HMGT 420 UMGC Ambulatory Care Case Study

In 3–4 pages address the following aspects:

List five different types of ambulatory care settings, describe the services they provide, the populations they serve, their importance within the U.S. healthcare system, and discuss why ambulatory care makes sense in the current healthcare environment.

Compare and contrast free-standing settings versus hospital-based settings.

Include an APA Title Page, APA Reference Page, and provide at least two APA references with correlating in-text citations.

https://leocontent.umgc.edu/content/dam/course-con…

PDF – The Joint Commission National Patient Safety Goals 2022 for Ambulatory Health Care Program

PDF – Understanding the Unique Demands of Ambulatory Care Settings Article

CDC Website: Outpatient and Ambulatory Care Settings Landing Page

PDF – Management of a Heart Failure Patient in an Ambulatory Care Setting Article

PDF – Ambulatory Care Nursing and Health Equity Publication

APA 7th Edition Formatting for eBook:Reiter, K.L. & Paula H. Song, P.H. (2021). Gapenski’s healthcare finance: An introduction to accounting and financial management. (7th ed.). Health Administration Press

Read

PDF – McKinsey & Company 2020 Publication: Ambulatory Care

Read

PDF – AHRQ: Ambulatory Care Information

Read

PDF – MedPac Ambulatory Care Publication 2022

Read

PDF – Trends in Hospitalization vs Observation in Ambulatory Care Article

AHRQ Website: Ambulatory Care Landing Page

Accreditation Association for Ambulatory Health Care (AAAHC) Website: Main Page

PDF – JAMA Article: Trends in Hospitalization for Ambulatory Care Sensitive Conditions During COVID-19

