What Is Cost-based Provider Reimbursement?

"Cost-based provider reimbursement" refers to a common payment method in health insurance. Under cost-based reimbursement, patients' insurance companies make payments to doctors and hospitals based on the costs of the care provided to the patients. However, insurers that use cost-based reimbursement won't pay for anything and everything. They pay only "allowable costs," those defined as covered in the policy.

Medicare, the federal health care system for Americans 65 and older, uses cost-based provider reimbursement, as do many private health insurers. Cost-based systems are retrospective, or backward-looking: This means they look at what has happened in the past -- the care provided to a particular patient, as well as the costs of various services -- and make payments based on that. The alternative is a "prospective" payment system, where an insurer pays providers based on the care the patient is expected to receive. For example, it will pay a certain amount of money for a patient admitted with a heart attack, regardless of the actual costs incurred.

Cost-based reimbursement assures health care providers that they will be paid for the costs of the services they provide, so long as they're allowable. It also assures patients that the care they receive will be paid for. Some insurers, particularly in managed care plans, pay on a "capitation" basis, where providers receive a set amount per month based on the number of people enrolled in a plan.