IT assignt 3

Key Terms Accountable care organization (ACO) Affordable Care Act (ACA) Allowable fee Bad debt Block grant Bundling Capitated payment method Capitation Case Case-based payment Charge Charity care Claim Connector Copayment Customary, prevailing, and reasonable (CPR) Deductible Dependent (family) coverage Discounted fee-for-service Episode-of-care reimbursement Fee Fee schedule Fee-for-service reimbursement First mover Fundamental healthcare reform Global payment method Guarantor Health disparity Health Care and Education Reconciliation Act of 2010

(P.L. 111–152): see Affordable Care Act (ACA)

Incremental healthcare reform Individual (single) coverage Insurance Manager’s amendment Meaningful use Medicare-severity diagnosis-related group (MS-DRG) Minimal creditable coverage Patient Protection and Affordable Care Act of 2010

(P.L. 111–148): see Affordable Care Act (ACA) Payer Per diem payment Policy Premium Prospective payment method Provider Regional health information organization (RHIO) Reimbursement Resource-based relative value scale (RBRVS) Retrospective payment method Risk pool Self-pay Self-insured plan Single-payer health system Sliding scale Third-party payer Third-party payment Uncompensated care Underserved area Universal healthcare coverage Usual, customary, and reasonable (UCR)

Chapter 1 Healthcare Reimbursement

Methodologies

Objectives • To use basic language associated with healthcare

reimbursement methodologies

• To differentiate payment methods on unit of payment, time frame, and risk

• To distinguish major payment methods in the United States

1

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C o p y r i g h t 2 0 1 3 . A H I M A P r e s s .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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Healthcare Reimbursement Methodologies 3

physician’s office might have “at least a dozen separate contracts for providing healthcare services” (Washburn 1999, 35). Finally, contributing to the complexity of the healthcare system are the sheer size, scope, and responsibilities of some of its programs (Medicare Payment Advisory Committee 2001, 3). For example, the volumes and methods of federal payment systems partially demonstrates this complexity as early as 2001 (tables 1.1 and 1.2). Since 2001, the complexity has not lessened. For example, in January 2006, a Medicare pharmacy benefit plan was implemented. Thus, the US healthcare system is inherently complex because it is actually multiple subsystems rather than a single system.

Health personnel can understand the US healthcare reimbursement systems. Health personnel’s under- standing can assist their patients and clients, their organizations, and their own families. This book is a guide to healthcare reimbursement. The book divides healthcare reimbursement into its essential systems. To put the systems in context, the background and key historical events in the development of each system and its payment methods are briefly described. Then, in straightforward language, the payment methods for each system are explained with clarity and detail. Step- by-step, the reader is walked through the procedures of each payment method. Terms, abbreviations, and

Introduction to Healthcare Reimbursement

The US healthcare sector is large. In 2009, the US healthcare sector accounted for $2.5 trillion (Martin et al. 2011, 11). This amount translates into 17.6 percent of the nation’s gross domestic product (GDP) (Martin et al. 2011, 11). To put these amounts in understand- able terms, $8,086 was spent for each person in the United States (Martin et al. 2011, 11). Moreover, the $2.5 trillion spent makes the US healthcare sector larger than the entire economy of France (Aaron 2009, W184–W185). Finally, the growth rate of healthcare spending in the United States outpaces the growth rate of the nation’s overall economy. For health personnel, understanding the reimbursement systems in this large sector of the economy is essential.

In addition to being large, the US healthcare system is complex. Factors in the system’s complex- ity are its fragmentation (France 2008, 676) and the sets of intricate interactions among these “fragments” (parts). For example, the system includes many frag- ments that are sources of health services, such as physicians, large and small hospitals, rehabilitation specialists, chiropractors, and medical equipment companies, to name a few. Just as numerous as the sources of health services are the fragments that pay for services. These payers include Medicare, private health insurance, Blue Cross, workers’ compensation, Indian Health Services, and private individuals, to begin the list.

Example: Noted Healthcare Economist’s Description of the US Healthcare System

Henry J. Aaron describes the US healthcare system as “an administrative monstrosity, a truly bizarre mélange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public systems with mind-boggling administered prices and other rules expressing distinctions that can only be regarded as weird” (Aaron 2003, 802).

Source: Aaron, H.J. 2003. The costs of health care administration in the United States and Canada—Questionable answers to a questionable question. New England Journal of Medicine 349(8):801–803.

These fragments interact using many varied and complicated payment methods and rules. For example, a

Table 1.1. 2001—Examples of complexity in federal payment methods

Example Complexity as Represented

by Volume

Recognized entities for payment 30

U.S. Federal Law Code More than 600 pages

Code of Federal Regulations (CFR) Two volumes

Three pages of new regulations for providers

100 pages of explanation

Medicare claims processing 900 million claims from more than 700,000 providers per year

Contractors for the Centers for Medicare and Medicaid Services (CMS)

116 private contractors to administer, regulate, and monitor Medicare program

Source: Medicare Payment Advisory Committee. 2001. A Report to the Congress: Reducing Medicare Complexity and Regulatory Burden. http:// www.medpac.gov/publications/congressional_reports/dec2001RegBurden. pdf, pp. 4, 5, 7, 15.

