse leaders (3rd ed.). Springer Publishing Company.

A fee-for-service funding model is one in which a doctor or other health-care professional gets paid a price for each particular treatment done, thereby advantageous medical practitioners for the number and quantity of products delivered, matter what the outcome. In recent decades, the fee-for-service reimbursement model has been the standard and most widely utilized healthcare model. In this arrangement, healthcare practitioners are paid depending on the specific services they perform (i.e. appointments, treatments, tests ordered, prescriptions given). These services are then included individually on bills, which may make them long and confusing (Health Insurance, 2018). As a result of this paradigm, many providers have taken on an increasing number of patients in order to generate more money, putting a premium on the quantity of services they can deliver to their patients. Examples of services include tests and office visits. 

Capitation is a set sum of money paid in advance to the physician for the performance of health care services per patient per unit of time. The quantity of money paid is decided by the kind of services offered, the number of patients engaged, and the length of time the services are supplied. Managed care companies employ capitation payments to keep health-care expenses in check. Capitation payments limit the utilization of health-care resources by imposing a financial risk on the physician for services rendered to patients (American College of Physician, 2019). At the same time, managed care organizations assess rates of resource use in physician practices to ensure that patients do not receive substandard treatment due to underutilization of health care services.

Episode-based payments are still in their early stages of development and adoption, although there is rising interest in them. Unlike typical fee-for-service reimbursement, which pays clinicians individually for each service, an episode-of-care payment covers all of the care a patient receives during treatment for a given sickness, condition, or medical event. All physician, inpatient and outpatient care for a knee or hip replacement, pregnancy and birth, or heart attack are examples of episodes of care for which a single, bundled payment can be issued. Savings can be realized in three ways: 1) by negotiating a payment so that the total cost is less than fee-for-service; 2) by agreeing with providers that any savings that arise because total expenditures under episode-of-care payment are less than they would have been under fee-for-service will be shared between the payer and providers; and/or 3) by not making additional payments for the cost of treating complications of care, as would a fee-for-service payment (National Conference of State Legislatures, 2022). Case rates, evidence-based case rates, condition-specific capitation, and episode-based bundled payments are other terms for episode-of-care payments.

American College of Physician. (2019). Capitation Payments | Understanding Capitation | ACP.

Health Insurance. (2018, November 20). fee-for-service definition. Health

National Conference of State Legislatures. (2022). Episode-of-Care and Bundled Payments – Health Cost Containment.

The capitation system provides financial security to providers and payors for care delivery. Providers assume the risk of patients becoming sick, and needing care and under the capitation system, healthcare providers are paid a set amount for each enrolled patient assigned to the particular physician. The traditional system of healthcare is a fee-for-service. This is when a patient goes to a doctor or has fixed payments and healthcare facility is evaluated and treated and then pays for what was done. Capitation is from an insurance group for the population that reduces the cost for patient. Fee for service has no fixed payments and providers bill for services that are delivered and paid for each service. (Chen, Chernew, Fendrick & Thompson 2019). The fee for service can be payment for 1 service or many follow up appointments that are prorated for the individual patient diagnosis.

Unlike capitation or fee for service, episode-based payments are structured to provide a discounted rate or set price for a predetermined visit. It is specific for the particular incident and timeframe and does not expand into further care. It is an all-inclusive health and payment model for services associated with that illness. It is also known as a bundled payment or alternative payment model. The total allowable remittance for the patient’s sequence of care is related to the specific incident of care that they are seeking medical help for. Moving from a fee for service to episode-based care requires coordination and the goal is to lower patient costs while providing increased revenue for the provider and healthcare system. (Penner, 2016).

Chen, J. L., Chernew, M. E., Fendrick, A., Thompson, J. W., & Rose, S. (2019). Impact of an episode-based payment initiative by commercial payers in Arkansas on procedure volume: An observational study. Journal of General Internal Medicine35(2), 578–585.

Penner, S. J., RN, , MN, , MPA, , DrPH, , & CNL, . (2016). Economics and financial management for nurses and nurse leaders (3rd ed.). Springer Publishing Company. 