PDF – HHS and AHRQ Patient Safety in Ambulatory Settings

CHAPTER
HEALTHCARE INSURANCE AND
REIMBURSEMENT METHODOLOGIES
2
Learning Objectives
Copyright 2021. AUPHA/HAP Book.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
After studying this chapter, readers will be able to
• Explain the overall concept of insurance, including adverse
selection and moral hazard.
• Briefly describe the third-party payer system.
• Explain the different types of general payment methods.
• Describe the incentives created by the different payment
methods and their impact on provider risk.
• Describe the purpose and organization of managed care plans.
• Explain the impact of healthcare reform on insurance and
reimbursement methodologies.
• Explain the importance and types of medical coding.
Introduction
Compared with other services, the provision of healthcare services is unique.
First, often only a few providers of a particular service exist in a given area.
Next, it is often difficult to judge the quality and cost of competing services,
although new tools aim to facilitate service comparison.1 Then, the decision
about which services to purchase is usually not made by the consumer but
by a physician or some other clinician. Also, full payment to the provider is
not normally made by the user of the services but by a healthcare insurer.
Finally, for most individuals, health insurance from third-party payers is paid
for or subsidized by employers or government agencies, so many patients are
partially insulated from the costs of healthcare.
This highly unusual marketplace for healthcare services has a profound
effect on the supply of, and demand for, such services. In this chapter, we
discuss the concept of insurance, the major providers of healthcare insurance,
and the methods used by insurers to pay for health services.
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G a p en s k i’s H e a l th c a re Fi n a n c e
Insurance Concepts
Healthcare services are supported by an insurance system composed of a wide
variety of organizations and payers. Because insurance is the cornerstone of
the healthcare system, a general understanding of insurance will help you
better comprehend the marketplace for healthcare services.
A Simple Illustration
To better understand insurance concepts, consider a simple example. Assume
that no health insurance exists and you face only two possible medical outcomes in the coming year:
Outcome
Stay healthy
Get sick
Probability
0.99
0.01
Cost
$ 0
20,000
Furthermore, assume that everyone else faces the same medical outcomes at the same odds and with the same associated costs. What is your
expected healthcare cost—E(Cost)—for the coming year? To find the answer,
we multiply the cost of each outcome by its probability of occurrence and
then sum the products:
E(Cost) = (Probability of outcome 1 × Cost of outcome 1)
+ (Probability of outcome 2 × Cost of outcome 2)
= (0.99 × $0) + (0.01 × $20,000)
= $0 + $200 = $200.
Now, assume that you, and everyone else, make $20,000 a year.
With this salary, you can easily afford the $200 “expected” healthcare cost.
The problem is, however, that no one’s actual bill will be $200. If you stay
healthy, your bill will be zero, but if you are unlucky and get sick, your bill
will be $20,000. This cost may force you, as well as other people who get
sick, into personal bankruptcy.
Next, suppose that an insurance policy that pays all of your healthcare
costs for the coming year is available for $250. Would you purchase the
policy, even though it costs $50 more than your expected healthcare costs?
Most people would. In general, individuals are risk averse, so they would be
willing to pay a $50 premium over their expected costs to eliminate the risk
of financial ruin. In effect, policyholders are passing to the insurer the costs
associated with the risk of getting sick.
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
Would an insurer be willing to offer the policy for $250? If an
insurance company sold a million policies, its expected total policy payout would be 1 million times the expected payout for each policy, or 1
million × $200 = $200 million. If there were no uncertainty about the
$20,000 estimated medical cost per claim, the insurer could forecast its
total claims precisely. It would collect 1 million × $250 = $250 million
in health insurance premiums; pay out roughly $200 million in claims;
and hence have about $50 million to cover administrative costs, create a
reserve in case realized claims are greater than predicted by its actuaries,
and make a profit.
Basic Characteristics of Insurance
This simple example of health insurance illustrates why individuals would
seek health insurance and why insurance companies would be formed to provide such insurance. Needless to say, the concept of insurance is much more
complicated in the real world. Insurance is typically defined as having four
distinct characteristics:
1. Pooling of losses. The pooling, or sharing, of losses is the basis of
insurance. Pooling means that losses are spread over a large group of
individuals, so that each individual realizes the average loss of the pool
(plus administrative expenses) rather than the actual loss incurred.
In addition, pooling involves the grouping of a large number of
homogeneous exposure units—people or things having the same risk
characteristics—so that the law of large numbers applies. (In statistics,
the law of large numbers states that as the size of the sample increases,
the sample mean gets closer and closer to the population mean.) Thus,
pooling implies (1) the sharing of losses by the entire group and (2)
the prediction of future losses with some accuracy.
2. Payment only for random losses. A random loss is one that is
unforeseen and unexpected and occurs as a result of chance. Insurance
is based on the premise that payments are made only for losses that are
random. We discuss the moral hazard problem, which concerns losses
that are not random, in a later section of this chapter.
3. Risk transfer. An insurance plan almost always involves risk transfer.
The sole exception to the element of risk transfer is self-insurance,
which is the assumption of a risk by a business (or an individual) itself
rather than by an insurance company. (Self-insurance is discussed in a
later section.) Risk transfer is the transfer of a risk from an insured to
an insurer, which typically is in a better financial position to bear the
risk than the insured because of the law of large numbers.
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G a p en s k i’s H e a l th c a re Fi n a n c e
4. Indemnification. The final characteristic of insurance is
indemnification for losses—that is, reimbursement to the insured if a
loss occurs. In the context of health insurance, indemnification takes
place when the insurer pays the insured, or the provider, in whole or in
part for the expenses related to the insured’s illness or injury.
Adverse Selection
adverse selection
The problem faced
by insurance
companies
because
individuals who
are more likely
to have claims
are also more
likely to purchase
insurance.
moral hazard
The problem faced
by insurance
companies
because
individuals are
more likely to use
unneeded health
services when they
are not paying the
full cost of those
services.
One of the major problems facing healthcare insurers is adverse selection.
Adverse selection occurs because individuals and businesses that are more
likely to have claims are more inclined to purchase insurance than those that
are less likely to have claims. For example, an individual without insurance
who needs a costly surgical procedure will likely seek health insurance if it
is affordable to do so, whereas an individual who does not need surgery is
much less likely to purchase insurance. Similarly, consider the likelihood of
a 20-year-old to seek health insurance versus the likelihood of a 60-year-old
to do so. The older individual, with much greater health risk due to age, is
more likely to seek insurance.
If this tendency toward adverse selection goes unchecked, a disproportionate number of sick people, or those who are most likely to become
sick, will seek health insurance, and the insurer will experience higher than
expected claims. This increase in claims will trigger a premium increase,
which will only worsen the problem, because the healthier members of the
plan will seek insurance from other firms at a lower cost or may totally forgo
insurance. The adverse selection problem exists because of asymmetric information, which occurs when individual buyers of health insurance know more
about their health status than do insurers.
The best strategy for healthcare insurers to combat adverse selection is
to create a large, well-diversified pool of subscribers. If the pool is sufficiently
large and diversified, the costs of adverse selection can be absorbed by the
large number of enrollees. Many current health policies, such as health insurance exchanges, attempt to limit adverse selection by creating or requiring
these large, diversified risk pools.
Moral Hazard
Insurance is based on the premise that payments are made only for random
losses, and from this premise stems the problem of moral hazard. An example of moral hazard in a casualty insurance setting is the owner who deliberately sets a failing business on fire to collect the insurance. Moral hazard
is also present in health insurance, but it typically takes a less dramatic form;
few people are willing to voluntarily sustain injury or illness for the purpose of
collecting health insurance proceeds. However, undoubtedly there are people
who purposely use healthcare services that are not medically required. For
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
example, some people might visit a physician or a walk-in clinic for the social
value of human companionship rather than to address a medical necessity.
Also, some hospital discharges might be delayed for the convenience of the
patient rather than for medical purposes.
Finally, when insurance covers the full cost or most of the cost of
healthcare services, individuals often are quick to agree to an expensive
magnetic resonance imaging (MRI) scan
or other high-cost procedure that may
not be necessary. If the same test required
For Your Consideration
total out-of-pocket payment, individuWho Should Pay for Health Services—
als would think twice before agreeing to
Users or Insurers?
such an expensive procedure unless they
One of the most confounding questions that
clearly understood the medical necessity
arises when discussing healthcare services is
involved. All in all, when somebody else is
who should bear the responsibility for payment.
Should the patient be responsible, or should
paying the costs, patients consume more
some third party, such as the government or an
healthcare services.
insurance company, foot the bill?
Even more insidious is the potenMany people argue that when individuals
tial impact of insurance on individual
bear the cost of their own healthcare, they will be
behavior. Individuals may be more likely
responsible consumers and only pay for necessary
to forgo preventive actions and embrace
services. In addition, they will choose providers
on the basis of cost and quality and hence create
unhealthy behaviors when the costs of
incentives for providers to offer better yet less
not taking those actions will be borne by
expensive services. It is estimated that this action
insurers. For example, individuals may
alone would reduce total healthcare costs in the
be less motivated to stop smoking if the
United States by 20 to 30 percent, or even more.
monetary costs associated with smokingOther people argue that individuals canrelated illnesses are carried by the insurer.
not make rational decisions regarding their
own healthcare because they do not sufficiently
The primary tool that insurers have
understand the nature of illness and injury. Furto combat the moral hazard problem is
thermore, there is insufficient information about
coinsurance, which requires insured indiprovider quality and costs available to guide
