What is Healthcare Reimbursement? Definition, Models and Resources

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New medical technologies such as bioprinters, brain stimulation devices and noninvasive treatments for dementia promise to transform healthcare. However, one of the most impactful healthcare changes relates to the way providers are paid, which technology can also spur. Healthcare reimbursement models emphasize cost-effective decisions about patients’ medical care without compromising the quality of patient services. Innovations such as patient engagement apps and price transparency tools help enable healthcare reimbursement changes.

This guide answers the question, what is healthcare reimbursement? The guide describes various healthcare reimbursement approaches and examines their implications for employers, healthcare professionals and patients. It compares the value-based reimbursement model with the traditional fee-for-service approach, health maintenance organizations, preferred provider organizations and other alternatives.

What Is Healthcare Reimbursement?

Healthcare reimbursement plans are sometimes referred to as healthcare reimbursement arrangements to distinguish them from traditional employer-sponsored health insurance plans. Rather than selecting and administering their employees’ health insurance plans themselves, employers fund health reimbursement plans to a specified amount, as Investopedia explains. Employees are reimbursed for their actual medical expenses from this fund.

Definition of Healthcare Reimbursement

Healthcare reimbursement is defined as the process by which private health insurers or government agencies pay for healthcare providers’ services. Verywell Health describes how the reimbursement system works:

  • After a patient receives medical treatment, the provider bills whichever party is responsible for the costs.
  • The amount billed is based on a prior agreement with the government (usually Medicare) or private insurance carriers.
  • Medicare uses a common procedural terminology (CPT) code, while private firms negotiate their own reimbursement rates with doctors and other healthcare providers.

The Role of Individuals and Employers in Healthcare Reimbursement

The U.S. Centers for Medicare and Medicaid Services (CMS) explains how various healthcare reimbursement approaches and group health insurance plans affect employees and employers:

  • In health reimbursement agreements, employers determine how much money to contribute to employees as compensation for their healthcare costs; this is called a defined-contribution plan.
  • In group health insurance plans, employers offer their employees one or more defined-benefit plans; employers fund and manage the plans themselves.

How Does Healthcare Reimbursement Work?

Many uncertainties about healthcare costs relate to how healthcare reimbursement works. The process differs based on whether the costs are paid by private payers or by public payers.

  • Private payers. The private payer category encompasses employer-based coverage and individually purchased health insurance. Private payers generally require a copay, coinsurance or a deductible that the patient pays directly to the provider.
  • Public payers. Medicare and Medicaid represent 25% of all healthcare payments, thus making the U.S. government the largest single healthcare payer in the country. The American Academy of Pediatrics notes that Medicare in particular has a large influence on payment levels for medical treatments.

In the healthcare industry, payments are made after the service is performed. This makes the payment process more complicated than in other industries where customers pay for products and services when they receive them. CareCloud, a telehealth service, describes the five-step healthcare reimbursement model.

Step One: Enter the Patient’s Diagnostic and Treatment Details in the Electronic Health Record

Healthcare providers must gather all the information required to process the payment, including data collected from the patient’s electronic health record (EHR).

  • Describe the patient’s medical history and the problem the patient presented with.
  • Document the examination results and the diagnosis and treatment plan.
  • Securely store the information in the patient’s medical record to establish the necessity of the service provided.

Step Two: Enter the Applicable Medical Codes in the Electronic Health Record

The healthcare provider’s certified medical coders enter the appropriate medical codes for the payment in the patient’s EHR. Some payment processing systems suggest the corresponding codes to automate coding entry.

  • The codes convert the provider’s narrative description of the treatment into the specific terms that payers use to describe the provider’s health services.
  • Tenth revision of the International Classification of Diseases (ICD-10) codes. The U.S. National Center for Health Statistics (NCHS) has created an ICD-10 browser for searching the code database and finding information about the codes.
  • CPT codes. The American Medical Association (AMA) explains the use of CPT codes by doctors and healthcare providers to improve the accuracy and efficiency of healthcare reimbursement
  • The fees that are paid to providers vary based on the payer contract and/or the provider’s fee schedule. The rates consider expenses related to the provider’s practice, including malpractice insurance costs. Physicians can negotiate healthcare reimbursement rates under private contracts, but Medicare bases rates on the provider’s location.
  • Diagnostic related groups. Diagnostic related groups (DRGs) are used to pay hospitals based on fixed amounts per hospital stay. Hospitals profit by spending less than the DRG rate and lose money when their costs exceed the DRG rate.
  • Value-based reimbursement models. Value-based reimbursement models reimburse providers based on the quality of the services rendered rather than the volume. These programs offer providers incentives for the quality of the care they provide based on patient outcomes and cost containment.

