Decoding Your Healthcare Bills

The sheer cost and administrative complexity of the U.S. healthcare system are the engines driving both the national frustration and the endless cycle of policy reform. While the previous essay covered the system's history and the broad impact of the One Big Beautiful Bill Act (OBBBA) on insurance access, it is necessary to examine the hidden machinery of how we pay for care, because this mechanism is why spending has spiraled out of control and why so many Americans struggle to get the care they need.

Under Fee-for-Service (FFS), which evolved from the 1930s origins of health insurance, doctors, hospitals, and other providers are paid for each service performed. This approach is the primary flaw of the system because it rewards the quantity of services provided rather than the quality of care furnished 1. Studies confirm the consequence of this: adults in the U.S. receive the generally accepted standard of care only about 55% of the time.

This incentive structure directly explains why doctor visits are so short. Physicians have generally been forced to spend less time with patients than is necessary or desirable because the fees paid per visit are too low to allow longer visits. If physicians try to provide higher quality care, which requires more time, the FFS system creates a financial loss for the practice. The consequences for the consumer are serious, as shortened visits can result in additional visits for the patient, misdiagnoses, and/or complications that increase the cost of care later on 2.

The financial pressure is intensified by the large gaps in FFS payment, which has no fees at all for many important healthcare services, particularly services needed for proactive care. Traditionally, fees have only been paid for face-to-face office visits and procedures, with little or no payment for phone calls, emails with patients, or education and proactive care management by nurses. Because providers are not paid for this essential proactive time, they must squeeze these necessary activities into the brief, reimbursable visit slot. The FFS payment approach financially penalizes providers for reducing unnecessary services and improving quality.

The FFS model relies entirely on a standardized coding system for billing. ICD codes (International Classification of Disease) classify the diagnosis, injuries, and causes of death. CPT codes (Current Procedural Terminology), developed and maintained by the AMA at $0 cost to the U.S. government, describe the specific tests, procedures, and services a doctor performs. For physician services, the complexity of the visit is determined by either the level of medical decision making (MDM) or the total time spent on the date of the encounter.

These codes determine how facilities are reimbursed by payers like Medicare:

• For inpatient services, hospitals are paid a fixed amount via Diagnostic-Related Groups (DRGs).
• For outpatient services, facilities are paid using Ambulatory Payment Classification (APC), where the CPT codes dictate the fixed rate.
• Doctors’ pay is governed by the Resource-Based Relative Value Scale (RBRVS), enacted by Congress in 1989 to replace older charge-based systems.

The reliance on coded claims data leads to intense administrative conflict, such as the battle over Prior Authorization (PA). PA is the insurer’s decision that a service or drug is medically necessary before they will cover it. A large majority of physicians report that the number of PAs required for both prescription medications (84%) and medical services (82%) has increased over the last five years 3.

Policymakers are actively tackling this burden through regulation:

• Technology Mandate: The CMS Interoperability and Prior Authorization final rule requires impacted payers to implement a Prior Authorization API (Application Programming Interface) starting by January 1, 2027, to handle requests and responses electronically 4.
• Time Limits: The rule mandates that payers must send decisions within 72 hours for urgent requests and seven calendar days for standard requests [CMS Interoperability, 14]. Furthermore, denials must now include a specific reason.
• Provider Incentives: CMS is adding a new Electronic Prior Authorization measure for MIPS eligible clinicians and hospitals starting in 2027 to encourage adoption. The AMA supports the integration of electronic PA into certified Electronic Health Records (EHRs) to cut physician administrative burdens.

This administrative chaos is compounded by the problem of price secrecy. Hardly anyone receiving health services understands the true cost of health care in the U.S., nor do they understand why providers are paid what they are paid. This lack of transparency is a primary obstacle to promoting market competition and informed consumer choice.

The government is actively battling price secrecy through Hospital Price Transparency (HPT) requirements:

• The Transparency Mandate: CMS requires hospitals to make standard charges public in two ways: a comprehensive machine-readable file (MRF) for developers and a separate consumer-friendly format to drive choice, promote market competition, and better inform healthcare decision making 5.
• The Compliance Crisis: Despite the clear mandate, CMS has received public feedback regarding the accuracy and completeness of the data reported in MRFs. Following a U.S. Government Accountability Office (GAO) review, CMS required that, as of July 1, 2024, hospitals must affirm the accuracy and completeness of their MRF.
• Defining the Law: CMS is actively seeking public input until July 21, 2025, on whether and how it should specifically define the terms “accuracy of data” and “completeness of data” in the context of HPT requirements, demonstrating the institutional complexity of enforcing transparency.

The financial disputes inherent in FFS are also seen in downcoding, where insurers attempt to reduce the payment level of CPT codes on the claim. The AMA wrote to Cigna in 2025 to oppose the R49 policy, arguing that automatically reducing the payment based only on the diagnosis code is inappropriate because the final diagnosis alone does not determine the complexity or risk of the encounter. Such practices place all burdens on physicians and staff, forcing them to waste time appealing for correct payment.

Because FFS fails to produce value, the long-term policy goal is Value-Based Care (VBC), which is guided by the Triple Aim of improving patient experience, improving population health, and reducing per capita costs. VBC uses financial incentives to reward quality rather than quantity.

Congress authorized the creation of Alternative Payment Models (APMs) in Medicare through the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) to accelerate this transition. This is done through models like:

• Accountable Care Organizations (ACOs): Providers who coordinate care and share savings if they meet quality and cost targets.
• Bundled Payments: A single payment links services for an entire episode of care to shift financial responsibility onto providers for efficiency.
• Capitation: The provider receives a predictable, upfront, set amount of money to cover all or some services for a patient, granting flexibility to pay for things like care management and patient education that FFS does not reimburse.

This shift to VBC is essential because the FFS model often creates barriers by offering no payment for needed services like time spent by nurses educating patients or non-medical services such as transportation. In VBC, payments are designed to support these new approaches, such as improving care for chronic disease patients to significantly reduce emergency department visits and hospitalizations.

However, the transition is fraught with challenges. When VBC succeeds in reducing expensive services, hospitals receive lower revenue, and the payment models must ensure that hospitals still receive enough revenue to support the essential, high-quality care that remaining patients need. Furthermore, attempts to establish target spending budgets for these APMs have serious flaws. Budgets based on past trends or comparisons to other providers may be wildly inaccurate due to unpredictable events like new diseases (e.g., COVID-19), new drugs, or workforce shortages, making accurate forecasting difficult.

While the OBBBA included a temporary 2.5% conversion factor update for Medicare physician payment for 2026, the constant struggle for a permanent, inflation-adjusted fix highlights the ongoing political battle to move beyond the flawed FFS system.

The struggle to enforce price transparency and streamline authorization, coupled with financial disputes like downcoding, vividly illustrates that the U.S. healthcare system is in a period of intense, multi-front policy warfare against the high costs and bureaucratic failures inherent in the traditional FFS model.