Financial Issues In Health Care week2 assignment
Elcrazyrepa22
89299_CH06_PP.pdf
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
2
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
5
•5–7
Health Care Payment Methods
6
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
7
•5–9
Figure 6–1 Factors Influencing Pricing
8
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
9
•5–11
Four Elements of Pricing
10
•Average costs
Losses on third-party fee-schedule payments
Medicaid
Medicare
Other
Write-offs on billed-charge patients
Self pay
Commercial
Reasonable return on investment
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)?
11
•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
12
•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
13
•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
14
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
15
•5–17
1. Return-on-Investment (ROI) adequacy
2. Comparison with other health care firms
Reasonableness of Charges
Two Generic Ways of Assessing:
16
•5–18
Is ROI at Case Hospital reasonable?
Are costs at Case Hospital reasonable?
Is investment at Case Hospital
reasonable?
ROI Method, Case Hospital Example
Three Issues:
Investment
CostRevenue InvestmentonReturn
17
•5–19
Figure 6–3 Return on Assets (Net Income/Assets)
5-Year Average – 2004 to 2008
18
•5–20
Figure 6–4 Return on Equity (Net Income/Equity) 5-
Year Average – 2004 to 2008
18
•5–21
Reasonableness of Costs, Case Hospital Example
1. Medicare cost per discharge – Case-mix- and wage-index adjusted (MCPD)
2. Medicare cost per outpatient claim – relative-weight and wage-index adjusted
(MCPC)
The hospital cost index (HCI) is then constructed as follows:
avgUS
MCPC xrevenueOutpatient%
avgUS
MCPD xrevenueInpatient%HCI
Cost Assessment Methodology:
20
•5–22
Figure 6–5 Hospital Cost Index – 2008
18
Figure 6–6 Medicare Cost per Discharge CMI & WI
Adj) – 2008
18
Figure 6–7 Cost per Medicare Visit (RW & WI Adj) –
2008
18
Figure 6–8 Fixed Asset Turnover (Net Revenue/Net
Fixed Assets) – 2008
18
•5–26
Case Hospital is not realizing excessive
profits
Costs at Case Hospital are consistent
with expected values and are reasonable
Investment at Case Hospital is
reasonable and not excessive
Therefore prices must be reasonable
ROI Method—Summary, Case
Hospital Example
Conclusions:
25
•5–27
Compare with similar hospitals and/or
Compare with hospitals in the same region
Comparison-of-Charges Method,
Case Hospital Example
General Methodology:
Compare with all academic centers in California
Compare with regional average for academic
medical centers (cost-of-living adjusted)
Case Hospital:
26
Figure 6–9 Hospital Charge Index – 2008
18
Figure 6–10 Medicare Charge per Discharge (CMI &
WI Adj) – 2008
18
Figure 6–11 Average Charge per APC (RW & WI
Adj) – 2008
18
Figure 6–12 Medicare Inpatient DSH % Average
Value – 2004 - 2008
18
Negotiating Managed Care Contracts
• Contract negotiation is critical to continued
financial solvency
• Contract negotiation involved 2 key areas
– Contract language
– Payment rates
•5–32
31
•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:
32
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
33
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
34
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
35
