Fee Agreements: What Works, What Doesn’t- and How to Use Them

Psychiatric TimesVol 31 No 5
Volume 31
Issue 5

This article reviews the many forms of fee agreement and notes the important factors to consider as well as questions to ask to properly assess and vet what may be best for one’s practice.

Many psychiatrists are faced with a variety of fee agreements. Some are relatively simple, others more creative and more complex, and still others may skirt the edge of ethical or legal boundaries. Thus it is critical for a practicing professional to be knowledgeable about the risks and rewards to adequately assess the differing opportunities that may unfold. This article reviews the many forms of fee agreement and notes the important factors to consider as well as questions to ask to properly assess and vet what may be best for one’s practice.

Perhaps the most traditional form of fee agreement is the rather straightforward fee-for-service model, in which a physician provides a service for a specified fee and is paid after providing the service or procedure. While this certainly still exists, there are many additional approaches that are helpful to be aware of, and in some cases, wary of.

Fee arrangements with individuals

Fundamental to the economics of sustaining one’s practice is ensuring that the fees charged are adequate to support the costs associated with the service. It is a common pitfall to spend too much on overhead (eg, rent, administrative support, furnishings) that may be difficult to recoup in the short term. It is useful to first do the math: calculate the annual costs associated with providing care and divide that by the number of hours that are devoted to clinical services. Appropriate margins should be added for profit and for bad debt as well. The result gives a figure used to gauge hourly (or annual) compensation across subsequent fee arrangements. Another variable is the marketplace in which one is practicing. If one’s fees are too high, it may be difficult to gain or sustain referrals. If they are too low, your services may be misperceived as being of poor quality.

Calibrate differential income depending on the nature of your practice (psychotherapy, medication management). Some psychiatrists prefer brief medication consulta-tion, which may be more profitable than 50 minutes of psychotherapy. However, demand becomes an important consideration as does burnout from stressful workdays. Paramount in decision making is maintaining excellence.

Arrangements with other mental health professionals (eg, social workers, psychologists) can be efficient and rewarding. These can be structured as a group practice with shared office space, or as strong and trusted relationships with a number of cross-referrals and consents to share information and coordinate care.

In addition, you may choose to have a sliding scale for those who are uninsured and cannot afford the usual and customary fee. Some physicians may find it awkward or uncomfortable to negotiate fees, both for themselves and for patients. However, it is important to have a fee policy before a patient asks for a fee reduction.

It may also be worthwhile to discuss with the patient the importance and therapeutic value of paying for services in the doctor-patient relationship. No fiscal involvement may diminish the value of treatment and can lead to inconsistent commitment by the patient. Establishing boundaries and expectations from the start will work to establish a better patient-therapist relationship.

Some patients may be ashamed to ask for a fee reduction. An honest discussion about fees will increase the patient’s comfort, especially if he or she understands that it is not unusual for a patient to ask about a sliding fee scale. If the patient is in any type of crisis, you may need to provide care and may not be paid for it.

Ideally, one should have a written policy that is discussed with patients who have a financial hardship. The rates may be updated annually. A written policy helps prevent awkwardness or embarrassment for both the patient and the physician.

Concierge fee arrangements

The concept of concierge practice has become more widely known. This model was originally one in which in addition to having private insurance coverage (or in some instances, purely fee-for-service with no insurance involvement), a patient would pay an annual out-of-pocket fee for additional services (eg, 24-hour 1:1 availability, more complex evaluations and diagnostics, accompanying a patient to another consultation).

The benefit for the provider is a smaller caseload and immediate availability as needed. Presumably this is less stressful but without a loss of income because of fewer patients. Some non-psychiatric providers are using this model for patients with insurance and charging a more affordable annual fee. They use more cost-effective laboratory services and technology to deeply cut overhead costs to make it viable for themselves and affordable for their patients.

Third-party payer fee arrangements

Psychiatrists may contract with third-party payers, such as insurance companies, preferred provider panels, managed care organizations, and health maintenance organizations (HMOs). In these cases, fee arrangements are lower. The presumed trade-off is that the provider needs to do little in the way of marketing and promotion. Of course, patients may be referred by another physician who is contracted with the same plan, which can lead to mutual, in-network cross-referrals.