Step Three: Submit the Claims Directly or Through a Clearinghouse

While many large healthcare organizations choose to submit their reimbursement claims directly to payers, a great number of providers choose to use clearinghouses. Clearinghouses allow healthcare providers to confirm that their payment claims are error-free before submitting them. Clearinghouses also translate claims into standard formats compatible with the payer’s software.

ClearingHouses.org explains the services that clearinghouses offer:

  • The provider creates the electronic claim using medical billing software and then uploads the claim to its clearinghouse account.
  • The claim is checked for errors; if it passes inspection, it’s forwarded securely to the specified payer. The claims are also referred to as “HIPAA transactions.”
  • If the claim is rejected, it’s sent back to the provider for correction, and then resubmitted.
  • Once the claim is accepted, the provider receives the reimbursement check and an explanation of benefits (EOB).

Step Four: Review the Payer’s Response to the Claim

After reviewing the claim, the payer either pays the full amount or rejects some or all of it.

  • Rejections are communicated to providers via remittance advice codes (RACs) that include brief explanations for the claim’s rejection.
  • Providers review the RACs to determine whether they can correct and resubmit the claim. Typical reasons for rejecting a claim include inappropriately billing services together in a single visit and billing for service too soon after a related service was rendered.

Step Five: Document the Claims Process for Potential Post-Payment Audits

Even after checking for errors before submitting reimbursement claims, providers are responsible for any mistakes in the claims they file that are discovered as part of a post-payment audit.

  • After payment, payers may request documentation to ensure that they’ve paid the claim correctly.
  • Providers may be required to reimburse the payer if the payer determines that the documentation doesn’t support the services that are billed for.

Resources for How Healthcare Reimbursement Works

What Is Value-Based Reimbursement in Healthcare?

Value-based reimbursement is designed to reward healthcare providers for successful patient outcomes and efficient use of resources. The increasing popularity of this relatively new healthcare payment model is due in large part to its data-driven approach to quality care and resource allocation, as The Fox Group, a healthcare consulting firm, reports.

Value-Based Care

Value-based care is also called pay for performance, as Deco Recovery Management, a health insurer,  explains. What value-based reimbursement in healthcare does is encourage healthcare providers to deliver quality care at the lowest possible price. The growing popularity of this reimbursement model is due in large part to its use in government healthcare programs.

  • Providers are paid based on the quality of care they provide rather than the quantity of patient services they offer.
  • Providers are rewarded financially for successful patient outcomes and efficient healthcare services.
  • Accountable care organizations (ACOs) adopt either a gain-share or a risk-share model. The gain-share model is one-sided; cost savings are shared with providers when they’re below a benchmark, but payers don’t need to be reimbursed when payments exceed the benchmark. Conversely, the risk-share model is two-sided; cost savings are shared with providers, but the risk-share model also makes them responsible for some of the loss when spending exceeds the benchmark, as HealthAffairs explains.

Txcin, a healthcare service provider, describes the primary models used in value-based reimbursement in the following sections.

Pay for Coordination

Under the pay-for-coordination model, primary care physicians (PCPs) are paid monthly fees in exchange for their commitment to coordinate and lead the healthcare efforts of providers, care managers, specialists, patients and patients’ families.

  • Pay for coordination is designed to reduce costs while encouraging a continuum of care that emphasizes prevention by implementing and maintaining a unified patient care plan.
  • One example of the pay-for-coordination model is the patient-centered medical home (PCMH), which involves a single integrated practice rather than multiple practices.

Pay for Performance

Pay for performance is one of the simplest and most direct healthcare reimbursement models; it links value and quality of care.

  • Payments to providers are tied to quality and value.
  • Reimbursements are on a fee-for-service schedule; incentives are offered for meeting quality and efficiency goals.
  • Examples of pay-for-performance models include the Physician Value-Based Modifier, the Hospital Readmission Reduction Program and the Skilled Nursing Facility Value-Based Program.

