Assignment 1 summer

Chapter 3

Financial

Environment of

Healthcare

Organizations

Learning Objectives

• Questions to answer

– What is the basic business structure of a

Healthcare Organization (HCO)?

• Viability

– Payers

– Payees

– How are HCOs paid?

• Types of payment systems

– Medicare payment

Basic Business Structure of HCOs

Suppliers HCO Community

Resources

Services

Resources

Services

In the long-run…you cannot pay out more than you make

Suppliers HCO Community

Resources

Services

Resources

Services

WHO?

Employees

Equipment suppliers

Service contractors

Consumable goods suppliers

Lenders

Basic Business Structure of

HCOs, cont.

Suppliers HCO Community

Resources

Services

Resources

Services

WHO?

Hospital

Nursing home

Physician group

ASC

Clinic

Basic Business Structure of

HCOs, cont.

Suppliers HCO Community Resources

Services

Resources

Services

PATIENTS

1. Self-payer

2. Third-party

1. Blue Cross & Blue Shield

2. Commercial insurance

3. Medicare

4. Medicaid

5. Self-insured employer

6. Other

WHO?

NONPATIENTS

1. Grants

2. Contributions

3. Tax support

4. Miscellaneous

Basic Business Structure of

HCOs, cont.

• Sources of funds  Revenues

• Public (Medicare, Medicaid)

• Private insurance (BC/BS, self-insured, commercial

insurance)

• Direct payment

• Nonoperating revenues

 Capital • Taxable debt

• Tax-exempt debt

• Equity (stock, partnership)

 Gifts

Basic Business Structure of

HCOs, cont.

• Uses of funds  Expenses

• Salaries

• Supplies

• Insurance

 Capital • Interest

• Debt principal

• Dividends/partner distributions

 Investment • Working capital

• Buildings and equipment

• Replacement reserves

Basic Business Structure of

HCOs, cont.

• Sources of funds for U.S. hospitals (by percentage)

Y e a r

O u

t-o f-P

o c k e t

P a y m

e n

ts

Third-Party Payments

P riv

a te

H e a lth

In s u ra

n c e

O th

e r

P riv

a te

a n d

G o v e rn

m e n t

S o u rc

e s

Government

M e d ic

a re

M e d ic

a id

2014 3.2 37.3 10.3 25.8 17.3

2025 3.0 35.6 9.6 27.0 18.6

Observation?

Basic Business Structure of

HCOs, cont.

• Sources of funds for physicians (by percentage)

Observation?

Basic Business Structure of

HCOs, cont.

Y e a r

O u

t-o f-P

o c k e t

P a y m

e n

ts

Third-Party Payments

P riv

a te

H e

a lth

In s u ra

n c e

O th

e r

P riv

a te

a n d

G o v e rn

m e n t

S o u rc

e s

Government

M e d ic

a re

M e

d ic

a id

2014 9.0 42.2 11.2 25.1 10.6

2025 7.7 39.3 10.7 29.0 13.3

How HCOs Are Paid

1. Cost Reimbursement

• Most prominent form of reimbursement by

Medicare for hospitals until early 1980s

• Most payers have abandoned this form today

• Two key components: • Reasonable cost

• Apportioned cost

ADVANTAGES?

DISADVANTAGES?

2. Specific Services (Charge Payment)

• In essence, this is payment via the hospital/HCO’s

“list price.”

FOR HOSPITALS • The “list price” can be found in a hospital’s

“Charge Description Master” (CDM)

• When a patient receives services, all of those

services are logged onto that patient’s “bill.” These

claims would contain all of the items from the CDM

and can be very long.

How HCOs Are Paid, cont.

How HCOs Are Paid, cont.

• Hospitals use a standard billing format developed by CMS called “Uniform Bill – 1992,” more commonly referred to as a “UB-92,” and now the “UB-04.”