If you want to be a network provider but feel that the fee schedule is too low, you can negotiate with the payer. While there are various ways to do this, the most successful approach is knowing the need for psychiatrists in your geographic area (supply and demand). If you know there is a high demand and low supply, then you are in a very good position to counter offer a higher fee in the contract. And always have a lawyer review the contract.

More complex fee arrangements

Capitated models are based on a per-member-per-month or per-employee-per-month approach in which a contracted provider, or more likely a contracted group practice, is paid a set monthly amount based on how many patients are enrolled. For example, if there are 5000 employees of a company enrolled in a capitated plan, and the provider is paid at a rate of $1 per-employee-per-month, then each month on a contract-specified date, they would receive a $5000 payment, regardless of the amount of service provided. Obviously, such a model incentivizes less care by an unscrupulous practice group. To protect against this, groups have contract-specified required times in which to set first appointments (eg, within 3 days of a first call) and clinical outcome targets (eg, significant improvement in depression scores).

This may be considered a shared-risk model in that a provider is “at risk” because the demand may exceed the ability to provide adequate and timely care (hence the reason these contracts are with group practices rather than individuals). There are tools to mitigate the risk, such as risk pools and reinsurance. However, fee arrangements in capitated or shared-risk situations generally require a team approach that includes accountancy expertise, legal counsel and review, and strong internal clinical outcomes management and unitization review systems.

A variation of capitation is that of case rates. In this scheme, a single, all-inclusive flat rate fee is established and mutually agreed on between the payer and the provider for specific diagnoses. Similar to capitation, provider groups need to have a robust dataset of how their practice operates along with a skilled team of consultants to help with establishing the proper rate and contract negotiation. States such as Colorado and Tennessee have implemented capitated fee agreements in emergency psychiatric settings, with differing results. Studies demonstrated that Colorado’s implementation was largely successful, while Tennessee’s was not.1

Government systems fee arrangements

As the Affordable Care Act becomes more functional and is instituted across the country, there may be a resultant uptick in referrals from individuals who formerly were uninsured. Along with federal-level changes, accountable care organizations (ACOs) have come to the fore. Traditional fee-for-service models reward providers for the quantity of their services rather than the quality of their care. An ACO, on the other hand, is a network of providers that agree on an internal fee structure that prioritizes patient health over economic benefit.2(p1389)

While the idea of ACOs is gaining popularity, many question whether the necessary infrastructure is in place, specifically regarding data sharing, communication, and the ability to divide patients between their respective practitioners’ ACOs.2(p1390) While they are hospital-centric, many of the currently approved ACOs are physician-led-generally by primary care physicians. As a result, many of the more “enlightened” hospital systems are looking for strong physician leadership. Psychiatrists would be well advised to keep up-to-date with ACOs in their geographic practice area and could consider either joining them or working on a contract basis for services.

A recent study on hospital readmission rates reported that the single most determining factor for hospital readmission was depression.3 Thus, psychiatric services may be critical in improving patient outcomes and diminishing readmissions.

Medical home

The idea of the “medical home” arrangement originated in pediatrics and now also includes care of adults.4 This is a team-based approach in which a patient’s primary care physician directs and coordinates a group of health care professionals to provide care that is ideally unified, constant, and convenient for the patient.5 With electronic medical records, providers can easily access a patient’s information, allowing communication to be smooth and continuous. Unlike the traditional fee-for-service model, the medical home arrangement encourages value (ie, a favorable outcome) over volume, by incorporating a pay-for-performance payment structure as well as a case management fee.6

While interest in and approval of the medical home model has increased over the past few years, it is not without controversy. Some naysayers argue that in addition to unacceptable reimbursement rates in specific scenarios, the patient-centered medical home mirrors third-party payer fee agreements that result in a “gatekeeper” effect and delayed referrals, similar to HMOs.7

Although psychiatry should proceed with caution because there may not be viable fee arrangements that mitigate potential fiscal risks, medical homes have the capacity to unite mental and physical health services. For example, a focus of a medical home could be patients with serious mental illnesses.8 For psychiatrists, particularly those with child or adolescent specialties, additional opportunities lie in being contracted with the physician practice for psychiatric services. Many general practitioners and pediatricians do not have the time or expertise needed to treat patients with psychiatric concerns efficiently. Providing care within the medical home can lead to a consistent stream of referrals, and the contracting psychiatrist has the potential flexibility to see these cases as fee-for-service paid by the general practice rather than a third-party payer or the patient.


