Drug Pricing, Supply & Payment Models

PHR 915 October 7, 2026

What are the three major topics covered in this lecture?

• Drug pricing: Understanding drug-price benchmarks, pharmacy reimbursement, and rebates.

• Drug shortages and recalls: Understanding why shortages happen, how to manage them, and how to respond to recalls.

• Healthcare payment models: Comparing fee-for-service (FFS), diagnosis-related groups (DRGs), and value-based care.

How do fee-for-service, DRG, and value-based payment differ?

• Fee-for-service: Payment for each service provided.

• DRG: A predetermined payment for a hospital inpatient stay.

• Value-based payment: Payment or financial incentives linked to quality, outcomes, or controlling healthcare spending.

These differences matter because they affect financial incentives, medication choices, and the role of pharmacists.

How does a drug move through the supply chain, and what price or payment is associated with each step?

1. Manufacturer: Sets the list price (WAC) and reports ASP for Medicare Part B and AMP and best price for Medicaid.

2. Wholesaler: Buys drugs at or below WAC and sells them to pharmacies, often with discounts.

3. Pharmacy: Pays its actual acquisition cost (AAC), which NADAC helps estimate, and sets a usual and customary (U&C) cash price.

4. Patient and health plan: The plan reimburses the pharmacy, while the patient pays applicable cost sharing or the cash price.

Manufacturers may also pay rebates to PBMs, health plans, and Medicaid after the sale.

Why is there no single price that accurately describes what a drug costs?

Different prices represent different things: the manufacturer's list price, the pharmacy's purchase cost, the plan's reimbursement amount, the patient's out-of-pocket cost, and the manufacturer's final net revenue after rebates. These amounts can all be different for the same drug.

What is the difference between a drug's list price and its net price?

• List price: The published price before applicable discounts and rebates.

• Net price: The amount remaining after applicable discounts and rebates are deducted.

What is WAC, and where is it used?

Wholesale Acquisition Cost (WAC) is the manufacturer's list price to wholesalers before discounts or rebates. It is a starting point for contracts and can be used to determine payment for new Medicare Part B drugs at WAC + 3%, according to the lecture.

What is AWP, and why can it be misleading?

Average Wholesale Price (AWP) is a published pricing benchmark that is usually much higher than the actual acquisition cost. Historically, reimbursement formulas have used AWP minus a percentage, plus a dispensing fee.

What is ASP, and how is it used for Medicare Part B drugs?

Average Sales Price (ASP) is a manufacturer-reported average sales price that accounts for rebates and discounts. Medicare Part B generally reimburses covered drugs using ASP + 6%, according to the lecture.

What is AMP, and why is it important for Medicaid?

Average Manufacturer Price (AMP) is the average price paid to manufacturers for drugs sold to retail community pharmacies. It is used in Medicaid drug rebate calculations and in determining the Federal Upper Limit (FUL) for certain generic drugs.

What is a manufacturer's best price, and how does it affect Medicaid?

Best price is the lowest price a manufacturer gives to any U.S. customer, subject to specified exclusions. It is used in calculating Medicaid rebates for brand-name drugs.

How do WAC, AWP, ASP, AMP, and best price differ?

• WAC: Manufacturer's list price to wholesalers.

• AWP: Published benchmark, generally higher than actual cost.

• ASP: Average sales price reported by the manufacturer, net of applicable discounts and rebates.

• AMP: Average price paid to manufacturers for drugs sold to retail community pharmacies.

• Best price: Lowest qualifying price offered to a U.S. customer.

What is AAC, and why is it important for pharmacy reimbursement?

Actual Acquisition Cost (AAC) is what the pharmacy actually pays for a drug after applicable discounts. Medicaid uses AAC to determine ingredient-cost reimbursement, with a dispensing fee added separately.

What is NADAC, and how does it differ from AAC?

National Average Drug Acquisition Cost (NADAC) is a CMS survey-based national average of pharmacy acquisition costs that is updated weekly. It helps estimate what pharmacies pay and is used by many state Medicaid programs.

What is U&C, and when does it matter?

Usual and Customary (U&C) is the pharmacy's cash price to the public. It matters for uninsured patients and when an insurance claim is paid using the lower of the applicable reimbursement formula or the U&C price.

What is MAC, and why do payers use it?

Maximum Allowable Cost (MAC) is a payer-set reimbursement ceiling for multisource drugs, particularly generics. PBMs and health plans use MAC lists to limit how much they reimburse pharmacies for these drugs.

