Advantages and Disadvantages of the Following Hospital Payment Systems on Cost Containment and Provider Behavior, Term Paper Example


Advantages and disadvantages of the following hospital payment systems on cost containment and provider behavior:

  • Fee-for-service
  • Per diem
  • The DRG-based payment system (i.e., Medicare’s Inpatient Prospective Payment System)
  • Capitation


A major advantage of the Fee-for-service (FFS) payment model is that services are paid for separately and not together as other plans. Importantly, it is beneficial to both hospital and the provider since through this payment system earnings can be increased because it patients are charged for each intervention. For example, if a patient had a surgery, the surgeon is paid for the operation whereas the hospital stay is recorded separately benefiting from the procedure. Hence, opportunities to provide more care since these are billed individually. In countries such as Japan fee –for-Service Payment methods are connected to national pricing to contain cost within health care organization

A notable disadvantage of this method, however, is that patients tend to be offered treatment, which unnecessary, but are added because the physician can derive a fee for the service. In this case the emphasis flows away from quality care towards quantity care critics argue that it is not cost effective because the focus in on quality and not quality. As such, whether patients are heard regarding their complaints is unimportant to both hospital and physician. Subsequently, efficiently is greatly compromised since the goal is more towards improving the censuses and not quality of care (Fuchs, 2009).

Per diem:

Per diem is a limited model of the prospective payment technique whereby patients pay a daily price or rate for their health care services when hospitalized. Reimbursement is through a third party payer. An example of this system and its advantages for healthcare organizations, especially, hospitals is one practiced by the Indian Health Service whereby they found it useful to combine these payment strategies with supplemental health insurance plans. It has been executed with such dexterity that the payment system has been a tradition in that society regarding fairness of reimbursing physicians for services rendered to patients who are being hospitalized for extended periods of time (Casto & Layman, 2006).

Critics argue that the method can be exploitive to patients because providers do take advantage of the opportunity to increase the days patients remain hospitalized or hospitalize patients unnecessarily. While all of this may be true the system is cost effective because calculations of daily rates are far less complicated than coding charges per service. Therefore, cost is contained and the health care facility makes a greater profit than in many other payment methods (Casto & Layman, 2006).


A great advantage of capitation payment method in health care relates to the third party payer reimbursement strategy. This is calculated based on providers being afixed a certain amount per given period, per capita amount for a period’ (Casto & Layman, 2006, p 4). The terminology per capita pertains to per head or on per person per month (PMPM). Usually, this is the amount of money paid to the provider or hospital on a monthly basis one the client/patient is enrolled in the health insurance plan. It means that providers receive payment for services of all group members regardless of whether the patient is seen or not. Therefore, this is a tremendous advantage for maintenance organizations (Hughes, 2004).

Consequently, the amount of services has no effect on payment as it relates to increase because there is a set amount of money allotted to the organization or provider for that period. As such, if the entered into an agreement to offer a certain amount of services within a given period of a set of employees this is the payment that will be received. This a notable disadvantage, but it can still contain cost to patients in long term care facilities (Casto & Layman, 2006).

The DRG-based payment system (i.e., Medicare’s Inpatient Prospective Payment System)

         An advantage of DRG-based payment system is the assignment of a specific DRG weight by Centers of Medicare Services to each patient’s accessibility of care profile. This weight gives an estimate regarding the services that are available to that Medicare recipient in the DRG program. It also helps the medical record department to align these resources to those received by other recipients. The purpose of all these weights is mainly for accurately giving account of cost differences among various treatments administered by care providers during hospitalization. Conditions that cost more are ascribed a higher DRG weight for accountability. Examples of weight ranges are ‘the fiscal year 2001 the DRG weights ranges were .5422 for a concussion (DRG 32) to 1.4966 for viral meningitis (DRG 21) to 19.0098 for a heart transplant (DRG 103).29’ (Blount & Waters 2001, p 12).

However, while the weight assignment is a great advantage of cost containment to hospitals and providers non – physician services provided by hospitals cannot be reimbursed though this system. The organization or provider has to access another resource for submitting such costs directly for reimbursement through PPS (Blount & Waters 2001).


Blount, L. L., & Waters, J.( 2001). Managing the Reimbursement Process. 3rd ed. Chicago: AMA Press

Casto, B., & Layman, E. (2006). Principles of Healthcare Reimbursement. American Health Information Management Association

Fuchs, V. (2009). Eliminating waste’ in health care. Journal of the American Medical Association, 302 (22), 2481–2482

Hughes, J. Averill, F.  Eisenhandler, J. Goldfield, N.Muldoon, J.  Neff, M., & Gay. J. (2004). Clinical risk groups (CRGs): A classification system for risk-adjusted capitation-based payment and health care management. Medical Care 42 (1): 81