Trends and challenges in the U.S. healthcare payment system

7 min read


The U.S. spends nearly 17% of its GDP on healthcare, more than any other high-income nation. Yet, according to a study by the Commonwealth Fund, the U.S. falls dead last in metrics such as access to care, healthcare outcomes, and efficiency. Some healthcare industry experts say that the U.S. healthcare payment system is a barrier to effective healthcare that should be available to all Americans.

Fortunately, that system is changing. Healthcare leaders and government officials are looking for ways to reduce the cost of care while increasing its effectiveness. Some of those changes have already been put in place, while others may require a significant overhaul of the ways the U.S. pays for healthcare.

What is the structure of the U.S. healthcare payment system?

Traditionally, doctors, hospitals, and other healthcare providers operate under a fee-for-service healthcare payment system. Under the fee-for-service model, each part of a doctor visit or procedure is billed separately. A patient who undergoes an operation is billed by the surgeon, anesthesiologist, and hospital. They receive bills for their room, medications, and medical products. For example, if someone is in a car wreck, they are billed by the ambulance company for transport. They will also be treated in the emergency room and will usually be billed at a higher emergency room rate.

Many experts agree that fee-for-service causes higher healthcare costs. That’s because providers are incentivized to prescribe treatment, order tests, and perform medical procedures. 

Who pays for care?              

About half of all Americans have health insurance through their jobs or purchased individually, according to the Congressional Budget Office. Another 64 million Americans are insured via Medicare. Policy holders pay premiums, copays, deductibles, and a predetermined percentage of the total bill. Insurance or Medicare pay the rest.

Who determines the fee-for-service rates?             

The government establishes the price it will pay per procedure for Medicare patients. Insurance companies and providers negotiate fee schedules. In cases in which patients don’t have coverage, they may be able to negotiate directly with hospitals or doctors.

What happens if patients are uninsured?          

According to the U.S. Census Bureau, around 28 million Americans were uninsured as of 2020. Many others are underinsured or ineligible for Medicaid or other government health programs. These patients may not receive care — or may choose not to seek it. They also may be unable to pay their medical bills. Hospitals in low-income communities serve large populations of low-income patients. While Medicaid pays some of the bills, these hospitals have low reimbursement and payment rates for their services. This creates financial hardship for care providers. 

How does medical debt impact Americans?           

Nearly 20% of all U.S. households have medical debt, according to the U.S. Census Bureau, defining high medical debt burden as debt that exceeds 20% of household annual income. While uninsured and underinsured patients carry high levels of medical debt, even insured patients have trouble paying for medical care. Medical debt is one of the leading causes of bankruptcy in the U.S., and COVID-19 medical care has increased the debt burden for many Americans. 

Current healthcare payment models

Healthcare payment models have been designed around fee-for-service. They use different methods to try to keep a lid on rising healthcare costs. Payment models include:

The Centers for Medicare & Medicaid Services            

The Centers for Medicare & Medicaid Services (CMS) provides healthcare to about 110 million seniors and low-income individuals and families. Under Medicare, every procedure has a corresponding Medicare code. This code establishes how much the government will reimburse providers for the care of Medicare-eligible patients. Medicare reimbursements are often lower than the negotiated fees that commercial insurers pay. Therefore, some physicians do not accept Medicare patients. 

Other government healthcare payment systems include:

  • Medicaid: The federal government and state governments fund Medicaid. It provides health coverage to low-income individuals as well as pregnant women, children, the elderly, and people with disabilities. 
  • CHIP: The Children’s Health Insurance Program serves eligible children whose parents don’t qualify for Medicaid but who can’t afford private insurance.
  • TRICARE and CHAMPVA: TRICARE provides coverage for active-duty soldiers (including reserves) and families. CHAMPVA covers veterans.

Private health insurance          

According to the U.S. Census Bureau, about 177 million Americans had healthcare coverage through their jobs in 2020. Companies pay most of the premiums, and employees pay the rest (usually deducted from their paychecks). They can choose from a variety of plans: HMO (health maintenance organization), PPO (preferred provider organization), or a combined HDHP (high-deductible health plan) and HSA (health savings account).

Private health insurance is also available through the insurance marketplace under the Affordable Care Act (ACA). Individuals who don’t have insurance through their jobs can sign up for an insurance plan through this marketplace. Other sources of private insurance include COBRA, which allows individuals who have lost their jobs to keep their insurance for 18 months.

Private insurance generally works on a capitation model. Under capitation, the insurer negotiates the amount it will pay a provider for services per patient. The goal of capitation is to keep costs low. Some insurance plans use capitation plans to encourage doctors to provide preventative care and reward them for avoiding expensive treatment. 

