DQ: Differentiate between fee for service, capitation, and episode-based payment

NUR 621 Topic 6 DQ 2

DQ: Differentiate between fee for service, capitation, and episode-based payment



Identify the primary payment mechanism for your organization. Provide discussion with response.


Fee-for-service (FFS) directly pays Medicaid participating physicians, clinics, hospitals, and providers a fee for each service rendered (Kaiser Family Foundation, n.d.). The FFS payment model rewards volume despite a patient’s health outcomes or quality of care (Kaiser Family Foundation, n.d.). Some disadvantages of the FFS payment model are fragmented care due to lack of care coordination, care gaps, duplicate services, and high out-of-pocket costs. Many consumers favor the FFS payment method due to the ability to choose providers without restrictions despite the high costs associated with the same (Penner, 2017). Individuals still widely use FFS, and many providers also favor this payment method.

Capitation is a healthcare payment system that pays a fixed amount per patient for a prescribed period by an insurer or physician association to the provider or hospital rendering services (Torrey, 2020). This financing model is a risk-sharing method for the cost of care from the payer to the provider (Penner, 2017). With capitation, a provider may be penalized for the use of services that value more than the fixed payment obtained or, on the other hand, may make a profit if the patient or consumer uses fewer services. If the patient or consumer does not use services, the provider still gets the fixed fee. One advantage to clients is that duplication of services is usually avoided, but a disadvantage is that providers may decrease time spent with one client.

Episode-based payments, also known as bundled payments, were created by the Center for Medicare and Medicaid Services (CMS) and came about with the Affordable Care Act to improve patient outcomes at a reduced cost to Medicare (Forrest, 2018). With this payment method, “the total allowable remittance for a patient’s sequence of care relating to a single episode of the medical event is predetermined instead of separate compensation for each service and provider along the way” (Forrest, 2018). Unlike FFS service payment, episode-based payments reward value over volume of care, and providers receive incentives when high-quality, cost-effective care is delivered.



Forrest, B. (2018). Episode-based payments explained.

Kaiser Family Foundation. (n.d.). Medicaid delivery system and payment reform: A guide to key terms and concepts

Penner, S. J. (2017). Economics and Financial Management for Nurses and Nurse Leaders (3rd ed.). Springer Publishing Company. ISBN: 978-0-8261-6001-0

Torrey, T. (2020). How healthcare capitation payment systems work, Very Well Health.


Thank you for your post, I like how you separated out each reimbursement model. Fee for service is what most of us are familiar with and is what a lot of hospital models are based off of as a volume-based system where increased volumes have increase revenues. while

DQ Differentiate between fee for service, capitation, and episode-based payment
DQ Differentiate between fee for service, capitation, and episode-based payment

some patients may not want to leave the hospital at times and enjoy the extra stay, the flip side is that patient satisfaction typically suffers in a FFS model due to overage or duplication of tests and higher cost of care. The FFS model looks at patients in silos instead to the patient as a whole and has been partnered with decline in overall health of our population.  In accountable care organizations where private insurers, hospitals and partitioners begin the establishment of partnerships to follow a patient across the continuum of care, is when other avenues of reimbursement based on quality were viewed. (Penner, 2016) Value based purchasing or care is as you stated putting value back into the care of the patient and placing value on the quality of care.  Value based care is has a culture shift necessary to change practice, but it changes it for the better to focus on the whole patient instead of silos

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Penner, S. J. (2016). Economics and financial management for nurses and nurse leaders, third edition (3rd ed.) [e-book]. Springer Publishing LLC.



The fee-for-service payment is a payment model that involves services being paid individually. This type of service provides encourages physicians to provide more healthcare treatments because the individual treatment payment is based on the quality treatment provided rather than the quality of care provided to the patient. The healthcare provider bills using an itemized list and is reimbursed based on patients or services (Penner, 2017). The fee-for-service is based on the premise that both provider and patient are conscientious or the healthcare services that are truly needed. Unfortunately, individuals who use the fee for service model payment system seem too careless how many healthcare treatments or services are being used because they know that the claim will be paid when submitted. Sometimes some of the treatments being ordered are unnecessary and a waste of resources and money. This plan also allows the consumer to choose specialists where treatment is accessible without the need to show the need of the specialty care. The same problem with waste can occur with physicians overusing the system by ordering unnecessary treatments. Because the model is based on volume-based payment system the reimbursement will be greater based on the number of patient and services that were provided (Penner, 2017).

