Fee-for-Service vs. Value Based Care Explained: Cost, Risk, and Quality Compared

This approach is mainly driven by the fee-for-service model, in which you have to bill for specific services performed, e.g., office visits, procedures, etc. Because the model may cause providers to focus on quantity over quality, there’s a steady shift towards a more patient-centred model, aptly called value-based care.

This post compares fee-for-service vs value-based care models and provides guidelines for choosing the right path for your organization.

TL;DR - Fee-for-Service vs. Value-Based Care

Here’s a quick look at how fee-for-service and value-based care models compare based on their key characteristics.

Why Payment Models Matter in Modern Healthcare

Payment models matter in healthcare because they determine how health systems design their operations, which ultimately drives the quality of patient outcomes.

It’s essentially an incentive structure, and policymakers are constantly improving payment models so that your financial goals as a provider can align with your patients' health goals.

Specifically, the improvements look to address the following concerns in modern healthcare:

• The US population is getting older, and 9 in 10 seniors now report 1 or more chronic conditions.
• Many patients increasingly prioritize personalized care delivery, a need that may be at odds with quantity-based payment models.
• There’s a rural health crisis, with the American Hospital Association (AHA) reporting that one-third of rural hospitals are at risk of closing.
• Legacy models are ill-equipped to address care fragmentation and accountability for outcomes.

Also, healthcare affordability remains a huge concern. The AHA reports that nearly half of American adults struggle to afford care.

What is Fee-for-Service in Healthcare?

Fee-for-service is a payment model in which payors reimburse you for each service you deliver, and your revenue is directly tied to the quantity of those services.

Because services are priced separately, you must document and code each encounter. It means you’ll bill each visit, procedure, test, surgery, etc.

How Fee-for-Service Reimbursement Works

Given that fee-for-service is a unit-based model, the lifecycle of a claim typically unfolds as follows:

1. You provide a service
2. You assign the correct medical code
3. You submit the claim
4. The payor adjudicates the claim and reimburses based on the pre-determined rate for each service

Therefore, the payment model relies more on activity levels than on desired patient outcomes.

Common Use Cases for Fee-for-Service

A fee-for-service model has its merits, and you can reliably use it in a setting where the offered services are separate, episodic, and easily quantifiable.

Some of the common areas where it is applied include:

• Acute care
• Diagnostics
• Specialist procedures
• One-off consultations with a specialist

Benefits of the Fee-for-Service Model

The benefits of the fee-for-service model mostly stem from its ability to allow you to easily standardize billing workflows.

You may find it valuable for the following reasons:

• Simplicity: You bill per-unit service, making it quite simple to account for claims.
• Predictability: When the rate of each service is pre-determined, and you can forecast your own productivity levels, revenue becomes relatively easy to predict.
• Systems for scale: Because billing is standardized at the service level, it is easy to scale the model operationally without requiring elaborate systems for care coordination.

What is Value-Based Care?

Value-based care is a framework that incentivizes accountability for outcomes by rewarding providers for the quality of care they deliver.

Some of the key goals of value-based care are to:

• Reduce service overutilization and manage costs
• Improve care coordination between providers
• Improve chronic disease management
• Lower readmission rates

As such, the framework ties payment to outcomes and administrative efficiency. Your healthcare organization will earn more when your patients stay healthy, manage chronic conditions well, and avoid readmissions.

Achieving the outcomes consistently requires you to monitor patients continuously, identify adverse events early, and intervene before conditions escalate.

Core Components of Value-Based Care

To deliver value-based care effectively, you must account for the following key elements:

• Patient engagement: It involves making your patients active participants in their own care. You should educate them about their condition, help them follow care plans, and support them in making informed daily health/lifestyle choices.
• Care coordination: Your systems should enable better coordination among primary care, specialists, and home health.
• Data integration: You should be able to combine patient data/information from multiple sources into a unified view to support care coordination and in-house decision-making.
• Measures: As the framework is focused on outcomes, you must track key quality metrics, including clinical outcomes (infection rates, HbA1c levels, etc.), utilization metrics (readmission rates, ED visits, etc.), patient experience, and cost efficiency.

Types of Value-Based Care Models

To incentivize efficiency, lower utilization, and provision of holistic care, value-based care models are structured in the following ways:

• Patient-centered primary care: It involves tailoring care to your patients’ specific preferences, needs, and goals. Aside from clinical indicators, you’ll also measure success based on the goals your patients care about.
• Shared savings cost of care: The model aims to keep costs low by rewarding you for keeping the patient’s total cost of care below the benchmark cost. You earn a percentage of the shared savings.
• Shared risk cost of care: It’s like the shared savings model above, but there is both an upside and a downside. You’ll earn money if costs are below the benchmark and owe money if costs are above the benchmark.
• Bundled payments: Rather than paying for each service you deliver, this model pays a single, fixed amount for all the services you deliver in a specific episode of care.
• Capitation: Instead of paying you per service or per episode, capitation involves getting payment per patient. You’ll receive a fixed monthly amount for all predefined services provided to the patient.

Benefits of Value-Based Care

Value-based care has several benefits for patients, providers, and the entire healthcare system.

It’s valuable for the following reasons:

• Benefits for patients: Patient-centered care leads to better outcomes, including better chronic disease management and lower readmissions. It also enables patients to be active participants in their own care, which can be satisfying.
• Benefits for providers: As a provider, you are rewarded for helping your patients achieve superior outcomes. It makes it much easier to align your organization’s financial goals with your patients' health goals.
• Benefits for the healthcare system: The entire healthcare system benefits from lower costs, improved coordination, and better overall outcomes.

