Understanding the Health Care Reform Act
Chapter 6
Revenue Determination
• 5–3
Learning Objectives • Define basic methods of payment for health care
firms
• Understand the general factors that influence pricing
• Define the basic health care pricing formula
• Determine if prices are defensible
• List some of the important considerations when negotiating a managed-care contract
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Alternative Payment Systems
• Payment systems can be categorized by 2 dimensions – Payment Basis – Unit of Payment
• 5–4
3
Payment Basis
• The basis of payment defines how the actual payment will be made. There are 3 primary methods- 1. Cost 2. Fee Schedules
– e.g. DRG’s 3. Price Related
– e.g. 75% of billed charges
• 5–5
4
Unit of Payment • Unit of payment defines how the services provided are
consolidated into an actual claim. There are 2 primary methods- 1. Specific Services
– Individual items that are listed in a claim are paid 2. Bundled Services
– Specific services listed in a claim are paid on some aggregated basis – such as a DRG or per diem
• 5–6
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• 5–7
Health Care Payment Methods
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Factors Influencing Pricing
• Pricing includes the establishment of CDM prices and the negotiation of managed care contracts
• Three factors drive pricing policies – Required net income – Competitive position – Market structure
• 5–8
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• 5–9
Figure 6–1 Factors Influencing Pricing
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Setting Actual CDM Prices • There are 4 factors that must be “mathematically”
reflected in prices • Failure to incorporate these 4 factors will impact
financial survival.
• 5–10
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• 5–11
Four Elements of Pricing
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• Average costs Ø Losses on third-party fee-schedule payments
ü Medicaid ü Medicare ü Other
Ø Write-offs on billed-charge patients ü Self pay ü Commercial
Ø Reasonable return on investment ü Sustainable growth
• 5–12
Pricing Example
Total cost $100,000 Total volume 1,000 Average cost $100
Payer volumes
Medicare (payment rate = $95) 400 Medicaid (payment rate = $75) 100
Managed Care # 1 (payment rate = $110) 300
Managed Care # 2 (pay 80% of charges) 100
Uninsured (pay 10% of charges) 100 Total all payers 1,000
Desired net income $5,000
Given the specified volumes, costs, desired profit, and other assumptions, what is the required charge per visit (i.e., price)?
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• 5–13
Pricing Example, Income Statement Approach
Given the specified volumes, costs, desired profit, and other assumptions, what is the required charge per visit (i.e., price)?
Revenue Computation Amount Medicare 400 x $95 $38,000 Medicaid 100 x $75 7,500
Managed Care # 1 300 x $110 33,000 Managed Care # 2 100 x 80% x $294.44 23,555
Uninsured 100 x 10% x $294.44 2,944 Total $105,000
less Costs 100,000 Profit $5,000
Solve for this
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• 5–14
Pricing Formula
General Pricing Formula
Required net income + Loss on fee-schedule payers Average cost + Volume of charge payers Price =
1 - Average discount experienced on charge payers
$5,000 + $1,500 $100 + 200 Price =
= $294.44
1 - .55
Pricing Formula Applied to Example
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• 5–15
1. Increase in costs 2. Governmental programs that pay less than cost 3. Managed-care plan fee schedules that do not
pay at levels above cost 4. Increases in required profit, such as debt-
service obligations or capital replacement 5. Reductions in charge-paying patients 6. Increases in uninsured patients
Factors That Tend to Increase Prices
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Assessing Reasonableness of Prices
• Many healthcare providers, especially hospitals, have been criticized for unreasonable prices.
• One web site http://www.hospitalvictims.com compares prices based on markups for all hospitals in US. A Maryland hospital (Johns Hopkins) is selected because Medicare + Medicaid pay close to 100% of charges which keeps Maryland hospital prices very low.
• 5–16
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• 5–17
1. Return-on-Investment (ROI) adequacy 2. Comparison with other health care firms
Reasonableness of Charges
Two Generic Ways of Assessing:
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• 5–18
Ø Is ROI at Case Hospital reasonable? Ø Are costs at Case Hospital reasonable? Ø Is investment at Case Hospital
reasonable?
