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Choosing the Right Fee Structure and Payment Terms for Your Practice

How to Choose the Right Fee Structure and Payment Terms for Your Healthcare Business

Determining the proper fee structure and payment terms is one of the most critical strategic decisions healthcare businesses must make. Your chosen model can significantly impact your revenue, cash flow, administrative costs, and patient satisfaction. As the healthcare industry continues to evolve rapidly, having pricing aligned with your business goals and market positioning is essential.

In this comprehensive guide, we'll explore:

  • The pros, cons, and use cases of various pricing models

  • Key factors to consider when selecting fee structure and payment terms

  • Examples and case studies of models in action

  • Best practices for implementing and optimizing your approach

Whether you want to revamp your current model or determine initial pricing as a new market entrant, this guide will provide valuable insights. 

Traditional Fee-for-Service Model

The traditional fee-for-service pricing model has long been the predominant approach used in healthcare. It involves providers setting a fixed price menu for specific services, procedures, tests, office visits, and other medical offerings. This fee schedule is published and shared with patients ahead of receiving care. Patients are expected to pay the total fee amount at the time of their appointment or service. Healthcare providers then directly bill the payment to insurance companies, who reimburse patients based on their plan coverage details. Any outstanding balance then falls to the patient to settle.

The advantages of fee-for-service are its simple, predictable structure where patients know costs upfront, and it maximizes per-service revenue for providers with low administrative overhead. However, the disadvantages are that it allows little flexibility or customization of pricing, needs to account for healthcare value or patient outcomes, and the model misaligns with recent shifts towards coordinated care initiatives. The fee-for-service approach works best for routine wellness visits, diagnostic testing, minor outpatient procedures, and other one-off medical services. It is less compatible with the pricing needs of ongoing chronic condition management.

Tiered Pricing by Insurance Category

With a tiered pricing approach, healthcare practices establish different fee levels based on a patient's insurance coverage:

  • Tier 1 features discounted rates for Medicaid patients

  • Tier 2 is mid-range pricing for Preferred Provider plans

  • Tier 3 is higher rates for Out-of-Network insurers

The practice maintains an underlying fee schedule, but the prices are adapted across the tiers. The practice handles submitting claims to insurance plans on the patient's behalf and bills the patient for any remaining balance (deductibles, copays, coinsurance).

The advantages of tiered pricing are allowing price differentiation across diverse patient populations, securing higher reimbursement rates from preferred and out-of-network payers, and putting less payment collection burden directly on patients. However, disadvantages include added administrative complexity, and the model needs more flexibility for further customization. Overall, tiered pricing is widely adopted by large health systems and hospitals serving patients with various insurance coverage types. It enables them to maximize revenue from private payers while remaining accessible to Medicaid populations.

Value-Based Pricing

A value-based pricing model does not focus on specific services delivered, but instead ties reimbursement to the health outcomes achieved and total cost savings. Providers are reimbursed based on performance metrics such as improving patient health, reducing acute care utilization, patient satisfaction scores, and overall care costs. Upside and downside financial risk is shared between the provider and payer. Exact terms are negotiated on a case-by-case basis.

The benefits of this approach are tying pay to value and performance, incentivizing coordinated and high-quality care, and enabling innovation and customization. However, challenges include difficulty setting benchmarks and metrics, revenue uncertainty for providers, and requiring robust data analytics capabilities. Overall, value-based pricing aligns well with coordinated care initiatives favored by payers. It is best suited for large health systems with the data tools, resources, and risk tolerance to measure outcomes and costs vs. benchmarks. Smaller practices often find this model difficult to take on.

Direct Primary Care (DPC)

The direct primary care (DPC) pricing model involves charging patients a monthly membership fee to access defined primary care services. Typically prices range from $50-150 per month per patient.

This covers office visits, preventive care, and chronic care coordination. The pros of DPC are that it provides predictable, recurring revenue for the practice, low administrative costs, and facilitates closer doctor-patient relationships. However, the cons are that a large patient panel is needed to generate sufficient revenue, the model is limited in scope to primary care, and monthly fees are generally not reimbursable by insurance companies.

Overall, the DPC approach works well for primary care clinics that want to offer streamlined access and personalized care for patients. However, the monthly fee structure must be thoughtfully designed to ensure it remains affordable for the target patient demographic while generating adequate revenue to support the practice.