What is FUL, and how is it calculated according to the lecture?

Federal Upper Limit (FUL) is a CMS payment ceiling for certain multisource generic drugs under Medicaid. The lecture defines it as 175% of the weighted average AMP.

Its purpose is to limit Medicaid payment for qualifying generic drugs.

What is the 340B ceiling price, and how is it calculated?

he 340B ceiling price is calculated as AMP minus the Medicaid unit rebate amount. It limits the price manufacturers may charge eligible hospitals and clinics participating in the 340B Drug Pricing Program.

How do AAC, NADAC, U&C, MAC, and FUL differ?

• AAC: What an individual pharmacy actually pays.

• NADAC: Survey-based national average pharmacy acquisition cost.

• U&C: Pharmacy's cash price to the public.

• MAC: Payer-set ceiling for multisource drugs.

• FUL: CMS ceiling for certain multisource generic drugs under Medicaid.

What is spread pricing, and how does a PBM earn money through it?

Spread pricing occurs when a pharmacy benefit manager (PBM) charges a health plan more for a medication than it pays the pharmacy, keeping the difference.

Example from the lecture:

• The PBM bills the health plan $100.

• The PBM pays the pharmacy $85.

• The PBM keeps a $15 spread.

The spread is the difference between what the plan pays the PBM and what the PBM pays the pharmacy.

What is a health insurance premium?

A premium is the fixed amount paid to maintain insurance coverage, usually monthly. It must be paid whether or not the person uses healthcare services or fills prescriptions.

What is a deductible?

A deductible is the amount a patient must pay each year before insurance coverage begins to pay according to the plan's benefits.

What is a copay?

A copay is a fixed dollar amount the patient pays for a covered service or prescription, such as $10 for a generic medication.

What is coinsurance, and how do you calculate it?

Coinsurance is the percentage of a drug's cost that the patient must pay.

For example, 20% coinsurance on a $200 drug costs the patient:

$200×0.20=$40\$200 \times 0.20 = \$40$200×0.20=$40

What does out-of-pocket cost mean for a prescription?

It is the amount the patient pays at the pharmacy counter. Depending on the insurance plan and the patient's coverage stage, it can include a deductible, copay, or coinsurance, or the full cash price.

What is the difference between a premium, deductible, copay, and coinsurance?

• Premium: Pays to keep insurance active.

• Deductible: Amount paid before coverage starts paying under the plan.

• Copay: Fixed dollar amount per prescription or service.

• Coinsurance: Percentage of the cost paid by the patient.

What are drug rebates, and who receives them?

Rebates are payments manufacturers make to PBMs and health plans after a medication is sold. They are often connected to formulary placement, meaning the drug's preferred status on a plan's list of covered medications. Manufacturers also pay required rebates to Medicaid.

How do rebates create a difference between a drug's list price and net price?

The manufacturer initially has a list price, but rebate payments reduce the amount it ultimately keeps. Therefore, the list price can be much higher than the net price after rebates and discounts.

Why can patients lose out financially even when a manufacturer pays a large rebate?

Deductibles and coinsurance are often calculated using the pre-rebate price, rather than the lower net price after rebates. As a result, patients may pay cost sharing based on a higher price even though the plan or PBM receives a rebate later.

How can a drug rebate affect the patient, health plan, PBM, and manufacturer differently?

• Manufacturer: Pays the rebate, reducing its net revenue.

• PBM and health plan: May receive rebate payments under their agreements.

• Patient: May still pay cost sharing based on the higher pre-rebate price.

This is why a rebate does not automatically translate into lower out-of-pocket costs for the patient.

What does it mean when a drug has only one source of supply, and why does that increase shortage risk?

A sole-source product depends on a single manufacturer or source. If that source has a manufacturing failure, quality problem, or interruption, there may be no other supplier able to replace the missing product quickly.

The lecture reports that 48% of new 2026 shortages involve sole-source products. The important lesson is that a lack of alternative suppliers makes the supply chain vulnerable to disruption.

Why is it important that some active drug shortages involve controlled substances?

Controlled substances are medications subject to additional legal controls. A shortage can make it harder for patients to obtain necessary therapy and can complicate substitution, dispensing, and inventory management. The lecture reports that 16% of active shortages involve controlled substances.