viduals to pay a certain percentage of eligiindividuals to good decisions. Finally, individuals
ble medical expenses—say, 20 percent—in
would skimp on routine preventive healthcare serexcess of the deductible (the amount that
vices to save money, which would create healthcare problems down the road and ultimately lead
individuals pay before their insurance plan
to higher future costs.
starts to pay). Insurers also use copayments,
What do you think? Should individuals be
which are similar to coinsurance but are
held more responsible for their own costs of
expressed as a dollar amount: $20 per prihealthcare services? What about the arguments
mary care visit, for example. To illustrate
stated here? Is there some way of balancing the
coinsurance, assume that Juan Pérez, who
need for more consumerism in healthcare service
purchases with the need to protect individuals
has employer-provided medical insurance
against the very high costs of many services? Can
that pays 80 percent of eligible expenses
you think of a current example?
after the $100 deductible is satisfied,
incurs $10,000 in medical expenses during
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G a p en s k i’s H e a l th c a re Fi n a n c e
the year. The insurer will pay 0.80 × ($10,000 − $100) = 0.80 × $9,900 =
$7,920, so Juan’s responsibility is $10,000 − $7,920 = $2,080. The purposes of coinsurance and copayments are to reduce premiums (monthly fees
for purchasing the insurance plan) to employers and to prevent overutilization of healthcare services. Because insured individuals pay part of the cost,
premiums can be reduced. Additionally, by being forced to pay some of the
costs, insured individuals will presumably seek fewer and more cost-effective
treatments and embrace a healthier lifestyle.
SELF-TEST
QUESTIONS
1. Briefly explain the following characteristics of insurance:
a. Pooling of losses
b. Payment only for random losses
c. Risk transfer
d. Indemnification
2. What is adverse selection, and how do insurers deal with the
problem?
3. What is the moral hazard problem, and how do insurers mitigate it?
Third-Party Payers
third-party payer
A generic term
for any outside
party, typically
an insurance
company or a
government
program, that
pays for part or
all of a patient’s
healthcare
services.
Up to this point in the chapter, we have focused on basic insurance concepts.
A large proportion of the health services sector receives its revenues not
directly from the users of their services—the patients—but from insurers,
which are known collectively as third-party payers. Because an organization’s revenues are critical to its financial viability, this section briefly examines the sources of most revenues in the health services sector. In the next
section, the reimbursement methodologies employed by third-party payers
are reviewed in more detail.
Health insurance originated in Europe in the early 1800s, when
mutual benefit societies formed to reduce the financial burden associated
with illness or injury. Since then, the concept of health insurance has changed
dramatically. Today, health insurers fall into two broad categories: private
insurers and public programs.
Private Insurers
In the United States, the concept of public, or government-provided, health
insurance is relatively new, while private health insurance has been in existence
since the early 1900s. In this section, the major private insurers are discussed:
Blue Cross Blue Shield (www.bcbs.com), commercial insurers, and self-insurers.
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
Blue Cross Blue Shield
Blue Cross Blue Shield organizations trace their roots to the Great Depression, when both hospitals and physicians were concerned about their
patients’ ability to pay healthcare bills. One example is Florida Blue (www.
floridablue.com) (formerly Blue Cross and Blue Shield of Florida), which
offers healthcare insurance to individuals and families, Medicare beneficiaries,
and business groups that reside in Florida.
Blue Cross originated as a number of separate insurance programs
offered by individual hospitals. At that time, many patients were unable to
pay their hospital bills, but most people, except the poorest, could afford to
purchase some type of hospitalization insurance. Thus, the programs were
initially designed to benefit hospitals as well as patients. The programs were
all similar in structure: Hospitals agreed to provide a certain amount of services to program members who made periodic payments of fixed amounts to
the hospitals, whether services were used or not. In a short time, these programs expanded from single-hospital programs to community-wide, multihospital plans called hospital service plans. The Blue Cross name was officially
adopted by most of these plans in 1939.
Blue Shield plans developed in a manner similar to Blue Cross plans,
except that the providers were physicians instead of hospitals. Today, there
are 36 Blue Cross Blue Shield organizations (referred to as “the Blues”).
Some offer only one of the two plans, but most offer both plans. The Blues
are organized as independent corporations, including some for-profit entities,
but all belong to a single national association that sets standards that must be
met to use the Blue Cross Blue Shield name. Collectively, the Blues provide
healthcare coverage for more than 106 million individuals in all 50 states, the
District of Columbia, and Puerto Rico.2
Commercial Insurers
Commercial health insurance is issued by life insurance companies, casualty insurance companies, and companies that were formed exclusively to
offer healthcare insurance. Examples of commercial insurers include Aetna,
Humana, and UnitedHealth Group. All commercial insurance companies are
taxable (for-profit) entities. Commercial insurers entered the health insurance market following World War II. At that time, the United Auto Workers
negotiated the first contract with employers in which fringe benefits were
a major part of the contract. Also following the war, the Internal Revenue
Service ruled that employer-provided health insurance was not taxable, giving
employers an incentive to offer this tax-free benefit. Like those covered under
Blue Cross Blue Shield, the majority of individuals with commercial health
insurance are covered under group policies negotiated by employee groups,
professional and other associations, and labor unions.
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G a p en s k i’s H e a l th c a re Fi n a n c e
Self-Insurers
The third major form of private insurance is self-insurance. Although it might
seem as if all individuals who do not have some form of health insurance are
self-insurers, this is not the case. Self-insurers make a conscious decision to
bear the risks associated with healthcare costs and then set aside (or have
available) funds to pay future costs as they occur. Individuals, except the very
wealthy, are not good candidates for self-insurance because they face too
much uncertainty concerning healthcare expenses. On the other hand, large
groups, especially employers, are good candidates for self-insurance. Today,
most large groups are self-insured. For example, employees of the State of
Florida are covered by health insurance whose costs are paid directly by the
state. Florida Blue is paid a fee to administer the plan, but the state bears all
the risks associated with cost and utilization uncertainty.
Public Insurers
Government is a major insurer as well as a direct provider of healthcare
services. For example, the US federal government provides healthcare services directly to qualifying individuals through the medical facilities of the
US Department of Veterans Affairs; the US Department of Defense and its
TRICARE program (health insurance for uniformed service members and
their families); and the Public Health Service, part of the US Department of
Health and Human Services (HHS). In addition, government either provides
or mandates a variety of insurance programs, such as workers’ compensation.
In this section, however, the focus is on the two major government insurance
programs: Medicare and Medicaid.
Medicare
A federal
government health
insurance program
that primarily
provides benefits
to individuals aged
65 or older.
Medicare
Medicare was established by Congress in 1965 primarily to provide medical
benefits to individuals aged 65 or older. About 44 million people have Medicare coverage, which pays for about 21 percent of all US healthcare services.
Over the decades, Medicare has evolved to include four major coverages: Part A, which provides hospital and some skilled nursing facility coverage; (2) Part B, which covers physician services, ambulatory surgical services,
outpatient services, and other miscellaneous services; (3) Part C, which is
managed care coverage offered by private insurance companies and can be
selected in lieu of Parts A and B; and (4) Part D, which covers prescription
drugs. In addition, Medicare covers healthcare costs associated with selected
disabilities and illnesses, such as kidney failure, regardless of age.
Part A coverage is free to all individuals who are eligible for Social
Security benefits. Individuals who are not eligible for Social Security benefits can obtain Part A medical benefits by paying monthly premiums. Part
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
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B is optional for all individuals who have Part A coverage, and it requires a
monthly premium from enrollees that varies with income level. About onethird of Medicare enrollees elect to participate in Part C, also called Medicare
Advantage Plans, rather than Parts A and B. Part D offers prescription drug
coverage through plans offered by private companies. Each Part D plan offers
somewhat different coverage, so the cost of Part D coverage varies widely.
Administration of the Medicare program falls under the HHS, which
creates the specific rules of the program on the basis of enabling legislation.
Medicare is administered by an agency within the HHS called the Centers
for Medicare & Medicaid Services (CMS). CMS has ten regional offices that
oversee the Medicare program and ensure that regulations are followed.3
Medicare payments to providers are not made directly by CMS but by contractors for 12 Medicare Administrative Contractor (MAC) jurisdictions.
Many private insurers also offer coverage called Medicare supplement
insurance, or Medigap. Such insurance is designed to help pay some of the
healthcare costs that traditional Medicare does not cover, such as copayments,
coinsurance, and deductibles. In addition, some Medigap policies offer coverage for services that Medicare does not include, for example, medical care
when traveling outside the United States. When an individual buys Medigap
coverage, Medicare will first pay its share of the Medicare-approved amount
for covered costs, and then the Medigap policy pays its share.
Medicaid
Medicaid began in 1966 as a modest program to be jointly funded and
operated by the states and the federal government. The goal was to provide
a medical safety net for low-income mothers and children and for elderly,
blind, and disabled individuals who receive benefits from the Supplemental
Security Income (SSI) program. Congress mandated that Medicaid cover
hospital and physician care, but states were encouraged to expand the basic
package of benefits, either by increasing the range of benefits or by extending
the program to cover more people. A mandatory nursing home benefit was
added in 1972.
Over the years, Medicaid has provided access to healthcare services for
many low-income individuals who otherwise would have no insurance coverage. Furthermore, Medicaid has become an important source of revenue for
healthcare providers, especially for nursing homes and other providers that
treat large numbers of indigent patients.
It is important to note that both Medicare and Medicaid expenditures
have been growing at an alarming rate, which has forced both federal and
