What are “Fee For Service” and “Managed Care”?

July 30, 2018     About this blog:  click here

What is “Fee For Service” and “Managed Care”?

These might be two of the most important terms you never heard of.

They make a big difference in the world of health care, and especially Medicare.

They describe two very distinct methods of paying medical providers (doctors, hospitals, etc.).  One has been around for a very long time, and the other is relatively newer.   Here’s what they are:

Fee For Service is the older one.  It’s the original way that medical providers had always been paid for their services.   It simply means:  A particular payment is given, at an established price, to the doctor (or other provider) for each service he or she does.

The payment wasn’t always money.  In many rural communities, the payment had often been a chicken, or something else the patient’s family produced on the farm.

With a Fee For Service system, there are several different possibilities as to WHO is coming up with the payment:  The patient himself/herself; the patient’s employer; the government (local, state or federal); or an insurance company; or some combination of these.

The amount that the doctor is paid for a particular service might be the same no matter which of the above are giving the payment.  OR, different payers might have negotiated or set different prices for themselves.

When an insurance company is the payer, that company usually negotiates its payment amount with the medical provider.   If the medical provider is big (like a huge hospital-clinic complex), the provider has a lot of leverage.   If the provider is small (like a one-person doctor office), the provider usually has a “take it or leave it” proposition.

When the government is the payer, the government usually sets the price (with advice from a panel of medical experts), and that is it.  This is how Medicare sets its payment prices, in general – although there is much complexity to it.

Managed Care, in contrast, is another world. 

Instead of having set prices for each service performed by each medical provider, it is based on having a payment middleman, usually an insurance company.

The middleman (aka “managed care contractor”) is paid a flat amount per month per patient.  The patient, employer, government, or some combination of these pays the monthly amounts.

Out of that money – pooled together for the insurance enrollees – all of the enrollees’ medical bills which are supposed to be covered get paid.

At the end of the year, the managed care insurance company either comes out ahead, or if those flat amounts it was paid wasn’t enough, it comes out behind and has to make up the difference.

It’s also called a “risk contract” because the insurance company can make a profit, but also takes the risk of losing money.

Each insurance company negotiates and sets what it will pay each provider for each service.  These prices are secret.  The Medicare Fee For Service prices, on the other hand, are public.

In general, Medicare pays lower prices to providers than do insurance companies, because Medicare is so big it has much greater leverage.

Fee For Service, and Managed Care, in Medicare

When Medicare was created in 1965, it was on a Fee For Service basis.  But, since it only pays about 80% of medical bills, insurance policies sprang up to supplement Medicare – to pay providers the portion not paid by Medicare.

In the late 1970s and into the 1980s, the insurance industry said to Congress: “You should start up an option for managed care Medicare” – known at the time as Medicare HMOs (Health Maintenance Organizations).

The theory was that Fee For Service Medicare was wasting government money, on the assumption  that doctors were ordering more procedures than needed, in order to make more money.

Therefore, the insurance industry argued, “You should give some of the Medicare money to us, a flat amount per month per person, and we will ‘manage’ that money so it doesn’t get spent on unnecessary care.”

The insurance companies promised Congress that this would save the government money, while still providing good health care.  However, instead of saving money, Managed Care Medicare is costing more per person on average than the original Fee For Service Medicare.

In 2003, the name of these Medicare HMOs was changed to:  Medicare Advantage plans.  The insurance companies push hard to get as many people as possible into these plans, because they generate more profit for them than other kinds of Medicare policies.

There is a policy proposal to turn Medicare into a “premium support” (aka voucher) program, which would greatly expand Managed Care Medicare, and cause much greater cost to enrollees – other than the very healthiest ones.   Congress will be debating whether or not to do this.

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