There are some interesting and promising models of innovation in fee agreements and payment models that while not yet having migrated to psychiatry, show promise in other specialties. For example, Harbor Health System focuses on quality as a practical and effective tool for managing workers’ compensation costs. They use historical claims and billing data to select physicians for an outcome-based medical network solution and establish fees that are higher than those with other payers because they believe that physicians who provide demonstrably positive clinical outcomes actually save money through a reduction in complications, improvement in care decisions, and higher-quality patient management.

Similarly, the Prometheus Payment model focuses on patient-centered payment through evidence-informed case rates.9 There are bundled prices for care that split patient-related risks (such as demographics, comorbidities, severity of condition) from provider management failure–related risks that cause much of the economic waste in health care. Since patient-related risks can be adjusted on the basis of severity, providers are compensated fairly. In addition, the payment isolation of provider management failure–related risks discourages their use, thus cutting waste. While such payment models are more hospital-focused, they may be harbingers of what may be soon available to clinical psychiatry.

The DIAMOND program in Minnesota seems to have successfully incorporated psychiatric services. This nationally recognized program partners primary care physicians with psychiatrists to unify care for patients with depression.10 The only things stopping a psychiatric prac-tice from further developing innovative models are suitable systems, partners, and imagination. Indeed, history shows that practice leaders and innovators in psychiatry (ValueOptions) and psychology (Biodyne) have been able to bridge the gulf between practice and payment.

Ethical and legal factors

There are few legal or ethical risks involved in fee-for-service arrangements. Likewise, there is little to worry about in contracted services. However, a very important but frequently overlooked aspect of contracting with a third-party payer is that of the actual contractual obligations. Psychiatrists may just sign on the dotted line, which may create a problem if one subsequently does something out of well-intended benevolence to the patient’s economic situation but runs afoul of the contract. Such a breach can result in economic consequences that would have been totally avoidable had the contractual obligations been kept in mind.

One must also be sure that one practices within the bounds of the contract to be insulated against the risk of a civil suit (ie, breach of contract). Some states, such as Illinois, have a corporate practice of medicine act that makes it illegal for non-physicians to operate a clinical practice that employs psychiatrists (although it is fine to be hired as a part-time consultant, as defined by the Internal Revenue Service).


With so many recent changes in the provisions of and payment for psychiatric care, the economics of practice are challenging. Psychiatrists need to be aware of available options and what might be a good fit for one’s practice or employment, as well as what may be just over the horizon.

Popular opinion on what constitutes a good fit has changed over the years. During the 1990s, researchers concluded that psychiatric facilities are better equipped to weather economic threats through the use of capitation rather than fee-for-service agreements.11 Since then, however, psychiatrists have been declining all types of insurance at a much higher rate than physicians in other specialties.12 This might be because insurance reimbursement rates tend to be lower for psychiatry than for other specialties, utilization review is an unwanted hassle, patient demand is generally high, and individual fee-for-service may still be the favored approach. Since many systems are experimenting with more integrated care and payment models, it is crucial for psychiatry to assertively demonstrate the improved quality of care and clinical outcomes in tandem with cost savings that can result from including psychiatric services.

The integration of psychiatry is not always considered or necessarily easy to incorporate without persuasive self-advocacy on the psychiatric practice’s part. As additional alternatives become more widespread and the necessary infrastructure for their success develops, the medical and mental health communities could very well progress. Researchers believe that physicians and patients may best benefit from new alternatives, such as ACOs and Medical Home fee agreements or a combination of the two.13,14


Dr Stout is Clinical Professor at the University of Illinois College of Medicine in Chicago and Director in the department of research and data analytics at ATI Physical Therapy. Ms Wang is Clinical Performance Manager/Caseloads Administrator at ATI Physical Therapy. They report no conflicts of interest concerning the subject matter of this article.


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