state policymakers to search for more effective ways to improve the programs’
access, quality, and cost.
Medicaid
A federal and
state government
health insurance
program that
provides benefits
to low-income
individuals.
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G a p en s k i’s H e a l th c a re Fi n a n c e
SELF-TEST
QUESTIONS
1. What are the different types of private insurers?
2. Briefly, what are the origins and purpose of Medicare?
3. What is Medicaid, and how is it administered?
Managed Care Plans
managed care
plan
A combined effort
by an insurer and a
group of providers
that aims both to
increase quality
of care and to
decrease costs.
Managed care plans combine the provision of healthcare services and the
insurance function into a single entity. Traditional plans are created by insurers that either directly own a provider network or create one through contractual arrangements with independent providers.
One type of managed care plan is the health maintenance organization (HMO). HMOs are based on the premise that the traditional insurer–
provider relationship creates incentives that reward providers for treating
patients’ illnesses while offering little incentive for providing prevention and
rehabilitation services. This is often referred to as volume over value. By combining the financing and delivery of comprehensive healthcare services into
a single system, HMOs theoretically have as strong an incentive to prevent
illnesses as to treat them. However, from a patient perspective, HMOs have
several drawbacks, including a limited network of providers and the assignment of a primary care physician (often called a gatekeeper) who acts as the
initial contact and authorizes all services received from the HMO.
Another type of managed care plan, the preferred provider organization (PPO), evolved during the early 1980s. PPOs are a hybrid of HMOs and
traditional health insurance plans that use many of the cost-saving strategies
developed by HMOs. PPOs do not mandate that beneficiaries use specific
providers, although financial incentives (i.e., patients pay less for going to
more efficient providers) encourage members to use providers that are part of
the provider panel—those providers that have contracts (usually at discounted
prices) with the PPO. Furthermore, PPOs do not require beneficiaries to use
preselected gatekeeper physicians.
In an effort to achieve the potential cost savings of managed care
plans, most insurance companies now apply managed care strategies to their
conventional plans. Such plans, which are called managed fee-for-service
plans, use preadmission certification (review of patient need before a hospital
admission), utilization review (examination of services provided to a patient),
and second surgical opinions (another physician validates recommended
treatment) to control inappropriate utilization.
Although the distinctions between managed care and conventional plans were once quite apparent, considerable overlap now exists
in the strategies and incentives employed. Thus, the term managed care
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
now describes a continuum of plans, which can vary significantly in their
approaches to providing combined insurance and healthcare services. The
common feature in managed care plans is that the insurer has a mechanism
by which it controls, or at least influences, patients’ utilization of healthcare services.
1. What is meant by the term managed care?
2. What are the different types of managed care plans?
SELF-TEST
QUESTIONS
Healthcare Reform and Insurance
The Affordable Care Act (ACA) introduced a number of provisions to expand
insurance coverage and improve insurance affordability and access. Here we
outline some of the act’s provisions that focus on healthcare insurance.
Insurance Standards
A number of new insurance standards were specified in the ACA. In terms of
coverage, these include the following:
• Children and dependents are permitted to remain on their parents’
insurance plans until their twenty-sixth birthday.
• Insurance companies are prohibited from dropping policyholders if
they become sick and from denying coverage to individuals due to
preexisting conditions.
• Individuals have a right to appeal and request that the insurer review
denial of payment.
In terms of costs, the standards include the following:
• Insurers are required to charge the same premium rate to all applicants
of the same age and geographic location, regardless of preexisting
conditions or sex (this is called community rating).
• Insurers are required to spend at least 80 percent of premium dollars
on health costs and claims instead of on administrative costs and
profits. If the insurer violates this standard, it must issue rebates to
policyholders (this is called the medical loss ratio).
• Lifetime limits on most benefits are prohibited for all new health
insurance plans.
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G a p en s k i’s H e a l th c a re Fi n a n c e
In terms of care, the standards include the following:
• All plans must now include essential benefits, such as ambulatory
patient services, emergency services, hospitalization, maternity and
newborn care, mental health and substance use disorder services,
prescription drugs, laboratory services, preventive and wellness services,
chronic disease management, and pediatric services, including oral and
vision care.
• Preventive services, such as childhood immunizations, adult
vaccinations, and basic medical screenings, must be available to patients
free of charge.
• Individuals are permitted to choose a primary care doctor outside the
plan’s network.
• Individuals can seek emergency care at a hospital outside the health
plan’s network.
It is important to note that individuals who seek primary or hospital care
out-of-network will likely pay more.
Individual Mandate
The individual mandate of the ACA went into effect in January 2014. This
mandate required that all eligible individuals (i.e., US citizens and legal
residents) who were not covered by an employer-sponsored health plan,
Medicaid, or Medicare have a health insurance policy or face a tax penalty. In
2017, passage of the Tax Cuts and Jobs Act repealed the individual mandate
(effective January 1, 2019). The Congressional Budget Office estimated that
repeal of the individual health insurance mandate would increase the number
of uninsured people by 4 million in 2019 and 13 million in 2027.4
Medicaid Expansion
One of the key provisions of the ACA was the expansion of Medicaid to
all citizens and legal residents between the ages of 19 and 64 who have
household incomes below 138 percent of the federal poverty level. Medicaid
expansion primarily benefits childless adults who previously did not qualify
for Medicaid regardless of their income level as well as low-income parents
who previously did not qualify even if their children did qualify. As a result,
if every state expanded Medicaid, it is estimated that an additional 16 million
people would receive coverage.
Originally, under the ACA, Medicaid expansion was mandatory for all
states; states that did not comply were to be penalized by the federal government. However, in 2012, the US Supreme Court ruled that states could
opt out of the Medicaid expansion, leaving the decision to participate in the
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hands of the state’s leaders. The court further ruled that the federal government could not penalize states through denial of federal funding if they did
not expand Medicaid. Despite these rulings, 37 states and the District of
Columbia had expanded Medicaid eligibility as of 2019.5
Health Insurance Exchanges
Health insurance exchanges (HIEs) are online marketplaces where people
can research and review their options and purchase health insurance. People
who are unable to receive health insurance through their employer, the unemployed, or the self-employed can purchase coverage through an exchange.
Therefore, HIEs are an important part of ensuring that healthcare access
is available to all Americans and legal immigrants. As of 2018, roughly 12
million people used HIEs to buy healthcare insurance coverage.6 To ensure
price transparency, all participating insurance companies are required to post
on HIEs the rates for their health insurance plans. This mandate permits
individuals and businesses shopping for insurance to compare all plans and
rates side by side and select plans that are affordable and meet their needs.
There are different types of HIEs. Public exchanges are created by
state or federal governments and are open to both individuals seeking personal insurance and small-group employers seeking insurance for their workers. All plans listed on an HIE are required to offer core benefits—called
essential health benefits—such as preventive and wellness services, prescription
drugs, and hospital stays. Private exchanges, on the other hand, are created
by private-sector firms, such as health insurance companies.
In addition to establishing HIEs, the ACA aimed to make insurance
more affordable by offering subsidies to individuals below 400 percent of
the federal poverty level that purchase insurance on the HIEs. There are two
types of subsidies: (1) premium tax credits that offset the amount of monthly
premiums that an individual pays, and (2) cost-sharing subsidies that minimize the amount of out-of-pocket costs an individual pays. There are several
challenges associated with HIEs. First, the federal exchange, along with many
state exchanges, had a difficult launch as a result of technological challenges.
This led to distrust of the system and initially lower enrollment than projected. Second, while coverage on the HIEs is largely affordable for individuals that receive subsidies, it is unaffordable for many individuals with incomes
above 400 percent of the federal poverty level who do not receive subsidies.
health insurance
exchange (HIE)
An online
marketplace
created primarily
by the states
or the federal
government that
insurers use to
post plan details
and consumers
use to purchase
health insurance.
High-Deductible Health Plans
Many consumers who choose coverage are opting for high-deductible health
plans (HDHPs). HDHPs are growing in popularity because they are among
the least expensive options on the insurance exchanges. In fact, the rate of
enrollment in HDHPs has more than doubled since 2009. These plans have
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50
G a p en s k i’s H e a l th c a re Fi n a n c e
low premiums and high deductibles. Some are linked with health savings
accounts or health reimbursement arrangements, under which enrollees can
use tax-advantaged accounts to pay for medical expenses. HDHPs aim to
provide individuals with control over their healthcare expenditures. Individuals enrolled in an HDHP are required to meet minimum deductibles before
the plan starts to cover healthcare expenses.
SELF-TEST
QUESTIONS
1. Briefly describe the impact of the ACA on health insurance.
2. What is a health insurance exchange (HIE)?
3. What is a high-deductible health plan (HDHP)?
General Reimbursement Methodologies
fee-for-service
A reimbursement
methodology that
provides payment
each time a service
is provided.
capitation
A reimbursement
methodology that
is based on the
number of covered
lives (or enrollees)
as opposed to the
amount of services
provided.
cost-based
reimbursement
A fee-for-service
reimbursement
method based on
the costs incurred
in providing
services.
Regardless of the payer for a particular healthcare service, a limited number
of payment methodologies are used to reimburse providers. Payment methodologies fall into two broad classifications: fee-for-service and capitation.
Under fee-for-service payment, of which many variations exist, the greater
the amount of services provided, the higher the amount of reimbursement.
Under capitation, a fixed payment is made to providers for each covered life,
or enrollee, independent of the amount of services provided. In this section,