Why can a shortage of contrast agents create problems for healthcare facilities?

Contrast agents are used in certain medical imaging procedures. If supplies are limited, facilities may need to prioritize patients, adjust imaging schedules, or consider suitable alternatives when available. The lecture reports that 10% of new 2026 shortages involve contrast agents.

What is the key lesson from the shortage statistics on this slide?

Drug shortages are not just a purchasing problem. Dependence on a single supplier and shortages of medications used in essential procedures or tightly regulated therapies can affect patient care. Pharmacies need contingency plans, alternative sources where possible, and a process for prioritizing limited supplies.

What are the three root causes of drug shortages identified in the lecture?

• Low profitability.

• Quality is not adequately rewarded.

• Slow recovery after a disruption.

Why does low profitability contribute to drug shortages, especially for older generic drugs?

If a medication generates little profit, manufacturers have less financial incentive to continue producing it, invest in additional capacity, or maintain multiple production sources. If production becomes unprofitable or is discontinued, the supply can become vulnerable.

What does it mean that the market does not reward quality adequately?

Manufacturers may invest in strong quality systems to prevent contamination, defects, and production failures, but the market may not provide enough financial reward for that investment. This can weaken incentives to invest in quality improvements that would make the supply more reliable.

Why can a drug shortage take a long time to resolve after a manufacturing disruption?

Recovery can require resolving production problems, obtaining necessary regulatory approvals, sourcing raw materials, and overcoming logistical barriers. Even if a manufacturer identifies the problem, restoring a safe and reliable supply may take time.

What immediate events can trigger a drug shortage?

• Manufacturing problems.

• Quality problems.

• Production or distribution delays.

• Raw-material shortages.

• Sudden increases in demand.

• Product discontinuations.

How do the root causes of shortages differ from their immediate triggers?

Root causes are underlying weaknesses that make shortages more likely, such as low profitability and insufficient incentives to invest in quality. Immediate triggers are events that disrupt supply, such as a manufacturing failure or unexpected demand increase.

A manufacturer might experience a quality failure as the immediate trigger, while low investment in quality systems is part of the underlying vulnerability.

What is the purpose of the early-warning requirement under FD&C Act §506C?

Manufacturers must notify the FDA about certain discontinuances or interruptions in the production of drugs, including active pharmaceutical ingredients (APIs), six months in advance or as soon as practicable.

The purpose is to give the FDA and healthcare system advance warning so they can assess the risk and prepare for a possible shortage.

What can the FDA do to help address a drug shortage?

• Expedite reviews when appropriate.

• Extend expiration dates when authorized and appropriate.

• Allow temporary importation of certain products.

What can the FDA NOT do to solve a drug shortage?

The FDA cannot require a company to manufacture a drug or increase production. Its regulatory tools can help address certain barriers, but they cannot guarantee that a manufacturer will produce more medication.

Why can a drug shortage remain unresolved even when the FDA is involved?

The FDA can facilitate certain regulatory actions, but it cannot force a company to manufacture a medication. If production capacity is inadequate, raw materials are unavailable, or manufacturing problems persist, the shortage may continue.

Where can pharmacists look for information about current drug shortages, and how should they use it?

The lecture identifies the American Society of Health-System Pharmacists (ASHP) current drug-shortages list:

What are the five steps for managing a drug shortage according to ASHP's approach?

• Verify and assess.

• Find alternatives.

• Conserve and allocate.

• Communicate.

• Monitor.

The steps help facilities respond systematically rather than making uncoordinated decisions as supplies run low.

What should a pharmacy do when verifying and assessing a shortage?

Confirm that the shortage is real, determine how much medication is on hand, calculate how quickly it is being used, and estimate how long the available supply will last.

This information helps the facility determine how urgent the problem is and how quickly it needs to act.

What should pharmacists consider when identifying alternatives to a drug in short supply?

Identify appropriate therapeutic alternatives and check for differences in dose and concentration.

A substitute may require a different dose, concentration, preparation, or administration process. Failure to account for these differences can lead to medication errors.

What does it mean to conserve and allocate a limited medication supply?

Establish criteria for appropriate use through the Pharmacy and Therapeutics (P&T) committee and prioritize patients who need the medication most.

The goal is to preserve supplies for patients with the greatest clinical need instead of allowing the medication to run out through unrestricted use.

Why is communication an essential part of shortage management?

Pharmacists should alert prescribers and nurses, communicate which alternatives are available, and update order sets and dispensing systems.

