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Home > Resources > PAF Publications > PAF Guides & Major Publications > Managed Care Answer Guide >
Part I: Terminology
 > Payment Methods


Managed Care Payment Methods



Many methods exist to pay for provider services, including discounted fee-for-service charges, capitation, and fee-for-service. Listed below are some common terms used in insurance plans to define payment obligations on the part of a patient, provider of services, or the insurance company

Capitation A payment system in which health care providers (physicians, hospitals, pharmacists, etc.) receive a fixed payment per member per month (or year), regardless of how many or few services the patient uses.

Coinsurance An insurance policy provision under which both the insured person and the insurer share the covered charges in a specified ratio (e.g., 80% by the insurer and 20% by the enrollee).

Co-payment A cost-sharing arrangement in which the managed care enrollee pays a specified flat amount for a specific service (such as $2.00 for an office visit or $1.00 for each prescription drug). It does not vary with the cost of the service, unlike coinsurance which is based on some percentage of charges.

Deductibles Amounts required to be paid by the insured under a health insurance contract before benefits become payable.

Discounted Fee-For-Service An agreed-upon rate for service between the provider and payer that is usually less than the provider's full fee. This may be a fixed amount per service or a percentage discount. Providers generally accept such contracts because they represent a means of increasing their volume or reducing their chances of losing volume.

Fee-for-Service (FFS) Reimbursement A method of reimbursement based on payment for services rendered. Payment may be made by an insurance company, the patient, or a government program, such as Medicare or Medicaid. With respect to the physicians or other suppliers of service, this refers to payment in specific amounts for specific services rendered-as opposed to retainer, salary, or other contract arrangements. In relation to the patient, it refers to payment in specific amounts for specific services received, in contrast to the advance payment of an insurance premium or membership fee for coverage, through which the services or payment to the supplier are provided.

Out-of-Pocket Expense The amount not reimbursed by insurance coverage and paid by the patient such as co-payments, deductibles and premiums.

Pharmacy Benefit Coverage of prescription drugs by an insurance company. Often, beneficiaries will have an identification card designating their eligibility and will have to pay partially for the drug in the form of co-payments, deductibles, or coinsurance. Also referred to as a "Prescription Drug Benefit."

Premium The amount paid to an insurer for providing coverage, typically paid on a periodic basis (monthly, quarterly, etc.).

Prevailing Charge This is a fee based on the customary charges for covered medical insurance services. In Medicare payments for services or items, it is the maximum approved charge allowed.

Reasonable Charge A methodology used by Medicare to determine reimbursement for items or services not yet covered under any fee schedule. Reasonable charges are usually determined by the lowest of the actual charge, the prevailing charge in the locality, the physician's customary charge, or the carrier's usual payment for comparable services.

Reasonable Cost A methodology used by Medicare to determine reimbursement for items and services that takes into account both direct and indirect costs of providers such as hospitals, as well as certain Medicare HMOs and competitive Medical Plans.

Reimbursement Refers to the actual payments received by providers or patients for benefits covered under an insurance plan.

Third-Party Payment (a) Payment by a financial agent such as an HMO, insurance company, or government rather than direct payment by the patient for medical-care services. (b) The payment for health care when the beneficiary is not making payment, in whole or in part, in his own behalf.

Usual, Customary, and Reasonable (UCR) Charges In private health insurance, the basis for reasonable-charge reimbursement of physicians. This approach was developed before the introduction of Medicare and was adopted byMedicare. "Usual" refers to the individual physician's fee profile, equivalent to Medicare's "Customary" charge screen. "Customary," in this context, refers to a percentile of the pattern of charges made by physicians in a given locality. "Reasonable" is the lesser of the usual or customary screens.