Bundled Payment or Episode-of-Care Payment

Under the bundled payment model, providers are paid a fixed amount for many different services they offer during a set period.

  • The reimbursement covers either a specific illness or episode of care, or all the care the patient received during a set period.
  • The model emphasizes quantity of care over quality of care, but bundled payments have been shown to encourage hospitals, physicians, post-acute care providers and other healthcare team members to align incentives among teams of providers to improve overall efficiency.
  • Examples of bundled payment approaches include Bundled Payments for Care Improvement Advanced (BPCI-A) and Comprehensive Care for Joint Replacement.

Shared Savings Programs

Under the shared savings model, also referred to as upside and downside risk, providers must create entity groups and offer population health management via a coordinated, team-based approach.

  • Physicians form ACOs that integrate the services offered by a group of providers, hospitals and other healthcare professionals to improve the efficiency of care delivery.
  • A Medicare Shared Savings Program (MSSP) is created that balances the physicians’ shared risks with financial rewards. The four MSSP “tracks” available to providers offer various levels of shared risks and rewards.
  • As groups become more experienced, they can adopt tracks that entail greater risks but also increase rewards.


This model provides patients with either a per member, per month (PMPM) payment or an annual payment to pay providers ahead of time for the services they offer to the patients.

  • Providers are paid for a specific set of services (partial) or for all of the services they extend (full or global).
  • All financial risk for the quality of care and the cost of services is assumed by providers.
  • The plans typically include incentive payments and penalties for meeting or missing quality metrics.

Resources for Value-Based Reimbursement in Healthcare

Digital innovations are transforming healthcare and enabling value-based care.

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Other Healthcare Reimbursement Models

Various healthcare reimbursement models are designed to meet the needs of specific categories of providers and employers. For example, small businesses can choose between a group coverage healthcare reimbursement arrangement (HRA) or a qualified small employer HRA (QSEHRA), as HealthCare.gov explains.

Fee for Service

The traditional fee-for-service (FFS) model for healthcare reimbursements arose in the 1960s with the advent of social safety net programs such as Medicare and Medicaid, as the American College of Cardiology describes. The model is seen as a primary reason for skyrocketing healthcare costs in the U.S. because of its “perverse incentive”: The more medical services the patient receives, the higher the amount that providers can bill.

  • Pricing is based on the cost of each service the patient receives.
  • FFS remains one of the most common reimbursement models, primarily because it simplifies billing, facilitates tracking the services that providers deliver and makes it easy to quantify the value of services offered, as Deco Recovery Management describes.
  • FFS has been cited as a primary reason for service inflation, redundancy, and unnecessary tests and procedures.
  • The Fox Group notes that under the FFS model, each procedure’s cost becomes more important than its effectiveness.

Resources for Fee for Service

Accountable Care

ACOs are seen as an offshoot of value-based reimbursement, according to Deco Recovery Management.

  • Healthcare providers in various specialties form ACOs to provide comprehensive, integrated care for their patients.
  • Providers’ operations must be coordinated to ensure consistent communication and accountability.
  • Providers assume the risk that payers won’t reimburse them for the full amount they claim; partial reimbursement occurs most often when physicians are faced with challenging patient care situations.

Medicare.gov points out that under Medicare rules, ACOs can’t dictate which healthcare providers patients see or change a person’s Medicare benefits.

Resources for Accountable Care

Patient-Centered Medical Home (PCMH)

The PCMH reimbursement model is much like that used by ACOs; both combine a group of providers so that patients receive a complete range of services for which providers can bill collectively, as Deco Recovery Management explains.

  • PCMHs differ from ACOs in that a single integrated practice uses PCMHs rather than many distinct practices.
  • While ACOs are formed primarily to facilitate provider reimbursement, PCMHs have a broader goal of offering patients holistic, personalized care.

Primary Care Collaborative describes the PCMH model as a partnership between patients and their primary care teams to guide all aspects of the healthcare journey.

Resources for Patient-Centered Medical Home

Clinical Pathways Model

The clinical pathways model presents an alternative approach to reimbursement of bundled healthcare services that’s designed specifically to guide clinical decision-making, according to The American Journal of Managed Care.