This reduces confusion and helps ensure that everyone uses the same plan. It also helps prevent errors caused by outdated orders or different concentrations being stocked

What should a pharmacy monitor after implementing a shortage-management plan?

Track medication errors and patient outcomes, and reassess the plan until the supply returns to normal.

Monitoring allows the pharmacy to identify unintended consequences, determine whether the alternatives are working, and adjust the plan when necessary.

How does the FDA classify drug recalls?

Recalls are classified according to the risk the product poses to health:

• Class I: There is a reasonable probability that using the product will cause serious adverse health consequences or death.

• Class II: The product may cause temporary or medically reversible harm; the probability of serious harm is remote.

• Class III: The product is not likely to cause adverse health consequences.

What is the difference between a Class I, Class II, and Class III recall?

The main difference is the level of health risk.

• Class I = greatest risk, potentially serious harm or death.

• Class II = moderate risk, usually temporary or reversible harm.

• Class III = lowest risk, adverse health consequences are unlikely.

What is a market withdrawal, and how is it different from a recall?

A market withdrawal involves a minor violation that would not ordinarily be subject to FDA legal action. It is distinguished from a recall involving a product that must be removed or corrected because of a potentially problematic issue.

Who can initiate a drug recall?

A recall may be initiated:

• Voluntarily by the manufacturer or firm.

• At the FDA's request.

• By an FDA order under statutory authority.

The FDA does not have to be the party that first initiates the recall.

What are the five steps a pharmacy should follow when responding to a drug recall?

• Receive the recall notice.

• Match the product's National Drug Code (NDC) and lot number.

• Quarantine the affected product.

• Check the recall's depth to determine whether patients must be contacted.

• Replace the product as needed and document all actions.

Where might a pharmacy receive a recall notice?

From the manufacturer, wholesaler, or an FDA enforcement report.

The pharmacy should identify the affected product and determine whether any of its stock or previously dispensed medication is involved.

Why must the pharmacy check both the NDC and lot number during a recall?

The NDC identifies the drug product, while the lot number identifies a specific batch. Checking both helps determine whether the exact recalled product is present.

The pharmacy should check all relevant storage and dispensing locations, including automated dispensing cabinets and satellite areas, rather than checking only the main pharmacy shelves.

What does it mean to quarantine a recalled drug?

Remove the affected product from use immediately and separate it from usable stock so it cannot accidentally be dispensed or administered.

When does a pharmacy need to contact patients about a recalled medication?

When the recall extends to the consumer or user level, the pharmacy must identify patients who received the affected lot and contact them as appropriate under the recall instructions.

The need to contact patients depends on the depth of the recall, not simply on the fact that a recall was announced.

What should a pharmacy do after removing a recalled medication from use?

Arrange an appropriate replacement or alternative with prescribers, return the affected product according to the recall instructions, and document the actions taken.

What is recall depth, and why does it matter?

Recall depth describes how far through the distribution chain a recall extends:

• Wholesale level: Affected products are removed from wholesalers or distribution channels.

• Retail level: Pharmacies or other retail outlets must take action.

• Consumer/user level: The recall extends to patients or other end users who received the product.

How should a pharmacist use an actual FDA recall notice when managing a recalled medication?

Use the notice to identify the affected product, determine the relevant NDC and lot information, understand the reason for the recall, and follow the specified instructions for removing, returning, replacing, or communicating about the product.

The lecture includes an example involving Sterling Pharmaceutical Services and an FDA recall database record. The key learning objective is knowing how to apply a real recall notice to pharmacy practice, rather than memorizing the example's dates or case details

What is the difference between knowing a recall's classification and knowing how to respond to it?

Classification tells the pharmacist the level of health risk. The response process tells the pharmacist what to do: identify affected products, remove them from use, determine recall depth, contact patients when required, arrange alternatives, and document the response.

Both are necessary for safe recall management.

What are the main healthcare payment models discussed in this section?

Fee-for-service, diagnosis-related groups (DRGs), bundled payments, pay for performance, shared savings, and capitation.

These models differ in how providers are paid and how much financial risk they bear when care costs more or less than expected.

What is fee-for-service (FFS), and what behavior does it reward?

FFS pays providers for each service they deliver. It rewards volume, meaning more billable services can generate more payment.

This differs from models where payment is fixed or linked to quality and total spending.

