Fee-For-Service (FFS) means that Medicaid pays doctors and healthcare professionals directly for each service they provide.
Section 1902(a)(30)(A) of the Social Security Act requires that FFS payments be consistent with efficiency, economy, and quality of care, and are sufficient to provide access equivalent to the general population.1
FFS allows patients to select a physician and hospital freely, and federal rules do not prescribe how physicians should be paid or how much they should be paid. Medicaid payment policies are however required to promote efficiency, quality, access, and safeguard against unnecessary utilization.
Medicaid payment systems vary by state and setting of care. In the inpatient setting states generally use three FFS payment methods: diagnosis related groups (DRGs), per-diem, and cost. DRGs is a method in which hospitals are paid a fixed amount per discharge, with outlier payments for especially costly cases. Payment for a particular inpatient service may vary by hospital because the DRG method is hospital-specific. The state assigns different base rates to different hospitals based on a variety of factors such as location and hospital type. The state also increases or decreases payment through supplemental payments, or incentive-based payments that support certain policy goals. For per diem and cost-based payment methods, base payments are determined using hospitals’ reported costs. Through the per-diem approach states pay hospitals for the number of days that a patient is in the hospital. In a per-diem payment, every procedure has the same base rate, which is multiplied by the total number of days during the stay to determine the total payment. The cost methodology involves paying for inpatient services based on each individual hospital’s reported costs. This approach is less common than DRGs or per diem-based payment.2 Many states use cost-based reimbursement for certain types of hospitals, such as small hospitals (e.g. critical access hospitals) and government-owned hospitals.
Payment methods for outpatient services also include payment based on reported costs, as well as an ambulatory patient classification (APC) system and enhanced ambulatory patient groups (EAPGs). In a few cases, payment is based on the bundle of services commonly associated with a particular patient condition. The APC system used by Medicare classifies individual services into one of 833 APCs based on clinical and cost similarity. All services within an APC have the same payment rate. A single visit may have multiple APCs and multiple separate payments. EAPGs bundle ancillary and other services commonly provided in the same medical visit; payment is based on the complexity of a patient’s illness.3
In the inpatient setting, nationally, as of 2018, 74% (37) of states utilized the DRG methodology as the basic payment approach, followed by 20% (10) electing a per-diem or per-stay method and the remaining 6% (3) implementing a cost or an uncategorized approach.4
Provider payment and delivery systems. MACPAC. https://www.macpac.gov/medicaid-101/provider-payment-and-delivery-systems/.
Medicaid Inpatient Hospital Services Fee-For-Service Payment Policy. Washington, DC: https://www.macpac.gov/wp-content/uploads/2016/03/Medicaid-Inpatient-Hospital-Services-Fee-for-Service-Payment-Policy.pdf; 2018. https://www.macpac.gov/wp-content/uploads/2016/03/Medicaid-Inpatient-Hospital-Services-Fee-for-Service-Payment-Policy.pdf.
Provider payment under fee for service : MACPAC. MACPAC. https://www.macpac.gov/subtopic/provider-payment/.
States' Medicaid Fee-For-Service Inpatient Hospital Payment Policies.; 2018. https://www.macpac.gov/wp-content/uploads/2018/12/State-Medicaid-Fee-for-Service-Inpatient-Hospital-Payment-Policies.xlsx.