The capitation payment model is very different from the fee-for-service payment model. The capitation payment model consists of physicians getting reimbursed on a set amount per patient and not based on the volume of treatments provided or volume of patients. This payment system is dealing with managed care plans. It is considered a financial strategy that is prepaid revenue considered a fixed payment or global budgeting (Penner, 2017). Healthcare providers that belong to managed care plans can negotiate and calculate their capitation reimbursement period which will also include the members for the capitation period that will pay in advance (Penner, 2017). The capitation rate is also based on the members age and sex. The capitation model of financing is a system of risk sharing or exporting risk where the provider is sharing the financial risk (Penner, 2017). The managed care provider must be able to control the expense costs to ensure that the capitation payment received does not exceed the capitation budget. This type of payment system encourages physicians to be conscientious about what treatments or procedures patients are receiving. Those physicians that abuse this system are penalized because managed care providers share the costs of unnecessary treatments.

Episode-based payment model is also called a retrospective payment model. This type of payment model is based on the expected costs for the healthcare services have been provided (Penner, 2017). Retrospective payment is the same as fee-for-service and one of the oldest payment systems in healthcare. The history of the payment system involves physicians charging fees for services that were provided to patients. Change-base reimbursement is a retrospective payment approach where the provider bills the payer for all the services that were provided to the patient. The payor will evaluate the itemized bill submitted and determine if payment will be provided or denied. Generally, providers will be paid for the services rendered. (Penner, 2017).


Penner, S. J. (2017). Economics and financial management for nurses and nurse leaders (3rd ed.). Springer Publishing Company.


A fee-for-service funding model is one in which a doctor or other health-care professional gets paid a price for each particular treatment done, thereby advantageous medical practitioners for the number and quantity of products delivered, matter what the outcome. In recent decades, the fee-for-service reimbursement model has been the standard and most widely utilized healthcare model. In this arrangement, healthcare practitioners are paid depending on the specific services they perform (i.e. appointments, treatments, tests ordered, prescriptions given). These services are then included individually on bills, which may make them long and confusing (Health Insurance, 2018). As a result of this paradigm, many providers have taken on an increasing number of patients in order to generate more money, putting a premium on the quantity of services they can deliver to their patients. Examples of services include tests and office visits.

Capitation is a set sum of money paid in advance to the physician for the performance of health care services per patient per unit of time. The quantity of money paid is decided by the kind of services offered, the number of patients engaged, and the length of time the services are supplied. Managed care companies employ capitation payments to keep health-care expenses in check. Capitation payments limit the utilization of health-care resources by imposing a financial risk on the physician for services rendered to patients (American College of Physician, 2019). At the same time, managed care organizations assess rates of resource use in physician practices to ensure that patients do not receive substandard treatment due to underutilization of health care services.

Episode-based payments are still in their early stages of development and adoption, although there is rising interest in them. Unlike typical fee-for-service reimbursement, which pays clinicians individually for each service, an episode-of-care payment covers all of the care a patient receives during treatment for a given sickness, condition, or medical event. All physician, inpatient and outpatient care for a knee or hip replacement, pregnancy and birth, or heart attack are examples of episodes of care for which a single, bundled payment can be issued. Savings can be realized in three ways: 1) by negotiating a payment so that the total cost is less than fee-for-service; 2) by agreeing with providers that any savings that arise because total expenditures under episode-of-care payment are less than they would have been under fee-for-service will be shared between the payer and providers; and/or 3) by not making additional payments for the cost of treating complications of care, as would a fee-for-service payment (National Conference of State Legislatures, 2022). Case rates, evidence-based case rates, condition-specific capitation, and episode-based bundled payments are other terms for episode-of-care payments.

American College of Physician. (2019). Capitation Payments | Understanding Capitation | ACP.