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4 Chapter 1

acronyms are clearly defined. Accuracy, however, is not sacrificed for simplicity. This systematic approach makes the complexity of the healthcare reimbursement systems manageable. Readers can feel confident as members of the healthcare team. In this chapter and the following chapters, readers will learn about health- care reimbursement methodologies; clinical coding

and compliance; voluntary healthcare insurance plans; government-sponsored healthcare programs; man- aged care plans; Medicare-Medicaid prospective pay- ment systems for inpatients, ambulatory, and other Medicare-Medicaid reimbursement systems; revenue cycle management; and models of quality, performance, and payment.

Site System Relative Weighted Group Per Diem Abbreviation Effective Date

Hospital Inpatient Settings

Inpatient acute care hospital

Inpatient prospective payment system (IPPS)

Diagnosis-related group

Medicare-severity diagnosis- related group (enhancement)

DRG

MS-DRG

October 1, 1983

October 1, 2007

Inpatient psychiatric facility

Inpatient psychiatric facility prospective payment system (IPF PPS)

Per diem with facility-level and patient-level adjustments

April 1, 2005

Postacute Settings

Skilled nursing facility

Skilled nursing facility prospective payment system (SNF PPS)

Resource utilization group RUG July 1, 1998

Home health agency Home health prospective payment system (HHPPS)

Home health resource group HHRG October 1, 2000

Inpatient rehabilitation facility

Inpatient rehabilitation facility prospective payment system (IRF PPS)

Case-mix group CMG January 1, 2002

Long-term care hospital

Long-term care hospital prospective payment system (LTCH PPS)

Diagnosis-related group

Medicare-severity diagnosis- related group (enhancement)

LTC-DRG

MS-LTC-DRG

October 1, 2002

October 1, 2007

Ambulatory Settings

Outpatient hospital service

Outpatient prospective payment system (OPPS)

Ambulatory payment classification group

APC group August 1, 2000

Ambulatory surgery center

Ambulatory surgery center (ASC) payment method

Ambulatory surgery center group

Ambulatory payment classification group (integrated into outpatient prospective payment system)

ASC group 1980

January 1, 2008

Physician offices and practice groups

Resource-based relative value scale

Relative value scale RBRVS January 1, 1992

Rate Method

Table 1.2. Selected federal payment systems

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Healthcare Reimbursement Methodologies 5

Health Insurance Generally, reimbursement for healthcare services depends on patients having health insurance. Insur- ance is a system of reducing a person’s exposure to risk of loss by having another party (insurance company or insurer) assume the risk. In healthcare, the risk the healthcare insurance company assumes is the unknown cost of healthcare for a person or group of persons.

However, the insurance company that assumes the risk reduces its own risk by distributing the risk among a larger group of persons (insureds). This group of persons has similar risks of loss and is known as a risk pool. In healthcare, the variability of health statuses across many people allows the healthcare insurance company to make a better estimate of the average costs of healthcare.

The insurance company, however, receives a pre- mium payment in return for assuming the insureds’ exposure to risk of loss. The premium payments for all the insureds in the group are combined in a pool of money. Insurers use actuarial data to calculate the premiums so that the pool of money is sufficiently large to pay losses of the entire group. Thus, specific to healthcare, the risk is the potential that a person will get sick or require health services and will incur bills (costs) associated with his or her treatment or services. The premium payments for health insurance are cal- culated to pay for all the potential covered healthcare costs for an entire group of patients.

Historical Perspectives Health insurance in the United States has been made available to help offset the expenses of the treatment of illness and injury. One health systems expert character- izes the development of health insurance in the United States as “accidental” (Gabel 1999, 63). The first “sick- ness” clause was inserted in an insurance document in 1847. However, health insurance did not become established until 1929, when Blue Cross first covered schoolteachers in Texas. In 1932, a citywide plan was begun in Sacramento, California. In the 1940s, during World War II, the executive and judicial branches of government issued a series of acts to address a labor shortage (Gabel 1999, 63). These acts became the basic structure of health insurance in the United States. Moreover, these acts resulted in today’s linkage of health insurance and employment. Thus, as an indus- try, health insurance became widespread in the United

States after World War II (Longest et al. 2000, 89–90). Such accidental evolution did not occur in other coun- tries, such as Great Britain, Canada, and Germany, where specific legislative acts created health insurance systems (Gabel 1999, 63).