we discuss the mechanics, incentives created, and risk implications of alternative reimbursement methodologies.
Fee-for-Service Methods
The three primary fee-for-service methods of reimbursement are cost based,
charge based, and prospective payment.
Cost-Based Reimbursement
Under cost-based reimbursement, the payer agrees to reimburse the provider for the costs incurred in providing services to the insured population.
Reimbursement is limited to allowable costs, usually defined as those costs
directly related to the provision of healthcare services. Nevertheless, for all
practical purposes, cost-based reimbursement guarantees that a provider’s
costs will be covered by payments from the payer. Typically, the payer makes
periodic interim payments to the provider, and a final reconciliation is made
after the contract period expires and all costs have been processed through
the provider’s managerial (cost) accounting system.
During its early years (1966–1982), Medicare reimbursed hospitals on
the basis of costs incurred. Now, most hospitals are reimbursed by Medicare,
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and by other payers, using a per diagnosis prospective payment system (this
topic is addressed in more detail later in this chapter). However, critical access
hospitals, which are small rural hospitals that provide services to remote populations that do not have easy access to other hospitals, are still reimbursed on
a cost basis by Medicare.
Charge-Based Reimbursement
When payers pay billed charges, or simply charges, they pay according to a rate
schedule, called a chargemaster, established by the provider. To a certain
extent, this reimbursement system places payers at the mercy of providers in
regard to the cost of healthcare services, especially in markets where competition is limited. In the early days of health insurance, all payers reimbursed
providers on the basis of billed charges. Few insurers still reimburse providers
according to billed charges; the trend for payers is toward other, less generous reimbursement methods (e.g., discounted charges).
Most payers that historically reimbursed providers on the basis of billed
charges now pay by negotiated, or discounted, charges. This is especially true for
insurers that have established managed care plans. Additionally, many conventional insurers have bargaining power because of the large number of patients
that they bring to a provider, so they can negotiate discounts from billed
charges. Such discounts generally range from 20 to 50 percent, or even more,
of billed charges. The effect of these discounts is to create a system similar to
hotel or airline pricing, where there are listed rates (e.g., chargemaster prices for
providers, and rack rates or full fares for hotels and airlines) that few people pay.
Prospective Payment
Under a prospective payment system, the rates paid by payers are established
by the payer before the services are provided. Furthermore, payments are not
directly related to either costs or chargemaster rates. Here are some common
units of payment used in prospective payment systems:
• Per procedure. Under per procedure reimbursement, a separate
payment is made for each procedure performed on a patient. Because
of the high administrative costs associated with this method when it is
applied to complex diagnoses, per procedure reimbursement is more
commonly used in outpatient than in inpatient settings.
• Per diagnosis. Under the per diagnosis reimbursement method,
the provider is paid a rate that depends on the patient’s diagnosis.
Diagnoses that require higher resource utilization, and hence are more
costly to treat, have higher reimbursement rates. Medicare pioneered
this basis of payment in its diagnosis-related group (DRG) system,
which it first used for hospital inpatient reimbursement in 1983.
chargemaster
A list of all items
and services
provided by a
health services
organization
containing their
gross (list) prices.
prospective
payment
A fee-for-service
reimbursement
method in which
the payment
amount is
established
beforehand by the
third-party payer
and, in theory,
is not directly
related to costs or
charges.
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52
G a p en s k i’s H e a l th c a re Fi n a n c e
• Per day (per diem). If reimbursement is based on a per diem
payment, the provider is paid a fixed amount for each day that service
is provided, regardless of the nature of the service. Note that per diem
rates, which are applicable only to inpatient settings, can be stratified.
For example, a hospital may be paid one rate for a medical/surgical
day, a higher rate for a critical care unit day, and yet a different rate
for an obstetrics day. Stratified per diems recognize that providers
incur widely different daily costs for providing different types of care.
Per diem rates may also vary by the day of a patient’s stay, recognizing
that early days of care may be more expensive than those later in a
patient’s stay.
bundled (global)
• Bundled. Under bundled payment, payers make a single prospective
payment
payment that covers all services delivered in a single episode, whether
The fee-for-service
the services are rendered by a single provider or by multiple providers.
payment of a
For example, a bundled payment may be made for all obstetric
single amount
for the complete
services associated with a pregnancy provided by a single physician,
set of services
including all prenatal and postnatal visits as well as the delivery. For
required to treat a
another example, a bundled payment may be made for all physician
single episode.
and hospital services associated with a joint replacement operation.
Bundled payments incent hospitals and providers to provide the most
efficient and effective care at the lowest
cost. Finally, note that, at the extreme,
For Your Consideration
a bundled payment may cover an entire
population. In this situation, the payment
Creating the Proper Provider Incentives
becomes a global payment, which, in
An article in the Wall Street Journal on February
effect, is a capitation payment (described
18, 2015, described the case of a patient who was
discharged from a Kindred Healthcare long-term
in the next section of this chapter).
per diem payment
A fee-for-service
reimbursement
method that pays
a set amount for
each inpatient day.
care hospital after 23 days of treatment for complications from a previous knee surgery. According to family members, the timing of his release
did not appear to be related to any improvement
in his medical condition. However, it did result in
the hospital receiving a higher reimbursement for
his stay.
According to billing documents, Kindred
collected $35,887.79 from Medicare for his treatment—the maximum amount it could earn for
treating patients with his condition. Under Medicare’s reimbursement rules, if the patient had
left the hospital one day earlier, Kindred would
have received a per diem rate that would have
resulted in a total payment of roughly $20,000. If
(continued)
Capitation
Up to this point, the prospective payment methods presented have been feefor-service methods—that is, providers are
reimbursed on the basis of the amount
of services provided. The service may be
defined as a visit, a diagnosis, a hospital
day, an episode, or in some other manner, but the key feature is that the more
services that are performed, the greater
the reimbursement amount. Capitation,
although it is a form of prospective payment, is an entirely different approach to
reimbursement and hence deserves to be
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53
treated separately. Under capitated reim(continued from previous page)
bursement, the provider is paid a fixed
he had stayed longer than 23 days, the hospital
amount per covered life per period (usulikely would not have received any additional
ally a month) regardless of the amount
reimbursement other than the $35,887.79 single
of services provided. For example, a pripayment for an “extended” stay.
mary care physician might be paid $15
What do you think? What incentives are
per member per month for handling 100
created for providers under the reimbursement
method used by Medicare for long-term (as
members of an HMO plan.
opposed to acute care) hospitals? Can you think
Capitation payment, which is used
of a payment system that would encourage longprimarily by managed care plans, dramatiterm care hospitals to discharge patients at the
cally changes the financial environment
appropriate time?
of healthcare providers. It has implications for financial accounting, managerial
accounting, and financial management.
Discussion of how capitation, as opposed to fee-for-service reimbursement,
affects healthcare finance is provided throughout this book.
1. Briefly explain the following payment methods:
a. Cost based
b. Charge based and discounted charges
c. Per procedure
d. Per diagnosis
e. Per diem
f. Bundled
g. Capitation
2. What is the major difference between fee-for-service reimbursement
and capitation?
SELF-TEST
QUESTIONS
Provider Incentives Under Alternative Reimbursement
Methodologies
Providers, like individuals and businesses, react to the incentives created
by the financial environment. It is interesting to examine the incentives
that alternative reimbursement methods have on provider behavior. Under
cost-based reimbursement, providers are given a “blank check” to acquire
facilities and equipment and incur operating costs. If payers reimburse providers for all costs, the incentive is to incur costs. Facilities will be lavish and
conveniently located, and staff will be available to ensure that patients are
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54
G a p en s k i’s H e a l th c a re Fi n a n c e
given “deluxe” treatment. Furthermore, services that may not be medically
required will be provided because more services lead to higher costs and
hence lead to higher revenues.
Under charge-based reimbursement, providers have incentives to set
high charge rates, which lead to high revenues. However, in competitive
markets, there will be a constraint on how high providers can go. But, to the
extent that insurers, rather than patients, are footing the bill, there is often
considerable leeway in setting charges.
Because charge-based payment is a fee-forservice type of reimbursement in which
For Your Consideration
more services result in higher revenue,
Value-Based Purchasing
a strong incentive exists to provide the
highest possible amount of services. In
Value-based purchasing is based on the concept
that buyers of healthcare services should hold
essence, providers can increase utilization,
providers accountable for quality of care as well
and hence revenues, by churning—that
as costs. In April 2011, the HHS launched the
is, by creating more visits, ordering more
Hospital Value-Based Purchasing Program, which
tests, extending inpatient stays, and so
marked the beginning of a historic change in how
on. Charge-based reimbursement creates
Medicare pays healthcare providers. The shift
incentives for providers to contain costs
from volume to value is widespread. Currently,
2,800 hospitals across the country are being paid
because (1) the spread between charges
for inpatient acute care services based on care
and costs represents profits, and the more
cost and quality, not just the quantity of the serthe better, and (2) lower costs can lead to
vices provided.7
lower charges, which can increase volume.
“Changing the way we pay hospitals will
Still, the incentive to contain costs is weak
improve the quality of care for seniors and save
because charges can be increased more
money for all of us,” said former HHS Secretary
Kathleen Sebelius. “Under this initiative, Medicare
easily than costs can be reduced. Note,
will reward hospitals that provide high-quality
however, that discounted charge reimcare and keep their patients healthy. It’s an imporbursement places additional pressure on
tant part of our work to improve the health of our
profitability and hence increases the incennation and drive down costs. As hospitals work to
tive for providers to lower costs.