  • Clinical pathways chart a patient’s healthcare needs and treatment options over time.
  • Providers join together to offer a range of specialty services, which gives patients a choice of plans based on price or treatment type.
  • The clinical pathways model is frequently used to reimburse providers for services related to a patient’s cancer treatment.
  • The clinical pathways model provides clinicians with a standard of care that addresses cost and treatment variations among similar patients, which improves outcomes and eliminates some unnecessary expenses.

Resources for the Clinical Pathways Model

Health Maintenance Organizations (HMOs)

A health maintenance organization (HMO) is an insurance plan that provides coverage for a monthly or an annual fee. It requires that members receive healthcare services from its network of doctors and other providers, as Investopedia explains.

  • A single organization provides patients with both medical services and insurance coverage.
  • Providers in the HMO’s network work under contract to offer their patients comprehensive care.
  • Out-of-network services can be expensive for patients, although exceptions are made for emergency care and urgent care.
  • The goal of HMOs is to reduce healthcare costs for patients and providers by entering into contracts with physicians and other providers that exchange their services for an agreed-upon fee.

Resources for Health Maintenance Organizations

Preferred Provider Organizations (PPOs)

The preferred provider organization (PPO) healthcare reimbursement model is similar to an HMO in requiring that members seek care from the organization’s network. However, PPO network providers are under contract to outside insurers or other third parties.

  • Patient treatment options may be limited under the PPO model, but patients can seek treatment outside of the PPO network without having to see their primary care physicians first. Out-of-network services are likely to be more expensive, however.
  • PPOs contract with a range of medical specialists, hospitals and other facilities, so patients generally have more care options available with a PPO than with an HMO, as Policygenius, an insurance site, explains.
  • The greater flexibility that PPOs offer their members usually means higher patient premiums than what HMOs charge.

Resources for Preferred Provider Organizations

There is an increase in U.S. patients in value-based healthcare programs compared to fee-for-service programs.

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<p style="clear:both;margin-bottom:20px;"><a href="https://healthinformatics.uic.edu/blog/what-is-healthcare-reimbursement/" rel="noreferrer" target="_blank"><img src="https://s3.amazonaws.com/utep-uploads/wp-content/uploads/UIC/2020/11/12155618/what-is-healthcare-reimbursement-end.jpg" alt="There is an increase in U.S. patients in value-based healthcare programs compared to fee-for-service programs." style="max-width:100%;" /></a></p><p style="clear:both;margin-bottom:20px;"><a href="https://healthinformatics.uic.edu" rel="noreferrer" target="_blank">University of Illinois at Chicago </a></p>

Importance of Reimbursement in Healthcare

The only way healthcare providers can continue to offer their valuable services to the public is if they get paid. That’s why the importance of reimbursement in healthcare can’t be overstated. The complexity of modern medical decision-making and healthcare reimbursement models present many challenges for patients, providers, and payers alike.

Which Groups Benefit from Healthcare Reimbursement?

Recent changes to federal regulations provide workers and employers with many new HRA options. CMS explains the new HRA options’ impact:

  • A new alternative to traditional group health plans is an “individual coverage HRA,” which includes reimbursements for premiums paid to the insurer of the person’s choice.
  • A new type of employer-sponsored HRA offers limited coverage and is intended to supplement a traditional health plan.

Why Is the Healthcare Reimbursement System Important in the U.S.?

In 2020, total healthcare spending in the U.S. will reach $4 trillion. However, as Bloomberg reports, people in the U.S. are less healthy and die younger than their counterparts in other wealthy countries. The American Academy of Family Physicians has created a framework for a primary care-based healthcare system in the U.S. The Healthcare for All framework is intended as a model for legislatures at the federal and state levels. The framework’s four goals address family and primary care physicians’ principal concerns:

  • Better care
  • Better health
  • Smarter spending
  • Increased efficiency and satisfaction for physicians

Resources for the Importance of Healthcare Reimbursement in the U.S.

Managing the Modern Healthcare Economy

Like so many others in 2020, healthcare professionals find themselves managing in times of tremendous, unpredictable change. The healthcare industry’s continuing transformation presents opportunities to make significant, positive, long-lasting changes that improve the quality, efficiency, and accessibility of healthcare services for patients, providers, and payers.

Infographic Sources:

Business Insider, “How and Why the Value-Based Payment Model Is Trending in the Healthcare Industry”
Forbes, “5 Ways Technology Will Enable Value-Based Care in 2020 and Beyond”