Healthcare reimbursement: Succeeding under value-based and FFS payment

Healthcare reimbursement — payment for care and services delivered — plays a key role in a hospital’s overall financial performance and organizational stability. There are many different types of reimbursement models, from fee-for-service to value-based payment and shared savings. Typically, a hospital operates under a variety of different reimbursement models according to the contracts it holds with various health plans.

To be effective, healthcare finance leaders must understand how payment incentives can vary across different healthcare payment models, the steps needed to optimize claim reimbursements and how errors or gaps in processes can affect the speed and amount of reimbursement.

Types of Healthcare Reimbursement Models

Payment structures in healthcare vary considerably, and each carries distinct implications for providers’ approaches to revenue predictability, operational efficiency and financial risk.

Fee-for-Service (FFS)

The FFS model operates as true reimbursement. Healthcare providers are reimbursed for each discrete service provided. The amount of payment is set by payer fee schedules or negotiated rates.

A provider’s service volume, payer rates, and ability to accurately and completely reflect services delivered are strong determinants of financial performance under FFS healthcare reimbursement. Critics of the model note that it does not inherently reward quality or outcomes and can create a financial incentive for overutilization.

Diagnosis-Related Groups (DRGs)

DRGs form the foundation of Medicare inpatient hospital reimbursement under the inpatient prospective payment system (IPPS), which is administered by the Centers for Medicare & Medicaid Services (CMS).

Under this model, hospitals receive a fixed payment per case based on the patient’s diagnosis, severity of illness, and expected resource utilization. The provider, therefore, has a financial incentive to manage cost per case while meeting quality benchmarks. An organization’s financial performance will be affected by the case mix index (how sick the patient population is) as well as documentation accuracy and length of stay. Critics of DRG payments say the model puts pressure to limit care and is a disincentive for treating complex patients.

Capitation

Capitation models provide a fixed per-member-per-month payment for a defined patient population, regardless of how much care is used. Although less common for acute care reimbursement, capitation is increasingly used in integrated delivery systems and accountable care organizations (ACOs). It shifts financial risk to providers and requires advanced capabilities in population health management, cost forecasting and care coordination. Besides the administrative complexity and the shift in risk with capitation, another potential downside of this model is that it incentivizes cost control, which could result in under-treatment. 

Value-Based Care (VBC)

Value-based reimbursement models, in which payment is tied to the quality of care, are expanding rapidly, particularly through CMS programs. Most programs take one of three forms: Pay-for-performance (P4P), where incentive payments are tied to quality and efficiency metrics; shared savings models, where providers retain a portion of savings achieved below cost benchmarks; or two-sided risk models, where providers share in both savings and losses.

Model	Definition
Fee-for-Service	Providers are paid per service, which emphasizes volume over value.
Diagnosis-Related Groups (DRGs)	DRGs are codes that are used to classify clinical diagnoses for inpatient care and standardize payment.
Capitation	This is a fixed per-member-per-month payment for a defined patient population, regardless of how much care is used.
Value-Based Care	In this model, providers receive payment according to the quality and efficiency of care received, the cost savings produced, or a share in both the savings and losses produced.

The healthcare claims reimbursement process

To succeed with healthcare reimbursement under an FFS arrangement, providers must ensure disciplined execution across the entire revenue cycle. Even small errors or gaps can significantly impact cash flow and net patient revenue. Claims reimbursement depends on 5 key steps.

Step 1: Documentation and coding

Incomplete documentation is a leading cause of both claim denials and under-reimbursement. EHRs can aid in capturing documentation details through field entries and prompts. Once documentation is complete, the clinical encounters are translated into standardized codes based on ICD-10 and current procedural terminology (CPT).

Step 2: Claim submission

Hospitals submit claims electronically, often through clearinghouses, to government and commercial payers.

Step 3: Payer review and adjudication

Payers evaluate claims for coverage eligibility, medical necessity, coding accuracy, and contract compliance. This stage determines whether claims are paid in full, adjusted, or denied.

Sept 4: Payment and settlement

The insurance company sends payment for approved services to the hospital or denies the claim. If a claim is denied, the payer returns it to the provider with a code explaining the error (e.g., lack of prior authorization or a service not covered under the patient’s plan.). Providers can then either appeal the denial or correct and resubmit the claim.

Step 5: Final patient billing

Once reimbursement is settled with the payer, the hospital sends a final bill to the patient for any remaining deductible, copayment, or coinsurance. Automation can aid the patient billing experience and success.

Healthcare reimbursement under FFS models

Payment accuracy is a significant concern to providers. Denial rates and underpayments have increased across the industry, particularly as payers adopt AI in claim review processes. Requests for information can also slow payment, and such requests are rising.

How can a provider improve healthcare reimbursement speed and accuracy?

• Automate eligibility checks to ensure accurate and current coverage information is obtained.
• Track denial patterns and fix root causes.
• Train staff on payer-specific requirements.
• Use claim scrubbing tools to predict and mitigate denials before submission.
• Share denial root causes as part of routine clinical documentation improvement (CDI) and coder training.
• Leverage ambient listening, EHR prompts, and other automation and AI tools to aid reimbursement completeness and accuracy.
• Use computer-assisted coding tools to support more precise ICD-10 and CPT coding.
• Examine denial trends by payer and service line to identify potential process improvement needs and contract issues.
• Analyze contract performance regularly and renegotiate underperforming contracts.

Healthcare reimbursement resources

Further reading and listening: value-based care (VBC), fee-for-service (FFS), and other payment models

• Value-based care adoption grows, but challenges remain
• The Healthcare CFO of the Future
• HEALTHCARE 2030: Value-Based Care?
• Podcast: The future of accountable care
• David Johnson: HHS launches a host of transformative payment models (Oh my!)

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