✅ Reviewed for accuracy and relevance by Deanna Cooper Gillingham, RN, CCM, FCM on June 26, 2025.
Healthcare reimbursement methods have been developed in an attempt to improve care quality while controlling costs. Methods include value-based reimbursement, financial risk, and episode-of-care models, which further include bundled payments, case rates, and prospective payment systems. The alternative models attempt to prevent the overuse of healthcare resources by paying a predetermined amount regardless of the number or cost of services provided.
Prior to the advent of these reimbursement methods, providers and organizations were paid using a fee-for-service system, where each service was priced separately. For example, a mastectomy procedure would charge for the hospital room, medications, surgical supplies, OR suite, physician charges, surgeon charges, anesthesia, anesthesiologist charges, post-op office visits, etc. The new modes of payment emphasize quality and efficiency over the volume of services.
Reimbursement and payment methods can be categorized according to payment basis:
- Service provided
- Fee-for-service
- Diagnosis or procedure
- Bundled payment
- Case rate
- Prospective payment
- Outcome
- Value-based care
- Financial risk
- Shared risk
- Full risk (capitation)
Bundled/case rate
Bundled and case rates are used interchangeably. Both involve a single payment for all services related to a specific treatment or condition over a defined period. For example, a bundled payment for the mastectomy mentioned before would cover all the expenses listed.
Prospective payment system (PPS)
PPS is used primarily by the federal government to reimburse for care given to Medicare and Medicaid participants. Diagnoses (not services) are reimbursed at a predetermined, fixed amount based on the typical cost to treat a given diagnosis. Diagnosis-related groups (DRGs) categorize diagnoses based on their associated costs. (See the diagnosis-related groups section for more details.)
The PPS was developed to motivate providers to deliver patient care cost-effectively and efficiently without overusing services. Providers know the amount they will be reimbursed in advance and can either make a profit or incur a loss on the reimbursement. Whereas the traditional fee-for-service payment system incentivizes providing extra (perhaps unnecessary) services, the PPS system discourages this.
The PPS also encourages efficiency. In a fee-for-service reimbursement model, a hospital may keep a patient over the weekend to perform a test or procedure on Monday; the PPS system incentivizes the hospital to call in staff to conduct it over the weekend. This can lead to faster diagnosis and treatment, shorter hospital stays, and ultimately lower costs.
This article shares a portion of the information covered on this topic in CCM Certification Made Easy, 4th Edition by Deanna Cooper Gillingham, RN, CCM, FCM (2025). For more details on this topic, including value-based care financial risk models, purchase your copy at CCMCertificationMadeEasy.com.