Concierge services         

Concierge healthcare bypasses health insurance for primary care services. Instead, patients pay a monthly fee and receive the same health services they would receive at a traditional doctor's office. The advantages of concierge healthcare include faster access to providers and more personalized services. However, concierge healthcare providers usually don’t handle surgery or serious health emergencies. Patients will still need medical insurance to cover those incidences.


Self-pay is self-explanatory: Patients may prefer to (or have to) pay for services directly rather than through insurance. This is partly because out-of-pocket costs are rising rapidly, increasing 10% in 2021 to about $1,650 per person, reports Fierce Healthcare, based on data from market research firm Kalorama. This trend is prompting many individuals to forgo insurance coverage or skip preventive care visits. Many providers have established self-pay rates; practices that aren’t set up for self-pay may run into roadblocks in trying to treat patients.

Changes in healthcare reimbursement models

The most significant shift in healthcare reimbursement models has been Medicare’s move toward value-based care. Under value-based care, physicians and hospitals are paid according to the quality of care. That means putting more emphasis on preventive care that keeps patients from needing more expensive interventions. It also emphasizes metrics such as preventing hospital-acquired infections or readmissions after surgery.

These alternative healthcare payment systems reward clinicians who provide high-quality and cost-effective care to a community or patient population and penalize providers who don’t meet standards.

These Medicare value-based programs include:

  • End-Stage Renal Disease Quality Incentive Program: The ESRD QIP calculates scores for dialysis providers and reduces payments to facilities that don’t meet quality metrics.
  • Hospital Readmissions Reduction Program: The HRRP incentivizes hospitals to reduce readmissions and hospital-acquired infections.
  • Hospital Value-Based Purchasing Program: Similar to the HRRP, the HVBPP scores hospitals on their progress in improving the patient experience, implementing evidence-based care, and reducing hospital errors.
  • Merit-Based Incentive Payment System: CMS scores clinicians on quality, improvement, and cost, among other metrics. Qualifying physicians may receive a payment bonus or penalty, depending on the score.
  • Skilled Nursing Facility Value-Based Purchasing Program: Nursing homes and similar facilities that meet CMS quality standards are eligible for incentive payments.

Insurance companies have also started shifting their focus to value-based healthcare reimbursement models. For instance, Blue Cross Blue Shield and Humana have rolled out value-based models for chronic disease management.

Value-based care has been influential in encouraging hospitals and other providers to develop innovative solutions to healthcare access and quality. These solutions are aimed at reducing the cost of care while improving patient health. For example:

  • Population health: Population health looks at the overall health of a neighborhood, community, or city and provides services to improve general health. Social determinants of health such as genetics, pollution, access to work and supermarkets, and education have a significant impact on population health.
  • Data analysis: Healthcare researchers use health data analytics to collect and analyze healthcare data from patient populations to better understand health needs.
  • Mobile health technology: Increasingly, patient data is coming in from a variety of mobile sources. Examples include consumer wearables that track sleep and steps, temporary heart monitors, and phone apps. This data enters the stream of health data and provides information to physicians and public health officials.
  • Artificial intelligence and machine learning: Chatbots and other apps can be used to provide patient intake and scheduling, send bills, and do other routine tasks. These systems free up administrators to handle more complex issues.

What are the economic trends of the healthcare payment system?

It’s not surprising that the COVID-19 pandemic initiated a number of changes to medical payment methods. Other economic trends of the healthcare payment system have been in the works for years. Together, the natural evolution of the healthcare industry, changes in government regulations, and the pandemic have vastly changed patients’ expectations and the way doctors provide care. 

Rising patient costs and price transparency            

The cost of healthcare and insurance continues to climb. Patients are on the hook for higher premiums, copays, deductibles, and out-of-pocket costs. As a result, patients have become more sensitive to the cost of doctor visits, prescription drugs, and medical procedures. The federal Hospital Price Transparency rule went into effect in 2021. Hospitals must give patients a list of services and costs so patients can estimate the cost of care.  

Value-based care          

As discussed above, the move to value-based care continues to impact healthcare payment systems. CMS rolled out value-based payment models in 2011. More than ten years on, experts say there have been mixed results. While the government has instituted value-based and performance-based payments, the data hasn’t shown a significant impact on reducing costs and improving quality.

Likewise, care models such as accountable care organizations and medical homes, which aim to create teams of providers who collaborate on a patient’s care needs, haven’t yet shown improved metrics.

However, according to one metric reported by Health Affairs from a survey by the Duke Margolis Center for Health Policy, providers who operated under value-based care have been more resilient during the pandemic than organizations that stuck to fee-for-service. This is because many patients held off on seeking care, which meant utilization (a key metric) dropped drastically, reducing fee-for-service revenues.