What is a case rate or diagnosis-related group (DRG) payment?

A DRG pays a predetermined amount for a hospital inpatient stay based on the patient's assigned diagnosis-related group. The payment covers the stay rather than separately reimbursing every individual service or medication.

What is a bundled payment?

A bundled payment provides a fixed amount for an episode of care, which may include multiple services associated with that episode.

Providers must manage the costs of the included services within the payment arrangement.

What is pay for performance?

Pay for performance links bonuses or penalties to the quality of care or achievement of specified performance measures.

It creates a financial incentive to meet quality targets rather than focusing only on the number of services provided.

What is shared savings, and how does it work in an Accountable Care Organization (ACO)?

Under shared savings, providers can receive a share of savings when healthcare spending is below a specified target, subject to the program's requirements.

An ACO coordinates care for a defined patient population and has incentives to improve quality while controlling spending.

What is capitation?

Capitation pays a fixed amount per person per month, regardless of how many individual services that person uses.

Because the payment is predetermined, providers may bear more financial risk if the cost of providing care exceeds the amount received.

How do the six payment models differ?

• FFS: Payment for each service.

• DRG/case rate: Fixed payment per inpatient stay.

• Bundled payment: Fixed payment per episode of care.

• Pay for performance: Financial incentives tied to quality.

• Shared savings: Providers share savings against a spending target.

• Capitation: Fixed payment per person per month.

How does financial risk generally change across payment models?

In general, providers face less financial risk under payment models that reimburse individual services and more risk under arrangements with fixed payments or population-based budgets.

The lecture places FFS at the lower-risk end and capitation at the higher-risk end. The precise amount of risk depends on the contract and its requirements.

What are the four Healthcare Payment Learning and Action Network (HCP-LAN) categories?

• Category 1: Fee-for-service only.

• Category 2: Fee-for-service linked to quality.

• Category 3: Alternative payment models that incorporate value-based care, such as shared savings.

• Category 4: Population-based payment, such as capitation.

What is the general progression from HCP-LAN Category 1 to Category 4?

The categories progress from traditional fee-for-service payment toward payment arrangements increasingly based on quality, value, and population-level spending.

The key distinction is whether providers are mainly paid for individual services or are increasingly accountable for outcomes and total costs.

How are inpatient drugs paid for under a DRG system?

Under a DRG system, the hospital receives one predetermined payment per discharge that covers the inpatient stay, including medications.

The hospital does not automatically receive extra payment for every additional drug used. It must manage medication costs within the fixed payment.

Under a DRG, who benefits financially when medication costs are lower than expected, and who bears the cost when they are higher?

The hospital keeps the savings when costs are below the payment amount and absorbs the extra costs when spending exceeds that amount.

This creates an incentive for hospitals to manage medication costs while maintaining appropriate patient care.

Why do DRGs encourage formulary management, medication stewardship, IV-to-oral switches, and the use of generics and biosimilars?

Because the hospital receives a fixed payment for the stay, reducing unnecessary medication expenses can help it stay within budget.

• Formulary management: Encourages the appropriate selection of medications.

• Medication stewardship: Promotes safe, effective, and appropriate medication use.

• IV-to-oral switches: When clinically appropriate, oral therapy can reduce costs associated with intravenous administration.

• Generics and biosimilars: Can provide suitable lower-cost alternatives to certain brand-name products and biologics.

The goal is to manage costs without compromising treatment quality or patient safety.

How are outpatient Medicare Part B drugs generally paid for under the model described in the lecture?

The drug is generally paid for separately using ASP + 6%, on top of the payment for the visit, according to the lecture.

This is different from an inpatient DRG, where drug costs are included in the fixed payment for the hospital stay.

Why is outpatient Part B drug reimbursement described as fee-for-service?

Each qualifying drug dose is billed separately. Payment is linked to the individual dose rather than being fully included in one fixed payment for the entire hospital stay.

Why can the 6% add-on under ASP + 6% create a greater dollar payment for a more expensive drug?

Because the add-on is calculated as a percentage of ASP.

For example, using the lecture's formula:

• A drug with an ASP of $100 has a 6% add-on of $6.

• A drug with an ASP of $1,000 has a 6% add-on of $60.

The percentage is the same, but the dollar amount is larger for the more expensive drug. This illustrates how percentage-based reimbursement can create different financial incentives than a fixed dispensing or service fee.

