Healthcare Glossary→Fee-for-Service
Revenue Cycle

Fee-for-Service (FFS)

Fee-for-service is the dominant traditional healthcare payment model where providers are paid separately for each service rendered, with Medicare using a Resource-Based Relative Value Scale (RBRVS) to determine payments.

How Fee-for-Service Works

Under fee-for-service (FFS), providers submit claims for each individual service provided (each office visit, procedure, laboratory test, imaging study) and receive payment for each billable service. Medicare FFS uses the Resource-Based Relative Value Scale (RBRVS), developed by Harvard's William Hsiao in the 1980s, to assign Relative Value Units (RVUs) to each CPT-coded service.

The RVU Payment Formula

Medicare payment for a service = (Work RVU + Practice Expense RVU + Malpractice RVU) × Geographic Practice Cost Index (GPCI) × Conversion Factor (CF)

  • Work RVU: Reflects physician time, effort, skill, and stress. Accounts for approximately 50% of total RVUs.
  • Practice Expense RVU: Covers overhead costs (staff, supplies, equipment). About 44% of total RVUs for non-facility services.
  • Malpractice RVU: Covers malpractice insurance cost liability. About 4% of total RVUs.
  • GPCI: Geographic adjustment for local cost differences. Separate GPCI values for work, practice expense, and malpractice.
  • Conversion Factor: The dollar value per RVU. For CY2024, the Medicare conversion factor is $32.74 — reduced from $33.89 in CY2023, representing an ongoing trend of annual cuts to CF.

Common E&M Code RVU Values

  • 99213 (Established, Level 3): 1.30 Work RVU → ~$78 Medicare
  • 99214 (Established, Level 4): 1.92 Work RVU → ~$111 Medicare
  • 99215 (Established, Level 5): 2.80 Work RVU → ~$147 Medicare
  • 99203 (New, Level 3): 1.60 Work RVU → ~$109 Medicare
  • 99204 (New, Level 4): 2.60 Work RVU → ~$167 Medicare

FFS Limitations in the Value-Based Era

FFS creates volume incentives misaligned with health outcomes — it does not reward care coordination, prevention, or communication that does not generate a billable encounter. Annual CF cuts (Congress has reduced the conversion factor nearly every year since 2010 without major legislation) have driven practices to increase volume to maintain revenue, undermining the time needed for complex patient management. Understanding FFS economics is essential for evaluating when value-based arrangements offer genuine financial advantage.