From paper to portal          

Technology is making inroads into patient billing. One of the biggest areas of change is the move from sending out paper bills in the mail to online payment systems. Web portals let patients schedule appointments, pay their bills, get a record of their care and doctor’s instructions, and manage other information. According to research firm InstaMed, most patients prefer contactless payment and would prefer to make all their healthcare payments through one portal.  


When the pandemic hit, providers scrambled for ways to treat patients without increasing their risk of infection. Although it had been increasing in prevalence already, telemedicine usage skyrocketed to fill the gap. Doctors, nurses, therapists, and other clinicians could meet with patients safely and remotely. 

Since telehealth visits are billed at a lower rate, they also lowered care costs for patients and payers. Telehealth visits have also helped lower no-show rates, which can contribute to greater cost efficiencies for care providers and better health outcomes for patients. Now that telehealth has proved effective, it will likely continue to be used by doctors and patients. However, it remains to be seen whether telehealth services will continue to be reimbursed at a lower rate.

Population health initiatives            

State and local governments, large hospital systems, and insurance companies have rolled out population health initiatives. These programs take social determinants of health into account. They focus on providing preventive care to vulnerable populations. Some programs include Rhode Island’s Comprehensive Medicaid Accountable Care Organizations, Minnesota’s Integrated Health Partnerships, and Michigan’s Comprehensive Healthcare Program.

Single-payer support           

According to the Pew Research Center, a 2020 poll showed that 63% of American adults support healthcare for all, with 36% of respondents supporting a national healthcare system. A 2020 study reported in Fierce Healthcare suggested that the U.S. could save $600 billion in administrative costs by adopting a single-payer system. Physician support for single-payer is mixed, with concerns that physician compensation could fall.

Retail medicine

Retail medicine is part of the trend toward putting the patient first by eliminating barriers to healthcare. Clinics inside grocery stores and pharmacies have become commonplace. Many consumers have grown accustomed to getting flu shots, COVID-19 vaccines, and other services at these clinics. These facilities are more adaptable when it comes to private pay and other alternatives to traditional insurance payments. Many large players have entered this market, including Amazon, Walgreens, and CVS, making it more likely this is a trend that will last.

How healthcare financing impacts providers and patients

In the U.S., private insurance, patients, government programs, and providers finance healthcare services. As shown, the current healthcare financing model hasn’t been able to stem rising costs, despite the incentive on behalf of all parties.


The cost to patients continues to rise under current healthcare payment systems. Affording care is hard for uninsured patients, but even insured patients are struggling. According to a study by the Kaiser Family Foundation, 46% of insured adults had difficulty paying out-of-pocket costs for healthcare. The study also showed that patients went without dental care and other needed healthcare because of the inability to pay, even with insurance. 

Employer-provided insurance

Employers that provide insurance benefits continue to see increases in premiums. According to the human resources association SHRM, premiums are expected to rise more than 5% in 2022, to around $13,360 per employee. Some of that cost is passed on to workers. Employers have rolled out a number of cost-saving programs, including narrow networks that limit provider groups and telemedicine benefits. 

Hospitals and other providers

The relationship between healthcare providers and payers has always been somewhat adversarial. Medicare keeps reimbursement costs low via government regulation, and insurance companies, therefore, are billed at higher rates. Some insurance companies and hospital systems have combined forces to reduce healthcare costs. It may be too early to tell if these partnerships are successful in reducing costs.

What are the challenges of the healthcare payment system?

If the current state of the U.S. healthcare payment model illustrates anything, it’s that medical financing is complex. There are no easy fixes. Change, if any, is incremental. Below outlines some of the challenges of the healthcare payment system:

  • Two payment models: The transition from fee-for-service to value-based care has been slow. Insurers and providers have had to work within the two payment models for more than 10 years now.
  • Adoption of value-based care: Implementing value-based care payment models has also been slow. Providers have to overhaul almost all of their processes, from how they treat patients to how they bill payers.
  • New finance regulations: Medicare’s new payment models that reward care quality and improvement are complex. Hospitals that serve high-risk populations may find it difficult to avoid Medicare penalties.
  • New technology and rules: Clinicians may find healthcare technology to be frustrating and a barrier to providing quality care. Yet, electronic health records and medical records are part of the move toward value-based care.
  • Access to care: People who are uninsured or underinsured lack access to medical care. Patients who are from disadvantaged communities face challenges in navigating the healthcare system, including language and cultural barriers, access to technology or the internet, transportation, and other issues.

Make change happen: Become a healthcare leader

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