What Is a Fee-for-Service Agreement?

By Katherine Graham
Fee-for-service agreements give consumers choices.

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A fee-for-service agreement is defined as a method of business payment in which separate services are not bundled together but are instead paid for individually. (Reference 1). This is sometimes called "a la carte" payment. Many industries use fee-for-service agreements, such as cellular phone carriers and other telecommunications carriers, healthcare providers and the real estate industry.

Features

Payment for service is a key feature of the fee-for-service agreement. This is the ability of the consumer to pay individually for each aspect of the goods or services she receives.

Increased control of services rendered is an important feature of the fee-for-service agreement. This control allows a consumer to decide individually which products or actions he will purchase. This decision-making ability may lead to more personal control of exactly what the consumer receives.

Specific choice is a crucial aspect of a fee-for-service agreement. Specific choice allows for personal tailoring of products and services. For example, a fee-for-service agreement with a cable television provider would allow a customer to purchase only the channels she wants, so her choice of channels is more specific than a traditional bundled cable television package.

Types

Healthcare is one of the most often discussed types of fee-for-service agreements. A fee-for-service agreement allows patients to pay for each instance of care, such as basic doctor's office visits, dentistry services, prescription medications, operations and procedures.

Real estate fee for service agreements are fairly rare. For the most part, real estate transactions use a commission payment model instead of fee for service.

Telecommunications services are basic enough to provide under a fee-for-service agreement. Commodities such as cellular phone minutes, cable channels and lines of home phone service can be chosen individually by a consumer based on need and can be valued as individual items by the service provider.

Legal work can also be provided under a fee-for-service agreement. Like real estate brokers, lawyers are often paid on a contingency fee basis. However, some types of legal work, such as helping a client with an immigration issue, can be charged on the basis of each service performed.

Financial services can be provided on a fee-for-service basis as well. Clients can pay for services such as stock purchases or sales on an individual basis.

Customer support services of all types may be arranged under a fee-for-service agreement. If the provided service is one that can be individually selected by the customer and valued accurately by the business, it is likely that a fee-for-service agreement is feasible.

Function

The primary function of a fee-for-service agreement is to allow consumers to pay for only what they need, instead of paying for a bundle of products or services.

In the healthcare industry, a fee-for-service agreement allows a patient to pay individually for each instance of care, such as a visit to the doctor's office, an x-ray or other test, or a surgery. In this type of agreement, patients have flexibility over other types of healthcare systems, because they may often visit the doctor of their choice. In contrast, another common healthcare system, managed care, allows patients to choose a doctor from an approved list.

In the real estate industry, a fee-for-service agreement functions to allow home sellers to pay a broker for each instance of his work, such as trips to show the home to prospective buyers. A fee-for-service agreement is very different from the standard method of paying a real estate broker, which involves the payment of a commission upon the sale of the home.

Benefits

A fee-for-service payment model has the benefit of offering customers the ability to customize the products and services they receive, potentially leading to increased customer satisfaction. Additionally, a fee-for-service agreement may assist service providers in learning which of their services are chosen most often by customers and so are the most in demand.

The benefits of a fee-for-service agreement are often a topic of discussion relating to the healthcare system. Due to rising healthcare costs in the United States, there are many advocates of using a fee-for-service payment system instead of the more popular managed care system.

Considerations

Providers of services may want to consider the potential consequences of a fee-for-service agreement. Consumers pay only for the individual products and services they choose, so revenue is not as predictable as it may be in a bundled or flat fee system of payment.

Expert Insight

In its July 2009 report, the World Bank Development Research Group found that switching to a fee-for-service healthcare payment system increased a nation's overall spending on healthcare and also increased each patient's average cost. (Reference 2). However, the report also found that fee-for-service healthcare payment systems lead to significantly increased patient admissions, so there is some indication that patients have more access to certain types of healthcare under a fee-for-service system.

About the Author

Katherine Graham has been writing since 2005. She has worked in the fields of criminal, civil, regulatory and corporate law, now sharing her expertise on eHow. Graham graduated cum laude from law school and received special recognition in the area of legal writing. She has a Juris Doctor from Whittier College.

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