Traditional Fee-for-Service Medicare/Provider Payment

On this page: Medicare


Medicare uses several payment systems to pay providers for services in the traditional fee-for-service program. Congress defines the payment systems and the CMS designs the payment mechanisms within the legal framework. The fee-for-service program includes prospective, episode-based, and fee-schedule payment systems. Under a prospective payment system, providers get a predetermined amount based on the patient’s diagnosis; the amount is intended to reflect the average cost of providing services to patients with a similar diagnosis. With episode-based payment, a single payment is made for all services provided during a specified episode. As with prospective payment, the amount depends on the patient’s diagnosis. With fee-schedule payment systems, providers are paid a set amount for each service.

Traditional Fee-for-Service Medicare/Provider Payment: Policy


In this policy: Federal

Medicare payment rates should be fair and should encourage preventive services, evidence-based practice, person- and family-centered care, efficiency among providers, management of chronic conditions, and access to affordable, high-quality care.

Access to care

In this policy: Federal

CMS and MedPAC must monitor the effects of Medicare payment reforms. In particular they must monitor provider payments, alert Congress if payments are inadequate, and discourage providers from offering services to Medicare beneficiaries such as those with complex conditions or beneficiaries in rural areas or result in compromised quality of care (see this chapter’s section Health Care Coverage: Medicare—Access to Services).