Understanding Fee-for-Service Payment in Health Insurance (Full Transcript)

Speaker 1: All right, in this video I'm talking about what is fee-for-service payment in health insurance. And this of course has to do with the relationship between the doctor and the insurer. So how much does the insurer pay the doctor? Well, fee-for-service is actually classic. It's just where the doctor puts together a bill. So the doctor says, I did the following things to the patient. I did surgery and I'm charging $9,000 for that. I consulted with the patient a few times and I'm charging $2,000 for that. And I did some diagnostic testing. I'm charging $1,000. And the doctor then sends that bill to the insurer and the insurer pays it. So very simple. Now historically this got to be a problem because of course there's an incentive for the doctor to put really high price tags on the doctor's things they're doing. And that led to a huge rise in the cost of health insurance. For a while medical care started to look like it was not sustainable. So in which case that's when managed care came on the scene. And there is still fee-for-service in managed care. It's just that the insurer puts a lot of effort into determining what is an appropriate price for each of these things. So that the doctor doesn't set the price, the insurer sets the price, and the doctor gets to decide do I accept that insurance. And that's still true under fee-for-service that these numbers are generally set by the insurer now, not the doctor. And of course because it's so expensive to come up with realistic numbers for this, the government generally does this by setting Medicare insurance prices. And insurance companies will sort of link their pricing scheme to Medicare's. Now of course one problem with this payment scheme is that there's an incentive for the doctor to do more things to the patient than necessary. To invite them in for more consultations, to require the patient to come into the office for a consultation if there's a higher payment for the office than for online care. There's lots of incentives for the doctor to sort of make sure the list of things on that bill is both lucrative and long. So that's the problem with fee-for-service, and it's the reason why there are other mechanisms for insurers to pay doctors, which I'll talk about in other videos.