Fee-for-service (FFS) reimbursement is a term used for retrospective payment of all allowable costs meeting accepted standards of care. Providers bill payers using an itemized list of charges and are reimbursed based on the volume of patients or services. Physicians are typically reimbursed based on their charges (which are often negotiated or discounted) or on some predetermined fee schedule. Hospitals are reimbursed based on charges, per diem (a set amount of reimbursement per patient day) or per case. The FFS reimbursement system assumes that both the insured consumers and the providers billing insurance will be prudent users of health care services. However, the FFS system makes consumers insensitive to the costs of health care because the assumption is that the insurer will pay any claims that are submitted, so the consumer can demand services that might be medically unnecessary. FFS health plans also allow consumers to freely choose providers, including more costly specialists, without determining the necessity of specialist care (Penner, 2016). 

FFS can make providers insensitive to costs as well. FFS is a volume-based payment system, in which reimbursement is tied to utilization or the number of patients or patient services provided. More patient encounters or procedures lead to greater reimbursement for physicians and other outpatient providers. The same is true for hospital readmissions and for patient length of stay because hospitals receive more reimbursement for generating more volume in FFS systems. Hospitals have high fixed costs that do not change in proportion to changes in utilization. As a result, under FFS systems, if hospitals reduce their volume, they lose reimbursement, but do not reduce their costs proportionately (Penner, 2016). 

Another problem is that FFS may encourage providers to increase the intensity of services. Insurance plans with FFS systems typically pay claims only when there is a diagnosis provided. As a result, this reimbursement approach may discourage the use of preventive services when there are no symptoms of health problems. Better coverage is provided for more intensive services such as hospitalization, rather than efforts to improve wellness. Under FFS, physicians may be rewarded for hospitalizing patients, and hospitals may be rewarded for keeping patients hospitalized if possible. In addition, under FFS provider claims often do not undergo review unless there is reason to suspect fraud. Costs are thus largely uncontrolled under traditional FFS insurance plans (Penner, 2016). 

Prepayment for the care of populations, or capitation. A financing strategy such as capitation that prepays total revenue as a fixed payment is sometimes referred to as global budgeting. Capitation realigns incentives to resolve problems with third-party transactions between the patient and the provider. Capitation rewards providers for promoting population wellness and for only providing medically necessary services. Physicians must report and monitor their utilization of costly procedures and verify that these services are medically necessary. Also show improvements in population health, such as raising vaccination rates to target levels. Rather than the insurance plan paying the provider’s charges following the provision of health care goods and services, managed care plans estimate and negotiate a capitation contract for a specified period, with reimbursement for the coverage of a specified number of members paid in advance (Penner, 2016). 

The capitation rate is adjusted by the age and sex of its members, so the capitation rate for pediatricians is lower than for the physicians of adult and elderly members. The capitation model of financing is a method of risk sharing or exporting risk for the costs of care from the payer to the provider. The managed care provider shares financial risk because, in capitation contracts, providers may keep any surplus funds if they are able to provide care under the capitation budget amount. If providers cannot control costs and their costs exceed the capitation budget, they are not reimbursed for these excess costs. Risk sharing aligns incentives to make providers more sensitive to health care costs. Risk sharing leads to penalties for providers who provide more procedures and other services than are medically necessary, because providers share the costs of their decisions. Capitation therefore addresses problems with third-party transactions, such as moral hazard and supplier-induced demand. Providers in capitated systems are rewarded if they are careful to only recommend medically necessary services and face financial penalties if they recommend medically unnecessary services. The physicians must keep the costs of care at or under the capitated amount or the practice will lose money (Penner, 2016). 

 The ACA allows ACOs to establish partnerships and networks that include payers, patients, and providers, such as hospitals, physician groups, subacute care facilities, and home health agencies that follow the patient across the entire continuum of an episode of care, or all services both acute and subacute involved in managing a specific diagnosis or disorder.  ACOs share the same goals as MCOs of controlling costs while ensuring access and high-quality patient care. However, reimbursement for care is on a per-episode, bundled basis including all care provided from disease onset to recovery, rather than a predetermined capitation rate (Penner, 2016). For example, with episode-based payment patient care provided for a total hip replacement would extend from hospitalization and surgery through skilled nursing care and rehabilitation on through home health care and transition to the home setting. The reimbursement for these services over an episode of care is a flat fee shared among these providers. Another feature of ACOs is agreements between providers and payers known as shared savings, shared risk, or gainsharing. This is a financial strategy to move health care reimbursement from volume based to value based (Penner, 2016). 


Penner, S. J., RN, , MN, , MPA, , DrPH, , & CNL, . (2016). Economics and financial management for nurses and nurse leaders (3rd ed.). Springer Publishing Company.