Different Types of Healthcare Provider Contracts
As a healthcare provider, it’s important to weigh your options when considering provider contracts for health care services. Not all provider contracts are created equal—major differences in their payment systems can significantly affect your revenue, the overall success of your facility, and even patient outcomes.
Each contract has its own nuances and unique stipulations and must be considered in an independent context before signing with a specific healthcare contract management system. With that being said, there are two general types of healthcare provider contracts for health care services you should be familiar with: fee for service and predetermined per-person payments.
To help you find the system that best suits your needs, this simple guide breaks down the pros and cons of all types of healthcare provider contracts.
Fee For Service
In a fee for service model, healthcare providers are paid via invoices for services rendered. In this system, each service’s cost is charged to the patient and their insurer by the provider. Different services carry different price tags. In some fee for service cases, providers may charge patients on a sliding scale according to their income level.
Pros of Fee For Service Contracts
- More tests and services for patients – Because physicians are paid for every service they administer at a healthcare facility, they are more likely to offer their patients a wide range of care. The fee for service model incentivizes physicians to try all available treatments, leading to better patient outcomes.
- Chance of higher revenue for providers – Medical services vary significantly in cost, and patients’ need for treatment also varies over time. It is likely that, in certain periods, a health care provider will see many patients who require many different high-cost treatments. When the health care provider sends all of those invoices to the payor, they are likely to generate more revenue.
Cons of Fee For Service Contracts
- Uncertainty in revenue – For the same reason that fee for service contracts may lead to higher revenue at times, they can also contribute to unpredictability. The provider’s revenue is entirely dependent on how many patients they see and how many services they administer. It’s impossible to predict with 100% accuracy how much revenue the provider will generate. In other words, provider income is not guaranteed.
- Risk of cost overruns – More patients than expected may require care in a certain period, which will lead to more money being spent by the payor to cover the costs of services. The risk of cost overruns is entirely on the payor, as the provider is incentivized to charge for as many treatments as possible. This is a con of the fee for service model from the perspective of payors, making them less likely to employ it in their contracts.
Predetermined Per-Person Payments
In a predetermined per-person payment model, providers receive a set payment for each person assigned to their care, regardless of whether or not those patients seek medical services. This system may also be referred to as a capitation model.
For example, a physician may be paid $50 per month for each of the 100 people under their care ($5000). If the physician only sees 30 of their patients in January, they will still be paid $5000 for that month.
Pros of Predetermined Per-Person Payments
- Financial certainty – For both providers and payors, predetermined per-person payments lead to a greater degree of predictability. The provider knows exactly how much they can expect to be paid every month, and the payor is not fully at risk of cost overruns as with a fee for service model.
- Easier budgeting for patients – Because costs are not tied to the specific services rendered, patients can seek medical treatment from their physicians with the confidence of knowing their expenses will not greatly fluctuate based on the kind of care they need.
Cons of Predetermined Per-Person Payments
- Not being compensated for expensive treatments – At certain times, some patients may require lots of expensive treatments. Under a fee for service model, this would lead to much higher revenue for the provider. In a predetermined per-person payment model, when more patients than predicted fall sick and need care, providers are not compensated for that extra work.
- Quantity over quality – Capitation payment models have been criticized for prioritizing quantity over quality of healthcare. Providers are incentivized to add more patients to their coverage, rather than to deliver the best medical treatments. Capitation has led some providers to “cherry pick” healthy patients, because unhealthy patients require more resources and services whose costs cannot be recouped in extra payment.
Choosing the Right Type of Healthcare Provider Contract for You
Fee for service and predetermined per-person payment models have benefits and drawbacks that must be balanced before agreeing to a provider contract management system. Plus, the payment model is only one aspect of this dense and complex business agreement.
Fortunately, third-party contract management firms like PayrHealth help guide providers toward contracts best suited to their needs. With PayrHealth, you can rest assured that your provider contracts will result in higher revenue. PayrHealth also monitors your contracts after you sign, notifies you of any changes, analyzes your data, and creates valuable insights about your organization’s growth.
For providers both big and small, PayrHealth is the managed care contracting solution across all 50 states.
If you have any contracting questions, get in touch with PayrHealth today.
Diffen. Capitation vs. Fee For Service. https://www.diffen.com/difference/Capitation_vs_Fee_For_Service
Houston Chronicle. Participating Provider Agreement. https://smallbusiness.chron.com/participating-provider-agreement-81128.html
Canopy Health. The Difference Between Fee-for-Service and Capitation. https://www.canopyhealth.com/en/brokers/articles/the-difference-between-fee-for-service-and-capitation.html