improve quality, all patients—not just Medicare
Under prospective payment reimpatients—will benefit.” The measures to determine quality focus on how closely hospitals folbursement, provider incentives are altered.
low best clinical practices and how well hospitals
First, under per procedure reimburseenhance patients’ care experiences. The better a
ment, the profitability of individual procehospital does on its quality measures, the greater
dures varies depending on the relationship
the reward it receives from Medicare.
between the actual costs incurred and the
What do you think? Should providers be
payment for that procedure. Providers,
reimbursed based on quality of care? How should
“quality” be measured? Should the additional
usually physicians, have an incentive to
reimbursement to high-quality providers be
perform procedures that have the highest
obtained by reductions in reimbursement to lowprofit potential. Furthermore, the more
quality providers?
procedures, the better, because each procedure typically generates additional profit.
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
The incentives under per diagnosis reimbursement are similar. Providers, usually hospitals, will seek patients with diagnoses that have the greatest
profit potential and discourage (or even discontinue) those services that have
the least potential. Furthermore, to the extent that providers have some
flexibility in selecting procedures (or assigning diagnoses) to patients, an
incentive exists to upcode procedures (or diagnoses) to ones that provide the
greatest reimbursement.
In all prospective payment methods, providers have an incentive to
reduce costs because the amount of reimbursement is fixed and independent
of the costs actually incurred. For example, when hospitals are paid under
per diagnosis reimbursement, they have an incentive to reduce length of stay
and hence costs. Note, however, that when per diem reimbursement is used,
hospitals have an incentive to increase length of stay. Because the early days
of a hospitalization typically are more costly than the later days, the later days
are more profitable. However, as mentioned previously, hospitals have an
incentive to reduce costs during each day of a patient stay.
Under bundled pricing, providers do not have the opportunity to be
reimbursed for a series of separate services, which is called unbundling. For
example, a physician’s treatment of a fracture could be bundled, and hence
billed as one episode, or it could be unbundled, with separate bills submitted for making the diagnosis, taking X-rays, setting the fracture, removing
the cast, and so on. The rationale for unbundling is usually to provide more
detailed records of treatments rendered, but often the result is higher total
charges for the parts than would be charged for the entire package of services.
Also, bundled pricing, when applied to multiple providers for a single episode
of care, forces involved providers (e.g., physicians and a hospital) to jointly
offer the most cost-effective treatment. Such a joint view of cost containment
may be more effective than each provider separately attempting to minimize
its treatment costs because lowering costs in one phase of treatment could
increase costs in another.
Finally, capitation reimbursement changes the playing field by completely reversing the actions that providers must take to ensure financial
success. Under all fee-for-service methods, the key to provider success is to
work harder, increase utilization, and hence increase profits; under capitation, the key to profitability is to work smarter and decrease utilization. As
with prospective payment, capitated providers have an incentive to reduce
costs, but now they also have an incentive to reduce utilization. Thus, only
those procedures that are truly medically necessary should be performed,
and treatment should take place in the lowest-cost setting that can provide
the appropriate quality of care. Furthermore, providers have an incentive to
promote health, rather than just treat illness and injury, because a healthier
population consumes fewer healthcare services.
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55
56
G a p en s k i’s H e a l th c a re Fi n a n c e
SELF-TEST
QUESTION
1. What provider incentives are created under fee-for-service
reimbursement? Under capitation?
Medical Coding: The Foundation of Fee-for-Service
Reimbursement
medical coding
The process of
transforming
medical diagnoses
and procedures
into universally
recognized
numerical codes.
Medical coding, or medical classification, is the process of transforming
descriptions of medical diagnoses and procedures into code numbers that
can be universally recognized and interpreted. The diagnoses and procedures
are usually taken from a variety of sources within the medical record, such
as doctor’s notes, laboratory results, and radiological tests. In practice, the
basis for most fee-for-service reimbursement is the patient’s diagnosis (in the
case of inpatient settings) or the procedures performed on the patient (in the
case of outpatient settings). Thus, a brief background on clinical coding will
enhance your understanding of the reimbursement process.
Diagnosis Codes
International
Classification of
Diseases (ICD)
codes
Numerical codes
for designating
diseases plus a
variety of signs,
symptoms, and
external causes of
injury.
The International Classification of Diseases (most commonly known by
the abbreviation ICD) is the standard for designating diseases plus a wide
variety of signs, symptoms, and external causes of injury. Published by the
World Health Organization (WHO), ICD codes are used internationally to
record many types of health events, including hospital inpatient stays and
causes of death. (ICD codes were first used in 1893 to report death statistics.) The WHO periodically revises the diagnostic codes in ICD, which is
now in its eleventh version (ICD-11).8
The United States has used ICD-10-CM since October 1, 2015. This
national variant of ICD-10 was provided by CMS and the National Center for
Health Statistics, and the use of ICD-10-CM codes is now mandated for all
inpatient medical reporting. There are over 70,000 ICD-10-CM procedure
codes and over 69,000 diagnosis codes, compared with about 3,800 procedure codes and roughly 14,000 diagnosis codes found in the ICD-9-CM.
The ICD-10 codes are three to seven characters long. The first three
characters refer to the category; the next three characters refer to etiology,
anatomic site, severity, or other clinical detail; and the seventh character
refers to extension. For example, code S52 describes a fracture of the forearm, while S52.521A describes a torus fracture of the lower end of the right
radius, initial encounter for closed fracture.
In practice, the application of ICD codes to diagnoses is complicated
and technical. Hospital coders have to understand the coding system and the
medical terminology and abbreviations used by clinicians. Because of this
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57
complexity, and because proper coding can mean higher reimbursement from
third-party payers, ICD coders require a great deal of training and experience
to be most effective.
Procedure Codes
While ICD codes are used to specify diseases and conditions, Current Procedural Terminology (CPT) codes are used to specify medical procedures
(treatments). CPT codes were developed and are copyrighted by the American Medical Association. The purpose of CPT is to create a uniform language
(set of descriptive terms and codes) that accurately describes medical, surgical, and diagnostic procedures. CPT and its corresponding codes are revised
periodically to reflect current trends in clinical treatments. To increase standardization and the use of electronic health records, federal law requires that
physicians and other clinical providers, including laboratory and diagnostic
services, use CPT for the coding and transfer of healthcare information. (The
same law also requires that ICD codes be used for hospital inpatient services.)
To illustrate CPT codes, there are ten codes for physician office visits. Five of the codes apply to new patients, while the other five apply to
established patients (repeat visits). The differences among the five codes in
each category are based on the complexity of the visit, as indicated by three
components: (1) extent of patient history review, (2) extent of examination,
and (3) difficulty of medical decision-making. For repeat patients, the least
complex (typically shortest) office visit is coded 99211, while the most complex (typically longest) is coded 99215.
Because Medicare, Medicaid, and other insurers require additional
information from providers beyond that contained in CPT codes, CMS developed an enhanced code set, the Healthcare Common Procedure Coding
System (HCPCS) (commonly pronounced “hick picks”). The system expands
the set of CPT codes to include nonphysician services (e.g., ambulance transportation) and durable medical equipment (e.g., prosthetic devices).
Although CPT and HCPCS codes are not as complex as the ICD
codes, coders still must have a high level of training and experience to use
them correctly. As in ICD coding, correct CPT coding ensures correct
reimbursement. Coding is so important that many businesses offer services,
such as books, software, education, and consulting, to hospitals and medical
practices to improve coding efficiency.
1. Briefly describe the coding system used in hospitals (ICD codes)
and medical practices (CPT codes).
2. What is the link between coding and reimbursement?
Current Procedural
Terminology (CPT)
codes
Codes applied to
medical, surgical,
and diagnostic
procedures.
Healthcare
Common
Procedure Coding
System (HCPCS)
A medical coding
system that
expands the CPT
codes to include
nonphysician
services and
durable medical
equipment.
SELF-TEST
QUESTIONS
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58
G a p en s k i’s H e a l th c a re Fi n a n c e
Healthcare in Practice
Using RVUs for Physician Compensation
Traditionally, there have been a number of ways of
estimating physician productivity when tying compensation to performance. For many years, productivity was measured by volume-based metrics such
as number of patients seen or amount of revenue
billed. Today, however, physician productivity measures and compensation models are rapidly moving
toward models based on relative value units (RVUs).
Work RVUs, which are one of three components of RVUs, measure the relative level of time,
skill, training, and intensity required of a physician to provide a given service. They are a good
proxy for the training required and volume of work
expended by a physician in treating patients. A
routine well-patient visit, for example, would be
assigned a lower RVU than an invasive surgical
procedure. Given this relative scale, a physician seeing two or three complex or high-acuity
patients per day could accumulate more RVUs than
a physician seeing ten or more low-acuity patients
per day. Thus, the nature of the work, rather than
number of patients or billings, is being measured
and hence used for compensation levels.
According to the Medical Group Management Association, well over half of all physicians
are compensated, at least in part, on the basis of
productivity as measured by work RVUs. Usually,
work RVUs are combined with other productivity
and quality measures in determining productivity
and compensation, but there is little doubt that
work RVUs have the dominant role.
inpatient
prospective
payment system
(IPPS)
The method, based
on diagnosis,
that Medicare
uses to reimburse
providers for
inpatient services.
Specific Reimbursement
Methods
There are many specific reimbursement
methods in use today. Typically, the methods differ from one insurer to another. In
addition, insurers use different methods for
different types of providers and services,
such as hospitals versus physicians or even
hospital inpatients versus outpatients. In
this section, we discuss the specific methods used by Medicare to reimburse hospitals for inpatient services and physicians
