Managing healthcare contracts is incredibly complex. As a healthcare provider or business, it’s important to weigh your options when managing healthcare agreements for services provided. Not all provider contracts are created equal— important details and major differences in their payment systems can significantly affect your revenue, the overall success of your healthcare facility, and even patient relationship and outcomes.
Each healthcare contract has its own key details and unique stipulations that 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 contracts for healthcare services you should be familiar with: fee-for-service and predetermined per-person agreements. To help you find the managed services contract that best suits your needs and the needs of your healthcare business, this simple guide breaks down the risk and benefits of all types of healthcare contracts.
Fee-For-Service Healthcare Contracts
In fee-for-service agreements, healthcare providers are paid via invoices for services provided. In this system, each service’s cost is charged to the patient and their insurer by the provider or business. Different services carry different price tags. In some fee-for-service agreements, hospitals may charge patients without insurance plans on a sliding scale according to their income level.
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Pros of Fee-For-Service Contracts
- More tests, equipment, and services for patients – Because a physician is paid for every service they administer at a healthcare facility, they are more likely to offer their patients a wide range of care. A fee-for-service agreement incentivizes physicians or hospitals to try all available treatments and advanced technology, leading to better patient relationship and outcomes.
- Chance of higher revenue for healthcare facilities – Medical services and equipment vary significantly in cost, and patients’ needs for treatment also vary over time. It is likely that, in certain periods, a physician will see many patients who require many different high-cost treatments or equipment. When the physician 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 healthcare contracts may lead to higher revenue at times, they can also contribute to unpredictability. The provider’s pay 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 physician 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 (which can become incredibly expensive). The risk of cost overruns is entirely on the payor, as the physician is incentivized to charge for as many treatments and medical equipment as possible. This is a con of fee-for-service contracts from the perspective of payors, making them less likely to employ it in their healthcare agreements.
Predetermined Per-Person Payment Healthcare Contracts
In a predetermined per-person healthcare contract, providers or healthcare facilities receive a set payment for each person assigned to their care, regardless of whether or not those patients access health services. These contracts 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 Agreements
- Financial certainty – For both providers and payors, predetermined per-person agreements lead to a greater degree of predictability. The physician 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 healthcare contract.
- Easier budgeting for patients – Because costs are not tied to the specific services rendered, patients can seek medical treatment from their physicians or healthcare facilities with the confidence of knowing their expenses will not greatly fluctuate based on the kind of care they need. These contracts can increase the relationship between the patient and provider.
Cons of Predetermined Per-Person Agreements
- Not being compensated for expensive treatments or equipment – At certain times, some patients may require lots of expensive treatments or medical equipment. For one physician under a fee-for-service agreement, this would lead to much higher revenue. For an other healthcare provider in a predetermined per-person payment agreement, when more patients than predicted fall sick and need care, they are not compensated for that extra work.
- Quantity over quality – Capitation payment contracts 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 or brand new equipment. Capitation contracts have led some providers or healthcare facilities to “cherry-pick” healthy patients because unhealthy patients require more resources, equipment, and services whose costs cannot be recouped in extra payment.
Choosing the Right Type of Managed Services Contract for You
Fee-for-service and predetermined per-person healthcare contracts have benefits and drawbacks that must be balanced before agreeing to a provider contract management system. Plus, payment contracts are only one aspect of this dense and complex healthcare industry. There is a variety of detailed information that should be considered when signing a managed services contract or agreement, and if your healthcare facility doesn’t have the capacity for healthcare contract management and other administrative tasks, it can take time away from valuable patient care.
Fortunately, third-party healthcare contract management firms like PayrHealth help guide healthcare facilities toward contracts best suited to their needs. With PayrHealth, you can rest assured that your provider contracts will result in higher revenue. PayrHealth assists during the contract negotiation process and manages healthcare contracts by monitoring your agreement after you sign, notifying you of any changes to legal documents or regulatory requirements, analyzing your data with contract management software, and creating valuable insights about your business growth. By managing contracts, PayrHealth can help your healthcare facility focus on what matters.
For providers both big and small, PayrHealth is the contract management solution for the healthcare industry across all 50 states. If you have any questions about how to manage healthcare contracts, 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