What is the key difference between inpatient DRG payment and outpatient Part B drug payment?

• Inpatient DRG: Drugs are included in a fixed payment for the hospital stay; the hospital manages the medication costs within that payment.

• Outpatient Part B: Qualifying drugs are generally reimbursed separately at ASP + 6%, in addition to the visit payment.

This difference affects how hospitals and clinicians approach drug selection and medication costs.

How do medication-adherence measures affect value-based care?

Medication adherence measures assess whether patients take their prescribed medications as intended. The lecture identifies three Medicare Part D Star Ratings adherence measures:

• Diabetes medications.

• Renin-angiotensin system (RAS) antagonists.

• Statins.

Each measure is weighted 3 in the 2027 ratings described in the lecture.

Poor adherence can undermine treatment effectiveness, so supporting patients in taking medications correctly can help improve both quality measures and health outcomes.

Why do hospital readmission penalties make medication reconciliation and transitions of care important?

Hospitals can lose payment for excess readmissions. Medication reconciliation helps identify discrepancies between a patient's medication lists, while transitions-of-care services help ensure that medication plans are understood and followed when patients move between care settings.

These services can help prevent medication errors, interruptions in therapy, and avoidable complications that may lead to readmission.

What pharmacist services support value-based care?

The lecture highlights:

• Medication reviews: Assess medications for appropriateness, safety, effectiveness, and potential problems.

• Adherence support: Help patients take their medications as prescribed.

• Deprescribing: Reduce or discontinue medications that are no longer appropriate when clinically justified.

These services align with payment models that reward better outcomes, improved quality, and reduced avoidable healthcare utilization.

How can pharmacists contribute to both better patient outcomes and lower healthcare costs?

Pharmacists can identify medication-related problems, improve adherence, reconcile medications during transitions of care, support appropriate prescribing, and recommend deprescribing when appropriate.

These activities may prevent medication errors and avoidable complications, helping patients while supporting the quality and cost goals of value-based care.

A pharmacy's acquisition cost for a medication is lower than the published AWP. Which benchmark best represents what the pharmacy actually pays?

AAC, or Actual Acquisition Cost. AWP is a published benchmark and does not necessarily reflect the pharmacy's actual purchase cost.

A patient pays coinsurance calculated from a drug's list price, even though the manufacturer later provides a large rebate. Why might the patient's cost remain high?

The patient's coinsurance may be calculated using the pre-rebate price. The later rebate may reduce the plan's or manufacturer's net cost without reducing the price used to calculate the patient's cost sharing.

A generic drug becomes unprofitable to manufacture, and its only manufacturer experiences a quality failure. Why is this situation especially likely to cause a shortage?

Low profitability reduces incentives to invest in continued production or backup capacity. A quality failure interrupts the only source of supply, and alternative manufacturers may not be able to replace it quickly.

A hospital has a limited supply of a critical medication. What should the pharmacy do first, and what should it do next?

First, verify and assess the shortage by confirming the available inventory, usage rate, and expected duration. Next, identify suitable therapeutic alternatives, establish conservation and allocation criteria, communicate the plan, and monitor errors and outcomes.

A pharmacy learns that a specific lot of a medication has been recalled. What are its immediate priorities?

Match the NDC and lot number, locate the affected stock in all relevant areas, and quarantine it immediately. Then determine the recall depth, contact affected patients when required, arrange alternatives, return the product as directed, and document the response.

Why might a hospital under a DRG payment choose a clinically appropriate generic rather than a more expensive brand-name drug?

The hospital receives a fixed payment for the stay and must cover medication costs within that amount. A suitable lower-cost generic may reduce spending and allow the hospital to retain savings, provided treatment quality and patient safety are maintained.

Why might a pharmacist's adherence-support service be especially valuable under a value-based payment model?

Better adherence can improve treatment effectiveness and quality measures. It may also reduce avoidable complications and hospitalizations, supporting the goals of value-based care.

Compare fee-for-service, DRG payment, and capitation in terms of how payment is calculated and who bears financial risk.

• Fee-for-service: Payment is based on each service provided. The provider generally has less risk from the cost of an individual service because payment is tied to the service delivered.

• DRG: Payment is fixed for an inpatient stay. The hospital bears the risk that the cost of that stay exceeds the predetermined payment.

  • Capitation: Payment is fixed per person per month. The provider bears more risk if the cost of caring for the covered population exceeds the payment received.