EDIT Fee for service payments
As the name implies, fee for service payments are made based on invoices for services delivered. In this system, neither the healthcare provider nor the payer have any certainty as to medical costs. The risk of cost overruns caused by more people than expected needing healthcare is assumed by the payer (insurance company) and not the providers. EDIT Fee For Service in the healthcare debate
Some critics believe that the fee for service system provides healthcare providers (doctors, hospitals) incentives to do unnecessary medial procedures. They argue that since providers get paid more for delivering more services, rather than for outcomes, they tend to run tests and procedures that may not otherwise be necessary. This drives up the cost of healthcare. Capitation has a dramatic impact on provider incentives, and hence on provider behavior. Consider Figures 5.3 and 5.5 in the textbook, which depict revenues and costs to Atlanta Clinic under fee-for-service and capitation. Regardless of the payment system, total costs (TC), which are merely the sum of fixed costs (FC) and variable costs (VC), are tied directly to volume, so the greater the volume of services delivered, the greater the amount of total costs. The difference between the two figures is the total revenues line, and how profits and losses are realized. Under fee-for-service (Figure 5.3), the revenues line is upward sloping, and it starts at the origin. At zero volume, the provider receives zero revenue, but at any positive volume, the greater the volume, the higher the revenue. Under capitation (Figure 5.5), assuming a fixed number of enrollees, total revenues are fixed independently of volume, and hence the revenue line is horizontal. On each graph, breakeven occurs when total revenues equal total costs. Although the graphs are somewhat similar in general appearance, there is a profound difference in how profits and losses occur. First, consider fee-for-service. All...
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