How KangarooHealth Supports Both Payment Models

KangarooHealth's platform works in both fee-for-service and value-based care environments. It is a flexible solution for organizations operating across both reimbursement models.

In a fee-for-service setting, KangarooHealth helps providers unlock reimbursement through billable programs such as:

• Remote Patient Monitoring (RPM)
• Chronic Care Management (CCM)
• Remote Therapeutic Monitoring (RTM)
• Principal Care Management (PCM)
• Advanced Primary Care Management (APCM)
• Guiding an Improved Dementia Experience (GUIDE)

These programs turn ongoing patient monitoring and care coordination into reimbursable activities. They generate direct revenue for providers.

In a value-based care setting, the platform focuses on cost savings. It helps providers and payers reduce avoidable utilization, prevent complications through early intervention, and lower readmission rates. All of this reduces the total cost of care.

For remote monitoring and engagement, we also offer clinical support through a dedicated team of virtual nurses. This includes US-based registered nurses, licensed practical nurses, and licensed vocational nurses.

Our staffing ratio is industry-leading. One nurse monitors only 125 to 150 patients, so each patient gets the attention they need.

Contact us today to see how our platform, connected devices, and clinical support services can work for your healthcare organization.

Factors That Define Fee-for-Service Models

As we noted earlier, fee-for-service models rely on activity levels rather than quality metrics. The defining factors are as follows:

• The provider's incentive is the volume of services.
• The payment trigger is services delivered. Therefore, every encounter must be documented and coded.
• It is characterized by standardized fee schedules.
• The payor bears most of the financial risk.
• Patient data is often organized around individual encounters.

How to Compare Cost Outcomes Between Both Models

If you’re currently running a fee-for-service model, your existing cost data can serve as a benchmark for evaluating value-based care.

You can compare these benchmarks against specialty-specific industry averages for value-based care by quantifying potential cost savings in key areas, including:

• Redundant/duplicate diagnostics
• Chronic disease management
• Acute care optimization

Also, the switch to value-based care often involves implementing new infrastructure, which may increase the cost burden. However, you can avoid the high upfront cost by working with a vendor with a turnkey implementation model.

For instance, at KangarooHealth, providers can roll out RPM, CCM, and other programs using our platform and devices without a heavy upfront investment. The pricing model is a monthly per-patient fee that covers the cost of the software and devices.

Fee-for-Service vs. Value-Based Care: How Do They Compare?

Here is how fee-for-service and value-based care compare across the dimensions that matter most to healthcare organizations.

Cost Savings

Fee-for-service offers cost predictability at the transaction level. Each service has a set rate, and billing is straightforward. But providers are paid per service delivered.

This creates limited incentive to:

• Reduce utilization
• Prevent costly episodes

Value-based care is designed to reduce the total cost of care. It rewards providers for keeping patients healthy and out of the hospital.

Well-implemented value-based programs can:

• Cut unnecessary procedures
• Lower readmission costs
• Reduce emergency department visits

Patient Outcomes

In a fee-for-service model, the focus on volume works well for acute, episodic care. A patient comes in, receives treatment, and is discharged.

For patients with chronic conditions, though, this model struggles to support:

• Continuous monitoring
• Coordinated care across providers
• Long-term disease management

Value-based care aligns financial incentives with patient health.

Providers are rewarded for:

• Managing chronic disease well
• Reducing complications
• Improving quality of life

This naturally leads to better outcomes over time.

Pros and Cons

Fee-for-service:

Value-based care:

Potential Risks and Trade-Offs

Fee-for-service carries the risk of overutilization. When revenue depends on volume, there is an incentive to order more than necessary.

This can include:

• Extra tests
• Additional procedures
• Unnecessary follow-up visits

The payor bears most of the financial risk in this model.

Value-based care shifts financial risk to the provider. Under shared-risk arrangements, if costs exceed the benchmark, the provider may owe money back to the payer.

Managing this downside requires:

• Strong population health capabilities
• Solid data infrastructure

In practice, most healthcare organizations operate under a hybrid of both models. The right balance depends on payer mix, patient population, and existing infrastructure.

Frequently Asked Questions (FAQs)

Let’s now answer some commonly asked questions about fee-for-service and value-based care models.

Does Value-Based Care Reduce Hospital Readmission Rates?

Yes, the model is designed to reduce readmission rates by enhancing care coordination, ensuring proactive post-discharge follow-ups, and providing ways to address social determinants of health.

The superior outcomes are possible because providers are incentivized to deliver holistic, highly responsive care that reduces readmissions.

Does Fee-for-Service Affect Preventive Care Rates?

Because of the incentive structure, healthcare organizations may prioritize reactive care over proactive care. Therefore, the organization's operational design will be suboptimal for preventive care.

How Do Quality Scores Affect Reimbursement Rates?

Quality metrics determine whether you receive the base rates for health services or receive a bonus or penalty.

Where there are pay-for-performance bonuses, you want high scores on key metrics (e.g., blood pressure control). You’ll receive a bonus on top of the standard payment.

There is also a downside risk. If the contract allows it, the payor may withhold a percentage of your reimbursement if your quality scores are below the set benchmarks.

Conclusion

While fee-for-service models remain useful in healthcare delivery, rising healthcare costs and the burden of chronic disease make a shift to value-based care necessary.
That said, successfully implementing value-based care requires you to have a strong technology partner for patient monitoring, seamless coordination, and actionable data.

This is where KangarooHealth comes in. Our platform and connected devices can give you real-time visibility into your patients’ health, wherever they are. You will be able to detect issues early, reduce avoidable readmissions, and raise reimbursements by improving outcomes.

Contact us today to speak with an expert and gain real-world insights into how implementing value-based care can transform your healthcare organization.