DB 2 Summer

Chapter 6

Revenue

Determination

Learning Objectives

• Define basic methods of payment for

healthcare firms.

• Understand the general factors that influence

pricing.

• Define the basic healthcare pricing formula.

• Determine if prices are defensible.

• List some of the important considerations

when negotiating a managed-care contract.

Alternative Payment Systems

• Payment systems can be

categorized by two dimensions:

– Payment basis

– Unit of payment

Payment Basis

• The basis of payment defines how the

actual payment will be made. There are

three primary methods:

1. Cost

2. Fee schedules

– e.g., DRGs

3. Price-related

– e.g., 75% of billed charges

Unit of Payment

• Unit of payment defines how the services provided

are consolidated into an actual claim. There are two

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

Healthcare Payment

Methods

Factors Influencing Pricing

• Pricing includes the establishment of

CDM prices and the negotiation of

managed-care contracts.

• Three factors drive pricing policies:

– Desired net income

– Competitive position

– Market structure

Factors Influencing Pricing, cont.

FIGURE 6-1 Factors Influencing Pricing

Setting Actual CDM Prices

• There are four factors that must be

“mathematically” reflected in prices.

• Failure to incorporate these four

factors will impact financial survival.

Four Elements of Pricing

• 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

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)?

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

Pricing Formula

General Pricing Formula

Average cost +

Required net income + Loss on fee-schedule payers

Price = Volume of charge payers

1 – Average discount experienced on charge payers

$100 +

$5,000 + $1,500

Price = 200 = $294.44

1 – 0.55

Pricing Formula Applied to Example

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

Assessing Reasonableness of

Prices

• Many healthcare providers, especially

hospitals, have been criticized for

unreasonable prices.

1. Return-on-Investment (ROI) adequacy

2. Comparison with other healthcare firms

Reasonableness of Charges

Two generic ways of assessing:

 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

 

Return on Assets (Net Income/Assets)

5-Year Average – 2012 to 2016

FIGURE 6-6 Return on Assets (Net Income/Assets)

Return on Equity (Net Income/Equity)

5-Year Average – 2012 to 2016

FIGURE 6-7 Return on Equity (Net Income/Equity)

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:

Hospital Cost Index – 2016

FIGURE 6-8 Hospital Cost Index—2016

Medicare Cost per Discharge (CMI &

WI Adj) – 2008

FIGURE 6-9 Medicare Cost per Discharge (CMI and WI Adj.)—2016

Cost per Medicare Visit (RW & WI Adj)

–2016

FIGURE 6-10 Cost per Medicare Visit (RW and WI Adj.)—2016

Fixed Asset Turnover (Net

Revenue/Net Fixed Assets) – 2016

FIGURE 6-11 Fixed Asset Turnover (Net Revenue/Net Fixed Assets)—

2016

 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:

 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:

Hospital Charge Index – 2016

FIGURE 6-12 Hospital Charge Index—2016

Medicare Charge per Discharge (CMI

& WI Adj) – 2016

FIGURE 6-13 Medicare Charge per Discharge (CMI and WI Adj.)—2016

Average Charge per APC (RW & WI

Adj) – 2016

FIGURE 6-14 Average Charge per APC (RW and WI Adj.)—2016

Medicare Inpatient DSH Percentage

Average Value – 2016

FIGURE 6-9 Medicare Cost per Discharge (CMI and WI Adj.)—2016

Negotiating Managed Care

Contracts

• Contract negotiation is critical to

continued financial solvency.

• Contract negotiation involves two key

areas:

– Contract language

– Payment rates

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 cost 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:

Average Commercial Contract

Rates to Hospitals 2016 Services Averag

e

INPATIENT SERVICES

All IP services paid at % 77.7%

MS-DRG $10,879

Medical–per diem $3,127

Surgical–per diem $3,377

Psych $1,225

SNF $1,049

Normal vaginal delivery case rate

(or 2-day stay)

$5,109

C-section case rate (or 3-day stay) $6,177

Nursery level 1- boarder-per diem $947

Stop loss: threshold $145,93

6

Stop loss charges paid at %: 58.3%

Rate increase limit % 4.6%

Courtesy of Cleverley & Associates

Average

Commercial

Contract Rates

to Hospitals 2016

Outpatient Services

All OP services paid at % 76.5%

Emergency department paid at % 72.3%

Emergency department-case rate $975

Observation paid at % 71.5%

Observation case rate-per hour $93

Physical therapy paid at % 72.6%

PT case rate-per visit $180

MRI OP paid at % 56.7%

MRI op-case rate $1,321

Outpatient surgery paid at % 73.4%

OP surg group 1-case rate $1,707

OP surg group 2-case rate $2,269

OP surg group 3-case rate $3,000

OP surg group 4-case rate $3,697

OP surg group 5-case rate $4,505

OP surg group 6-case rate $4,982

OP surg group 7-case rate $6,184

OP surg group 8-case rate $6,995

OP surg group 9-case rate $9,107

Courtesy of Cleverley & Associates

Summary

• Revenue generation is critical to financial

solvency.

• Revenue generation is impacted by three

areas:

– Pricing

– Contract negotiation

– Coding and billing

• Inadequate payments by many government

payers force healthcare providers to “cost

shift.”