Concierge Medicine

The concierge medicine model features annual membership fees patients pay for enhanced care and amenities. Fees often range from $1500-$5000+ per patient annually. In return, patients may receive benefits like 24/7 access to care, coordinated and proactive maintenance, and additional ancillary services.

The pros of this approach are that it provides a private, direct revenue stream, allows for a lower patient volume and panel size, and facilitates highly customized care and attention. However, the cons are that the high price point inherently limits the target patient population, conflicts can arise with insurance reimbursement structures, and administrative needs are associated with running a membership program.

Concierge medicine aims to position practices as luxury, attentive health services reserved for high-net-worth individuals. The membership fees supplement reimbursement from insurance plans. Given that the model seeks an affluent market segment, strict vetting of members is crucial for both optics and profitability.

Membership Plans

The membership plan pricing approach charges patients a monthly fee for a customized package of services tailored to their needs, usually $100-300. The fee covers a defined set of services such as x number of office visits, x procedures, and care coordination activities.

The pros of this model are providing a customized bundle of services, recurring monthly revenue, and simplified payment administration for the practice. However, potential cons include the administrative workload of managing the plans, patients wanting or utilizing more services than their plan covers, and requiring clear scope definitions for what is included. Overall, membership plan pricing offers flexibility to bundle pricing that appeals to patients creatively.

However, your practice must ensure the packages are designed to adequately cover costs and meet revenue goals based on their patient population's needs and utilization patterns. Careful plan design is crucial to make this model sustainable.

Retainer Model

In the retainer model, patients pay an upfront deposit that covers future care needs. Patients typically deposit between $500-$5000, which covers appointments until the funds are exhausted. When the balance runs low, patients replenish it.

The pros of this model are providing a buffer against appointment cancellations, ensuring payment, and eliminating the need for claim submissions. However, the cons are variable cash flow as accounts are drawn down, difficulty determining the optimal deposit amount, and the burden of tracking accounts and collections.

While this model offers financial protection for practices, there is uncertainty as account balances fluctuate. Implementing clear deposit policies and carefully tracking balances is essential for managing this model effectively. The retainer model must be evaluated to determine if the benefits outweigh the administrative challenges.

Discounted Cash Rates

Some practices publish discounted cash rates for patients paying out-of-pocket without insurance claims and, for example, offer a 10-30% discount from standard rates if no insurance billing or paperwork is involved. The pros of this approach are appealing rates for uninsured patients and increased price transparency.

However, the cons are that potential insurance reimbursement is left on the table, the accounting complexity of maintaining separate cash rates, and self-pay collections still need to be improved. While discounting may improve access for cash-paying uninsured patients, practices must closely evaluate whether forgoing potential insurance revenue is optimal and sustainable for each case. The discounted cash rates should be set at a level that covers costs while providing affordable options.

Key Factors in Choosing Your Model

As you can see, each pricing model has its own pros, cons, and use cases. Selecting the right approach involves weighing many essential factors:

  • Service offerings – What are your care delivery mix and areas of specialty?

  • Patient population – Are you serving a broad or niche demographic?

  • Location – What are common needs in your geographic market?

  • Financial goals – Where do you need your revenue targets and acceptable risk levels to be?

  • Practice culture – What care model and patient relationships do you want to cultivate?

  • Capabilities – How do you need clinical data, analytics, and administrative systems setup?

The Importance of Customizing Your Approach

Healthcare organizations should customize their approach across patient segments when implementing pricing models. For instance, a hybrid model could combine tiered insurance pricing with direct primary care for uninsured patients and membership-based concierge services for others. Practices should also continually optimize fee schedules based on evolving volumes, margins, and payer reimbursements. Conducting annual reviews helps rebalance pricing across services to match updated market rates and costs.

To improve affordability for uninsured patients, options like no-interest payment plans, partnerships with third-party lenders, and financial assistance programs should be considered. Bundling services into packaged pricing enables creative solutions for coordinated care under value-based models, such as comprehensive asthma management. When transitioning to value-based pricing, incremental steps like shared savings are recommended before taking on downside risk. Careful analysis is required when designing membership models to determine fee levels, panel sizes, and service mixes for profitability.

Clear payment policies outlining due dates, acceptable payment methods, and any late fees or interest for overdue balances are essential. Providing upfront estimates and collecting prepayments or deposits for planned, elective procedures also improve collections.