for all services. Medicare reimbursement
methods for other types of providers and
other services are described in the Payment
Basics series developed and maintained
by the Medicare Payment Advisory Commission (MedPAC), available at http://
medpac.gov/-documents-/payment-basics.
Hospital Inpatient Services
Medicare’s inpatient prospective payment system (IPPS) is a prospective
payment methodology based on an inpatient’s diagnosis at discharge. It starts with
two national base payment rates (operating and capital expenses), which are then
adjusted to account for two factors that
affect the costs of providing care: (1) the
patient’s condition and treatment and (2)
market conditions in the facility’s geographic location (see exhibit 2.1).
Discharges are assigned to one of 754 Medicare severity diagnosisrelated groups (MS–DRGs), which designate the diagnoses of patients with
similar clinical problems, who therefore are expected to consume similar
amounts of hospital resources. Each MS–DRG has a relative weight that
reflects the expected cost of inpatients in that group. The payment rates for
MS–DRGs in each local market are determined by adjusting the base payment rates to reflect the local input price level and then multiplying them by
the relative weight for each MS–DRG. The operating and capital payment
rates are increased for facilities that operate an approved resident training
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
Adjusted for geographic factors
Operating
base
payment
rate
Wage
index
> 1.0
68.3%
adjusted
for area
wages
Adjusted for case mix
+
Wage
index
≤ 1.0
62%
adjusted
for area
wages
Non-labor
related
portion
Base rate
adjusted
MS–DRG
for
× weight
geographic
factors
Adjusted
base
payment
rate
EXHIBIT 2.1
Medicare
Hospital Acute
Inpatient
Services
Payment
System
MS–DRG
Hospital
wage
index
Patient characteristics
Principal diagnosis
Procedure
Complications and comorbidities
Adjustment for transfers
Policy adjustments for
hospitals that qualify
Adjusted
base
payment
rate
+
Indirect
medical + Disproportionate
education
share payment
payment
Full
LOS
Per case
payment
rate
=
Short LOS and
discharged
to other acute
IPPS hospital
or post-acute
care*
Per
diem
payment
rate
If case is
extraordinarily
costly
Payment
59
Highcost
outlier
(payment
+
outlier
payment)
Note: MS–DRG (Medicare severity diagnosis-related group), LOS (length of stay), IPPS (inpatient
prospective payment system). Capital payments are determined by a similar system. In addition
to the inpatient operating and inpatient capital payments per discharge, hospitals may receive
additional payments, such as those related to direct graduate medical education, uncompensated care, and bad debts. Additional payments are also made for certain rural hospitals. Hospitals
may receive penalties or additional payments based on their performance on quality standards.
* Transfer policy for cases discharged to post–acute care settings applies for cases in 278
selected MS–DRGs.
Source: Reprinted from MedPAC, “Hospital Acute Inpatient Services Payment System,” revised
October 2019, http://medpac.gov/docs/default-source/payment-basics/medpac_payment_
basics_19_hospital_final_v2_sec.pdf.
program or that treat a disproportionate share of low-income patients. Rates
are reduced for transfer cases, and outlier payments are added for cases that
are extraordinarily costly to protect providers from large financial losses due
to unusually expensive cases. Both operating and capital payment rates are
updated annually.
The IPPS rates are intended to cover the costs that reasonably efficient
providers would incur in providing high-quality care. If the hospital is able
to provide the services for less than the fixed reimbursement amount, it can
keep the difference. Conversely, if a Medicare patient’s treatment costs are
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60
G a p en s k i’s H e a l th c a re Fi n a n c e
more than the reimbursement amount but do not meet the definition of an
outlier, the hospital must bear the loss.
Physician Services
relative value unit
(RVU)
A measure of
the amount
of resources
consumed
to provide a
particular service.
When applied
to physicians, a
measure of the
amount of work,
practice expenses,
and liability costs
associated with a
particular service.
SELF-TEST
QUESTIONS
Medicare pays for physician services using a resource-based relative value scale
(RBRVS). Under the RBRVS system, payments for services are determined
by the resource costs needed to provide them as measured by weights called
relative value units (RVUs). RVUs consist of three components: (1) a work
RVU, which includes the skill level and training required along with the intensity
and time required for the service; (2) a practice expense RVU, which includes
equipment and supplies costs as well as office support costs, including labor; and
(3) a malpractice expense RVU, which accounts for the relative risk and cost of
potential malpractice claims. To illustrate, the (total) RVU is 0.52 for a minimal
office visit, 1.32 for an average office visit, and 3.06 for a comprehensive office
visit. Furthermore, the average office visit RVU is composed of a work RVU of
0.67, a practice expense RVU of 0.62, and a malpractice expense RVU of 0.03.
The RVU values then are adjusted to reflect variations in local input
prices, and the total is multiplied by a standard dollar value—called the conversion factor—to arrive at the payment amount. Medicare’s payment rates
may also be adjusted to reflect provider characteristics, geographic designations, and other factors. The provider is paid the final amount, less any beneficiary coinsurance (see exhibit 2.2).
1. Briefly describe the method used by Medicare to reimburse
providers for inpatient services.
2. Explain the method used by Medicare to reimburse providers for
physician services.
Healthcare Reform and Reimbursement Methods
In addition to improving healthcare delivery through focusing on access and
quality, the ACA has significantly changed the way providers are reimbursed.
The key reforms include an increased focus on quality and efficiency and a
move from a fee-for-service model to a prospective payment model, which
may include bundled payments or capitation. These new payment methods
aim to shift from reimbursement based on the amount of services provided
(volume) to reimbursement based on value and better outcomes. Despite
efforts to repeal and replace the ACA, most experts predict that the shift
toward value-based payment will continue.
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
The new payment methods are specifically designed to accomplish the
following:
• Encourage providers to deliver care in a high-quality, cost-efficient
manner
• Support coordination of care among multiple providers
• Adopt evidence-based care standards and protocols that result in the
best outcomes for patients
• Provide accountability and transparency
• Discourage overtreatment and medically unnecessary procedures
• Eliminate or reduce the occurrence of adverse events
• Discourage cost shifting
Total RVUs from fee schedule
Conversion
factor
Complexity
of service
and expenses
×
Adjusted
for:
Work
RVU
×
Geographic
factors
PE
RVU
+
Work
GPCI
PLI
RVU
+
×
PE
GPCI
×
Payment
modifier
PLI
GPCI
Adjusted
fee schedule
payment
rate
EXHIBIT 2.2
Medicare
Physician
Services
Payment
System
Policy adjustments (multiplicative)
Provider type
Adjusted
fee schedule
payment
rate
Non-physician
billing
independently
Nonparticipating
(decreases)
Geographic
Quality Payment Program
HPSA
bonus
Clinicians who
participate in
advanced
alternative
payment models
Clinicians in
the Merit-based
Incentive
Payment System
(MIPS)
(increases)
(increases)
(increases, decreases,
or no change)
=
Payment
Note: RVU (relative value unit), GPCI (geographic practice cost index), PE (practice expense),
PLI (professional liability insurance), HPSA (health professional shortage area). This figure depicts Medicare program payments only. The fee schedule lists separate PE RVUs for
facility and nonfacility settings. Fee schedule payments are often reduced when specified
nonphysician practitioners bill Medicare independently, but not when services are provided
“incident to” a physician’s services and billed under a physician’s billing number. Clinicians
who participate in advanced alternative payment models receive an incentive payment of 5
percent of their professional services payments. Clinicians in MIPS (the Merit-based Incentive
Payment System) receive a positive or negative payment adjustment (or no change) based on
their performance in four areas: quality, resource use, advancing care information, and clinical
practice improvement.
Source: Reprinted from MedPAC, “Physician and Other Health Professional Payment System,”
revised October 2019, http://medpac.gov/docs/default-source/payment-basics/medpac
_payment_basics_19_physician_final_sec.pdf.
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61
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G a p en s k i’s H e a l th c a re Fi n a n c e
The sections that follow describe a few of the important implications
for provider payments.
Value-Based Purchasing
value-based
purchasing (VBP)
An approach
to provider
reimbursement
that rewards
quality and
efficiency of
care rather than
quantity of care.
Value-based purchasing (VBP) is a Medicare initiative that rewards acute
care hospitals with incentive payments for efficiently providing high-quality
care to Medicare beneficiaries. This should lead to lower costs and better clinical outcomes for all hospitalized patients. The amounts of these payments
are based on outcome measures such as mortality, healthcare-associated
infections, patient safety and experience, process of care, and efficiency and
cost reduction. Hospitals may be rewarded for their performance compared
with all other hospitals, or for how well they improved their own performance compared with performance during a baseline period. Medicare also
uses value-based payment programs for end-stage renal disease, skilled nursing facilities, and home health.
Quality-Based Clinician Compensation
In addition to VBP for hospitals, Medicare factors quality into payments for
physicians and most other clinicians. Quality-based compensation is part of
Medicare’s effort to shift medicine away from the volume-based focus, where
clinicians are paid for each service regardless of quality. Clinicians can earn
additional compensation based on the quality of care they provide to their
patients. Bonuses and penalties are calculated on the basis of performance
on quality measures, which vary by specialty. As with VBP programs for
hospitals, quality-based clinician reimbursement programs can be paired with
shared savings programs, discussed next.
Shared Savings Programs
Shared savings is an approach to reducing healthcare costs and a mechanism
for encouraging the creation of accountable care organizations (ACOs).
Under shared savings, if a provider reduces total healthcare spending for
its patients below the level that the payer expected, the provider is then
rewarded with a portion of the savings. The benefits are twofold: (1) The
payer spends less than it would otherwise, and (2) the provider gets more
revenue than it expected. The savings can arise from the more efficient, costeffective use of hospital or outpatient services that enhance quality, reduce
costs over time, and improve outcomes. It can be applied to hospital episodes
of care, including physician services, or to physician office care.
Bundled Payment Models
Bundled payment models are a form of fee-for-service reimbursement
in which a single sum covers all healthcare services related to a specific
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
procedure. The objective of bundled payments is to promote more efficient
use of resources and reward providers for improving the coordination, quality, and efficiency of care. If the cost of services is less than the bundled
payment, the physicians and other providers retain the difference. But if the