• The UB-04 is often more condensed than a complete claim because all of the items from the CDM are typically “rolled-up” to a higher level (usually by revenue code) on the inpatient side (outpatient not rolled up, with some exceptions). These revenue codes coincide with functional areas within the organization (i.e., pharmacy, emergency room).

2. Specific Services (Charge payment)

FOR PHYSICIANS

• The uniform billing format for a physician is called a

CMS-1500.

PAYERS WHO PAY VIA THIS ARRANGEMENT FALL

INTO THREE GROUPS

1. Patients without insurance

2. Patients with insurance from a firm that does not have

a contract with that HCO

3. Insurance firms that negotiate a ‘discount-of-charge’

contract with the HCO

ADVANTAGES?

DISADVANTAGES?

How HCOs Are Paid, cont.

3. Capitated Rates

• A negotiated arrangement between payer and

provider to cover specific services for a defined

population over an established period of time. An

example would be for an insurance company to

contract with OSU Medical Center to cover all

hospital care for its beneficiaries for a given year.

The insurance company would pay OSU a fixed

amount of money per month, knowing that hospital

service utilization could fluctuate each month.

How HCOs Are Paid, cont.

3. Capitated Rates

• Capitated arrangements gained popularity in the

mid-1990s, but have been declining in favor of

ACOs. ACOs represent groups of providers that

come together to give coordinated patient care, so

that the payer has more control over the global costs

of care for an enrolled population.

ADVANTAGES?

DISADVANTAGES?

How HCOs Are Paid, cont.

4. Bundled Services

• Two key features: – Payments to the provider are not necessarily tied

to the services provided to the patient as

recorded on the UB-04 or CMS-1500.

– These arrangements have a fixed fee specified per unit of service.

How HCOs Are Paid, cont.

How HCOs Are Paid, cont.

• Examples: – Hospital

• Medicare DRGs, APCs

• Per diem (per day) rates

• Case rates

– Physician • Resource-Based Relative Value Scale (RBRVS)

– Skilled Nursing Facilities • Resource Utilization Groups (RUGs)

– Home Health Agencies • Home health resource groups (HHRGs)

ADVANTAGES?

DISADVANTAGES?

4. Bundled Services: Medicare

• Medicare primarily pays hospitals on a

bundled service arrangement. This is

referred to as the Prospective Payment

System (PPS), which was officially launched

in 1983. • Some facilities are exempt from PPS, including psychiatric

hospitals, rehabilitation hospitals, children’s hospitals,

long-term-care hospitals, distinct psych and rehab units,

hospitals outside the 50 states, hospitals in states with an

approved waiver, critical access hospitals, and

comprehensive cancer clinics.

How HCOs Are Paid, cont.

4. Bundled Services: Medicare

• Medicare has three “insurance plans” for

beneficiaries: • PART A: hospital inpatient, SNF, hospice, home

health, and inpatient blood coverage (all persons

older than 65 years, some other groups)

• PART B: optional coverage for physician services,

hospital outpatient, labs, durable medical equipment

(DME), and other coverage (all persons older than 65

years who choose to pay monthly premium)

• PART D (NEW): prescription drug coverage (all

persons older than 65 years who choose to join)

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—

Calculating Payment

• Hospital inpatient

• Hospital outpatient

• Physicians

• Skilled nursing facilities

• Home health agencies

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—Calculating

Payment for Hospital Inpatient

How HCOs Are Paid, cont.

FIGURE 3-2 Breakdown of Medicare

4. Bundled Services: Medicare—

Calculating Payment for Hospital Inpatient

DRG Operating Payment = (Hospital Dollar Rate) x (DRG Case Weight)

Determined by:

1. Labor

2. Nonlabor components

(Labor component

should be multiplied by

the hospital’s wage index)

Determined by:

1. Weight of DRG

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—Calculating

Payment for Hospital Inpatient

• Additional payment can be obtained by Medicare

payments to cover:

1. Indirect medical education: separate from

salaries

2. Disproportionate share: for hospitals treating

large percentage of Medicare/Medicaid patients

3. Outlier: for those patients with unusually large

bills

• When threshold limit is reached, Medicare

pays percentage (less than 100%) of

difference between threshold and actual cost

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—Calculating

Payment for Hospital Inpatient

Medicare pays “reasonable costs” for the

following: 1. Direct medical education

2. Organ acquisition costs

3. Bad debts for copayments and deductibles of

Medicare beneficiaries

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—Calculating

Payment for Hospital Outpatient

• Based on the BBA of 1997: PPS was initiated on the

outpatient side for Medicare

• Provided services are grouped into “Ambulatory Payment

Classifications” (APCs)

• Payment rates are established for each APC: Hospitals

can have more than one APC per encounter (different

from the DRG system where only one DRG is assigned

per discharge)

• Not all outpatient services have an assigned APC; some

are paid on a fee-schedule basis (Ex: labs) and some are

not paid at all (some items that are deemed incidental;

ex: certain drugs and medical supplies)

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—Calculating

Payment for Hospital Outpatient

• 838 APC groups (2010): anything that says “APC

Payment” – Medical – Surgical–reducible – Significant procedures – Ancillary

• Each CPT/HCPCS code is assigned to one APC

group

• Each CPT/HCPCS code has an indicator that

tells how that procedure will be reimbursed by

Medicare

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—Calculating

Payment for Hospital Outpatient Indicator Example of Service Status

A clinical laboratory, ambulance, physical & occup

therapy fee schedule

B nonrecognized codes not paid

C inpatient procedure not paid

D discontinued codes not paid

E nonallowed item or service not paid

F acquisition of corneal tissue reasonable cost

G current drug/biological pass-through additional PPS

payment

H device pass-through cost-based pass-

through

How HCOs Are Paid, cont.

Indicator Example of Service Status

K non-pass-through drug/biological Additional PPS

payment

L vaccine reasonable cost

M not billable not paid

N incidental service packaged

P partial hospitalization paid per diem

Q packaged pps payment

R blood and blood products APC rate

S significant procedure APC rate

T significant procedure, reduced when multiple APC rate

U brachytherapy sources APC rate

V clinic or ED visit APC rate

X ancillary service APC rate

Y nonimplant DME not paid under OPPS

Indicator list, continued

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—

Calculating Payment for Hospital

Outpatient

Total Payment per Encounter = 1. APC (used for example)

2. Fee schedule payments

3. Outlier payments

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—

Calculating Payment for Hospital

Outpatient

Total Payment = [0.60 (labor) x APC Payment Rate x Wage Index] + [0.40 (nonlabor) x APC Payment Rate]

Coinsurance = [0.60 (labor) x National Median APC Coinsurance x Wage Index] + [0.40 (nonlabor) x National Median APC Coinsurance]

1. APC Payment

APC Payment Rate = Current Conversion Factor x Relative Weight

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—

Calculating Payment for Physicians

• Physicians are either participating or

nonparticipating

Participating physicians:

• Agree to accept Medicare’s assigned fees for

services and agree to only charge patient for

copayment (usually 20% of total assigned fee)

• Are included in directory of participants

• Have access to electronic claim transmission

• Receive payment at 100% of prevailing charge

versus 95% for nonparticipating physicians

How HCOs Are Paid, cont.

4. Bundled Services: Medicare—

Calculating Payment for Physicians

Doctor charge

Medicare approved

x participating factor

Medicare allowed

x MAC (max allowable charge)

factor

Max allowed charge

Medicare payment (80%)

Patient payment

Total allowed

$500

$400

1.0

$400

1.0

$400

$320

80

$400

$500

$400

0.95

$380

1.0

$380

$304

76

$380

$500

$400

0.95

$380

1.15

$437

$304

133

$437

Participating Assigned

Nonparticipating

Unassigned

0.95 is max

allowed for

“nonparticipati

ng” doc

1.15 is max

allowed for

“un-assigned”

case

How HCO’s Are Paid, cont.