ROI Method, Case Hospital Example
Three Issues:
Investment
CostRevenueInvestmentonReturn − =
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• 5–19
Figure 6–3 Return on Assets (Net Income/Assets) 5-Year Average – 2004 to 2008
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• 5–20
Figure 6–4 Return on Equity (Net Income/Equity) 5- Year Average – 2004 to 2008
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• 5–21
Reasonableness of Costs, Case Hospital Example
1. Medicare cost per discharge œ Case-mix- and wage-index adjusted (MCPD) 2. Medicare cost per outpatient claim œ relative-weight and wage-index adjusted
(MCPC) The hospital cost index (HCI) is then constructed as follows:
avgUS MCPCxrevenueOutpatient%
avgUS MCPDxrevenueInpatient%HCI +=
Cost Assessment Methodology:
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• 5–22
Figure 6–5 Hospital Cost Index – 2008
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Figure 6–6 Medicare Cost per Discharge CMI & WI Adj) – 2008
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Figure 6–7 Cost per Medicare Visit (RW & WI Adj) – 2008
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Figure 6–8 Fixed Asset Turnover (Net Revenue/Net Fixed Assets) – 2008
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• 5–26
Ø Case Hospital is not realizing excessive profits
Ø Costs at Case Hospital are consistent with expected values and are reasonable
Ø Investment at Case Hospital is reasonable and not excessive
Ø Therefore prices must be reasonable
ROI Method—Summary, Case Hospital Example
Conclusions:
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• 5–27
Ø Compare with similar hospitals and/or Ø Compare with hospitals in the same region
Comparison-of-Charges Method, Case Hospital Example
General Methodology:
Ø Compare with all academic centers in California Ø Compare with regional average for academic
medical centers (cost-of-living adjusted)
Case Hospital:
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Figure 6–9 Hospital Charge Index – 2008
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Figure 6–10 Medicare Charge per Discharge (CMI & WI Adj) – 2008
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Figure 6–11 Average Charge per APC (RW & WI Adj) – 2008
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Figure 6–12 Medicare Inpatient DSH % Average Value – 2004 - 2008
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Negotiating Managed Care Contracts • Contract negotiation is critical to continued
financial solvency • Contract negotiation involved 2 key areas
– Contract language – Payment rates
• 5–32
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• 5–33
Managed-Care Contract Negotiation
1. Remove contract ambiguity 2. Eliminate retroactive denials 3. Establish a reasonable appeal process 4. Define clean claims 5. Remove most favored nation (MFN) clauses 6. Prohibit silent PPO arrangements 7. Include terms for outliers or technology-driven increases 8. Establish ability to recover payment after termination 9. Preserve the ability to be paid for services 10. Minimize health plan rate differentials
10 Important Areas of Managed-Care Contract Language:
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Average Commercial Contract Rates to Hospitals 2009
Services Average
INPATIENT SERVICES
All IP services Paid at % 80.1%
MS-DRG $7,781
Medical-per diem $2,076
Surgical-per diem $2,228
Psych $868
SNF $761
Normal vag Del case rate (or 2 day stay)
$3,669
C-Section case rate (or 3 day stay) $4,780
Nursery Level 1- Boarder-per diem $740
Stop Loss: Threshold $100,212
Stop Loss Charges paid at %: 63.5%
Rate Increase Limit % 5.8%
• 5–34
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Average Commercial
Contract Rates to Hospitals 2009
Outpatient Services
All OP services Paid at % 79.8%
Emergency Department Paid at % 74.5%
Emergency Department-Case Rate $667
Observation Paid at % 73.5%
Observation case rate-per hour $65
Physical Therapy Paid at % 74.6%
PT case rate-per visit $147
MRI OP Paid at % 76.4%
MRI OP-case rate $1,009
Outpatient Surgery Paid at % 74.7%
OP Surgery Group-case rate $2,569
OP Surg Group 1-case rate $1,280
OP Surg Group 2-case rate $1,632
OP Surg Group 3-case rate $2,011
OP Surg Group 4-case rate $2,448
OP Surg Group 5-case rate $2,894
OP Surg Group 6-case rate $3,116
OP Surg Group 7-case rate $3,964
OP Surg Group 8-case rate $4,718
OP Surg Group 9-case rate $5,875
• 5–35
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Summary
• Revenue generation is critical to financial solvency
• Revenue generation is impacted by 3 areas: – Pricing – Contract negotiation – Coding and billing
• Inadequate payments by many government payers force healthcare providers to “cost shift”
• 5–36
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