costs exceed the bundled payment, physicians and other providers are not
compensated for the difference.
In some circumstances, an ACO may receive the bundled payment
and subsequently divide the payment among participating physicians and
providers. In other situations, the payer may pay participating physicians and
providers independently, but it may adjust each payment according to negotiated predefined rules to ensure that the total payments to all the providers do
not exceed the total bundled payment amount. This type of reimbursement
is called virtual bundling. For providers, the challenges of bundled payments
include determining who owns the episode of care and apportioning the payment among the providers.
Readmissions Reduction Program
The Hospital Readmissions Reduction Program is a Medicare initiative that
financially penalizes hospitals if they experience excessive readmission rates
compared with expected levels of readmission. The penalties are based on a
30-day readmission measure for conditions such as heart attack, heart failure,
and pneumonia.
Hospital-Acquired Conditions Reduction Program
The Hospital-Acquired Conditions Reduction Program is a Medicare initiative to encourage hospitals to improve patient safety. Under the program,
hospitals in the worst-performing quartile for hospital-acquired conditions
such as bed sores, infections, complications from extended use of catheters,
and injuries caused by falls are penalized 1 percent of inpatient payments for
all discharges.
1. Briefly describe the impact of healthcare reform on payments to
providers.
SELF-TEST
QUESTION
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G a p en s k i’s H e a l th c a re Fi n a n c e
Key Concepts
This chapter covers important background material related to healthcare insurance and provider reimbursement. The key concepts of this
chapter are as follows:
• Health insurance is widely used in the United States because
individuals are risk averse and insurance firms can take advantage
of the law of large numbers.
• Insurance is based on four key characteristics: (1) pooling of
losses, (2) payment for random losses, (3) risk transfer, and (4)
indemnification.
• Adverse selection occurs when individuals most likely to have claims
purchase insurance while those least likely to have claims do not.
• Moral hazard occurs when an insured individual purposely
sustains a loss, as opposed to a random loss. In a health
insurance setting, moral hazard is more subtle, producing such
behaviors as seeking more services than needed and engaging
in unhealthy behavior because the costs of the potential
consequences are borne by the insurer.
• Most provider revenue is not obtained directly from patients but
from healthcare insurers, known collectively as third-party payers.
• Third-party payers are classified as private insurers (Blue Cross
Blue Shield, commercial, and self-insurers) and public insurers
(Medicare and Medicaid).
• Managed care plans, such as health maintenance organizations
(HMOs), strive to combine the insurance function and the
provision of healthcare services.
• Third-party payers use many different payment methods that fall
into two broad classifications: fee-for-service and capitation. Each
payment method creates a unique set of incentives and risk for
providers.
• When payers pay billed charges, they pay according to a schedule
of rates established by the provider called a chargemaster.
• Negotiated charges, which are discounted from billed charges, are used
by insurers with sufficient market power to demand price reductions.
• Under a cost-based reimbursement system, payers agree to pay
providers certain allowable costs incurred when providing
services to the payers’ enrollees.
(continued)
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
(continued from previous page)
• In a prospective payment system, the rates paid by payers are
determined in advance and are not tied directly to reimbursable
costs or billed charges. Typically, prospective payments are made
on the basis of the following service definitions: (1) per procedure,
(2) per diagnosis, (3) per diem (per day), or (4) bundled pricing.
• Capitation is a flat periodic payment to a physician or another
healthcare provider; it is the sole reimbursement for providing
services to a defined population. Capitation payments are
generally expressed as some dollar amount per member per
month, where the word member typically refers to an enrollee in
some managed care plan.
• Medical coding is the foundation of fee-for-service reimbursement
systems. In inpatient settings, International Classification of
Diseases (ICD) codes are used to designate diagnoses, while in
outpatient settings, Current Procedural Terminology (CPT) codes
are used to specify procedures.
• Medicare uses the inpatient prospective payment system (IPPS)
for hospital inpatient reimbursement. Under IPPS, the amount
of the payment is determined by the patient’s Medicare severity
diagnosis-related group (MS–DRG).
• To provide some cushion for the high costs associated with
severely ill patients within each diagnosis, IPPS includes a
provision for outlier payments.
• Physicians are reimbursed by Medicare using the resource-based
relative value scale (RBRVS). Under RBRVS, reimbursement
is based on relative value units (RVUs), which consist of three
resource components: (1) physician work, (2) practice expenses,
and (3) malpractice insurance expenses. The RVU for each service
is multiplied by a dollar conversion factor to determine the
payment amount.
• Healthcare reform is having a significant impact on health insurance
and on the way providers are reimbursed. More people now have
access to insurance coverage, and new provider payment methods
emphasize value, efficiency, and patient outcomes over volume.
Because the managers of health services organizations must make
financial decisions within the constraints imposed by the economic environment, the insurance and reimbursement concepts discussed in this chapter
will be used throughout the remainder of the book.
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65
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G a p en s k i’s H e a l th c a re Fi n a n c e
Questions
2.1. Briefly explain the following characteristics of insurance:
a. Pooling of losses
b. Payment only for random losses
c. Risk transfer
d. Indemnification
2.2. What is adverse selection, and how do insurers deal with the
problem?
2.3. What is the moral hazard problem?
2.4. Briefly describe the major third-party payers.
2.5. a. What are the primary characteristics of managed care plans?
b. Describe different types of managed care plans.
2.6. What is the difference between fee-for-service reimbursement and
capitation?
2.7. Describe the provider incentives under each of the following
reimbursement methods:
a. Cost based
b. Charge based (including discounted charges)
c. Per procedure
d. Per diagnosis
e. Per diem
f. Bundled payment
g. Capitation
2.8. What medical coding systems are used to support fee-for-service
payment methodologies?
2.9. Briefly describe how Medicare pays for the following:
a. Inpatient services
b. Physician services
2.10. What are some features of healthcare reform that affect healthcare
insurance and reimbursement?
Selected Cases
Three cases in Gapenski’s Cases in Healthcare Finance, sixth edition, are
applicable to this chapter: Case 1: New England Healthcare; Case 2: Orlando
Family Physicians; and Case 3: Santa Fe Healthcare.
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C h a p te r 2 : H e a l th c a re Insuranc e and Reim b ur sem ent Methodologies
Notes
1. See, for example, the Hospital Compare tool of the Centers for
Medicare & Medicaid Services (www.medicare.gov/hospitalcompare
/search.html) and Medicare.gov’s Procedure Price Lookup (www
.medicare.gov/procedure-price-lookup).
2. Blue Cross Blue Shield Association. 2018. “Blue Facts: Healthcare
Coverage Designed for Your Community, Accessible Across the
Country.” Published May. www.bcbs.com/sites/default/files/file
-attachments/page/BCBS.Facts__0.pdf.
3. Centers for Medicare & Medicaid Services. 2018. “CMS Regional
Offices.” Modified April 18. www.cms.gov/Medicare/Coding
/ICD10/CMS-Regional-Offices.html.
4. Congressional Budget Office. 2017. “Repealing the Individual Health
Insurance Mandate: An Updated Estimate.” Published November 8.
www.cbo.gov/publication/53300.
5. Medicaid.gov. 2020. “October 2019 Medicaid & CHIP Enrollment
Data Highlights.” Accessed January 29. www.medicaid.gov/medicaid
/program-information/medicaid-and-chip-enrollment-data/report
-highlights/index.html.
6. Kaiser Family Foundation. 2020. “Marketplace Enrollment, 2014–
2019.” Accessed January 29. www.kff.org/health-reform/state
-indicator/marketplace-enrollment/?currentTimeframe=0&sortModel
=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D.
7. Centers for Medicare & Medicaid Services. 2020. “The Hospital
Value-Based Purchasing (VCP) Program.” Modified January 6.
www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment
-Instruments/Value-Based-Programs/HVBP/Hospital-Value-Based
-Purchasing.html.
8. World Health Organization. 2020. “International Classification of
Diseases, 11th Revision.” Accessed January 13. https://icd.who.int
/en/.
Resources
For the latest information on events that affect the healthcare sector, see Modern
Healthcare, published weekly by Crain Communications Inc.: www.crain.com/
brands/modern-healthcare/.
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Other resources pertaining to this chapter include
Beagle, J. T. 2010. “Episode-Based Payment: Bundling for Better Results.” Healthcare Financial Management 64 (2): 36–39.
D’Cruz, M. J., and T. L. Welter. 2010. “Is Your Organization Ready for Value-Based
Payments?” Healthcare Financial Management 64 (1): 64–70, 72.
. 2008. “Major Trends Affecting Hospital Payment.” Healthcare Financial
Management 62 (1): 52–58, 60.
Harris, J., I. Elizondo, and A. Isdaner. 2014. “Medicare Bundled Payment: What Is
It Worth to You?” Healthcare Financial Management 68 (1): 76–82.
Kaplan, R. S., and M. E. Porter. 2011. “The Big Idea: How to Solve the Cost Crisis
in Health Care.” Harvard Business Review 89 (9): 46–52, 54, 56–61.
Kentros, C., and C. Barbato. 2013. “Using Normalized RVU Reporting to Evaluate
Physician Productivity.” Healthcare Financial Management 67 (8): 98–105.
Kim, C., D. Majka, and J. H. Sussman. 2011. “Modeling the Impact of Healthcare
Reform.” Healthcare Financial Management 65 (1): 51–60.
Mulvany, C. 2013. “Insurance Market Reform: The Grand Experiment.” Healthcare
Financial Management 67 (4): 82–86, 88.
. 2010. “Healthcare Reform: The Good, the Bad, and the Transformational.”
Healthcare Financial Management 64 (6): 52–59.
Patton, T. L. 2009. “The IRS’s Version of Community Benefit: A Look at the Redesigned Form 990 and New Schedule H.” Healthcare Financial Management
63 (2): 50–54.
Pearce, J. W., and J. M. Harris. 2010. “The Medicare Bundled Payment Pilot Program: Participation Considerations.” Healthcare Financial Management 64
(9): 52–56, 58, 60.
Ronning, P. L. 2011. “ICD-10: Obligations and Opportunities.” Healthcare Financial Management 65 (8): 48–51.
Saqr, H., O. Mikhail, and J. Langabeer. 2008. “The Financial Impact of the Medicare
Prospective Payment System on Long-Term Acute Care Hospitals.” Journal
of Health Care Finance 35 (1): 58–69.
Shoemaker, P. 2011. “What Value-Based Purchasing Means to Your Hospital.”
Healthcare Financial Management 65 (8): 60–68.
Tyson, P. 2010. “Preparing for the New Landscape of Payment Reform.” Healthcare
Financial Management 64 (12): 42–48.
Wilensky, G. R. 2011. “Continuing Uncertainty Dominates the Healthcare Landscape.” Healthcare Financial Management 65 (3): 34, 36.
Williams, J. 2013. “A New Model for Care: Population Management.” Healthcare
Financial Management 67 (3): 68–76.
Woodson, W., and S. Jenkins. 2010. “Payment Reform: How Should Your Organization Prepare?” Healthcare Financial Management 64 (1): 74–79.
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