Fee for service or pay for performance: what are the differences?

The way healthcare services are paid for in Brazil is undergoing a gradual transformation. For decades, the volume of procedures performed was the main criterion for paying hospitals, clinics and physicians. This model, known as fee for service, pays for each service provided individually.

More recently, the industry has begun to discuss alternatives that better align financial incentives with the quality of care. In this context, value-based payment models are gaining ground, among them pay for performance.

To understand this shift, it is important to first look at how the traditional model works and what its limitations are.

What is the fee for service model?

Fee for service (FFS) is the payment model in which providers (such as hospitals, clinics, laboratories and physicians) are paid for each unit of service performed.

In a hospital stay, for example, the final claim is the sum of all the items used in the patient’s care, such as:

• physician consultations;

• laboratory and imaging tests;

• drugs;

• disposable materials;

• hospital daily rates.

This model is relatively simple to administer and ensures that every service performed is paid for. For that reason, it became the predominant format in Brazilian private healthcare for many years. However, fee for service has limitations.

The main one is that payment is directly tied to the volume of procedures, and not necessarily to the clinical results achieved. In other words, the quantity of services provided influences revenue more than the quality or effectiveness of care.

This mechanism can create unwanted incentives, such as more tests or procedures, longer hospital stays and fragmentation of care across different providers.

In addition, the model tends to evaluate each encounter in isolation, which makes it difficult to analyze the patient’s full journey and the results achieved over the course of treatment.

Why is the industry looking for value‑based models?

Given the limitations of the traditional model, many health systems began looking for ways to align financial incentives with the quality of care.

This discussion is tied to the concept of value-based health care (VBHC), which defines value in healthcare as the relationship between the results achieved for the patient and the total cost of care.

In simple terms:

Value in healthcare = relevant clinical outcomes ÷ cost of the full cycle of care

In this model, the goal is not just to cut expenses but to ensure that resources are used to produce better results for patients.

This requires a change in how providers are paid. Instead of paying exclusively for the volume of procedures, the new models seek to take into account factors such as:

• patient safety;

• the plan member’s experience;

• full control over the use of resources.

Adopting these criteria aims to encourage more coordinated clinical practices and improve treatment outcomes.

The role of the ANS in changing the payment model

In Brazil, the transition to value-based models has been encouraged by Brazil’s National Supplementary Health Agency (ANS).

To support this shift, the agency created the Value-Based Payment Models Program, which encourages payers and providers to test new forms of payment in the industry and to consider:

• measurement of clinical outcomes;

• quality and safety indicators;

• patient experience;

• more efficient use of resources.

The program also encourages pilot projects, in which payers and hospitals test new contract structures before broader adoption in the market.

What are the main alternative models to fee for service?

The transition to value-based healthcare does not depend on a single payment format. Different mechanisms can be used to align incentives between payers and providers.

The most discussed models include:

Capitation (a per capita amount)

In this model, the provider receives a fixed amount per patient (per capita) to cover the necessary care over a set period.

This format is common in Primary Health Care, as it encourages prevention and continuous follow-up of the patient, avoiding higher costs in the future.

Bundled payments (payment per episode of care)

In this model, a single amount is set for the entire episode of care, such as a childbirth or a surgery.

Instead of billing each item separately, the hospital receives a package that includes all the services related to the procedure. This reduces billing fragmentation.

Shared savings

In this arrangement, providers and payers share the savings generated when the cost of care is reduced without compromising quality.

If a hospital manages to treat a population at a lower cost and with good clinical results, part of the savings achieved can be split with the payer.

How does pay for performance work?

Pay for performance, also known as P4P, ties part of the payment to meeting care targets.

It does not necessarily replace the other payment formats. In most cases, it works as an additional layer of incentives, applied on top of existing contracts.

In this model, hospitals and professionals can receive financial bonuses when they meet previously defined indicators.

These indicators usually cover three main dimensions:

Care and safety indicators

They evaluate the quality of care and adherence to good clinical practices, such as:

• hospital infection rate;

• readmissions within 30 days;

• adherence to clinical protocols.

Patient experience

Measures the plan member’s perception of the care received, through instruments such as satisfaction surveys or patient experience indicators.

Care efficiency

Evaluates the rational use of resources and the ability to resolve the patient’s health problem with quality and safety.

When the indicators are met or exceeded, the provider receives a bonus. If performance falls below the expected standard, there may be contract adjustments or reduced incentives.

Challenges in implementing these models

Despite conceptual progress, implementing value-based models still faces challenges in Brazil.

The main ones include:

Data infrastructure

Evaluating performance requires systems capable of reliably collecting and analyzing clinical and operational indicators.

Interoperability between systems

Hospitals and payers often use different platforms, which makes it difficult to share information.

Contractual alignment

Moving from volume-based to value-based models requires renegotiating contracts and full transparency between the parties.

Outcome measurement

Measuring clinical results that are relevant to the patient is still a methodological challenge for many institutions.

The trend toward hybrid models

Given these challenges, the transition does not usually happen abruptly. The trend seen in many markets is the adoption of hybrid payment models.

In these arrangements, part of the payment remains based on volume or care packages, and another part comes to depend on performance and quality indicators.

As information systems evolve and outcome measurement becomes more accurate, value-based models are likely to take on a bigger role in Brazilian private healthcare.

Conclusion

The transition to value- and performance-based payment models also requires increasingly precise financial management. Technology and data analysis come to play a central role in the sustainability of healthcare institutions.

Rivio is a company that uses artificial intelligence to manage the entire hospital revenue cycle, increasing revenue and operational efficiency. From audit to payment, our technology analyzes clinical records, cross-checks information against hospital claims, identifies and corrects denials, submits the XML and manages denial appeals, all automatically.

With Rivio, hospitals and clinics leave the bureaucracy to AI and can focus their efforts on what really matters: caring for the health of the Brazilian population.