Health Insurance and Employment In the United States, health insurance is usually tied to employment. Many larger employers, as part of a pack- age of employment benefits, pay a portion of the health insurance premium. Health insurance that covers only the employee is known as individual (single) cover- age. Employees may be required to pay extra for health insurance for their spouse or children. Health insurance for spouses, children, or both is known as dependent (family) coverage. Medicare is also considered insur- ance because payroll taxes, through both employers’ and employees’ contributions, finance one portion of Medicare coverage. Premiums paid by eligible indi- viduals and matched by the federal government also finance Medicare’s supplemental medical insurance program.

When people lose their jobs, they often lose their health insurance. Although people can continue their health insurance by paying for the insurance entirely by themselves, the payments are expensive. In certain cir- cumstances, under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, people can extend their health insurance for a limited period (Department of Labor n.d.). In general, however, peo- ple without jobs are unlikely to have adequate health insurance.

Example: Effect of Loss of Health Insurance on Public Healthcare Spending

People’s loss of health insurance affects us all, not just the unemployed person. For example, Medicaid is a joint federal and state program that provides medical and health services to the poor. During an economic downturn between 2000 and 2003, more people were eligible for Medicaid. Their enrollment in Medicaid resulted in a 34 percent increase of Medicaid spending, from $205.7 billion to $275.5 billion. In the economic crisis of 2008, every 1 percent increase in the number of Americans unemployed equaled the loss of employer-sponsored health insurance for approximately 2.5 million workers and their dependents, according to the American Hospital Association. Comparing the periods of July through September, the amount of unreimbursed (uncompensated) care that hospitals provided

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increased by 8 percent, from $853.5 million in 2007 to $923.6 million in 2008. Therefore, people’s loss of health insurance results in greater public spending on healthcare (Holahan, J., and A. Ghosh, 2005, W5-61).

Sources: Holahan, J., and A. Ghosh. 2005. Understanding the recent growth in Medicaid spending, 2000–2003. Health Affairs Suppl. Web Exclusives: W5-52–W5-62.

American Hospital Association. 2008. Report on the Economic Crisis: Initial Impact on Hospitals. http://www. aha.org/aha/content/2008/pdf/081119econcrisisreport.pdf

For some employed people, the adequacy of the health insurance is an issue. Some health insurance plans require patients or their families to pay 20 percent or more of the costs of their healthcare. Health- care costs can easily be in the thousands of dollars; 20 percent of $10,000 is $2,000, which is a sizable sum for many people. Other employees work for employers that do not offer health benefits. These persons must purchase their own insurance at an extremely high rate or go without health insurance. Obtaining and retaining adequate health insurance are problems for many US workers.

Compensation for Healthcare Reimbursement is the healthcare term that refers to the compensation or repayment for healthcare services. Reimbursement is being repaid or compensated for expenses already incurred or, as in the case of health- care, for services that have already been provided. In healthcare, services are often provided before payment is made. Unlike the car dealership, in which custom- ers pay for a car or arrange a loan before driving the car off the lot, patients walk out of the hospital treated without making payment arrangements. Therefore, the physicians and clinics must seek to be paid back for services that they have already provided and for incurred expenses, such as the cost for supplies used. These physicians, clinics, hospitals, and other health- care organizations and practitioners are requesting reimbursement for health services.

Third-Party Payment Experts in healthcare finance refer to third-party payment or third-party payers. Who or what are these parties? Discussions of third-party payers can be confusing because no mention is made of first parties and second parties. A party is an entity that receives,

renders, or pays for health services. The first party is the patient himself or herself or the person, such as a parent, responsible for the patient’s health bill. The second party is the physician, clinic, hospital, nurs- ing home, or other healthcare entity rendering the care. These second parties are often called providers because they provide healthcare. The third party is the payer, an uninvolved insurance company or health agency that pays the physician, clinic, or other second- party provider for the care or services rendered to the first party (patient). Examples of third-party payers are health insurance companies, workers’ compensation, and Medicare.

Characteristics of Reimbursement Methodologies Three characteristics describe various methods of healthcare reimbursement. These characteristics are the unit of payment, the time orientation, and the degree of financial risk for the parties (Wouters et al. 1998, 3) (table 1.3). The unit of payment can range from a pay- ment for each service, such as a payment for each labo- ratory test, to a block payment for an entire population for a period of time, such as a governmental budget trans- fer to the state health department. The time orientation is retrospective versus prospective. In retrospective payment methods, the payer learns of the costs of the health services after the patient has already received the services. The provider also receives payment after the services have been provided. In a prospective pay- ment method, the payments are preset before care is delivered. Financial risk refers back to the definition

Table 1.3. Characteristics of reimbursement methodologies

Characteristic Description

Unit of payment Element that is the basis of payment; ranges in aggregation from single service such as a laboratory test, to an entire clinic visit, to an episode of care, to hospitalization, and, finally, to an entire population

Time orientation Retrospective (learned after care or services provided) or Prospective (determined in advance of care or services)

Degree of financial risk

Level of uncertainty related to the cost of healthcare or to a potential financial loss or harm

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Healthcare Reimbursement Methodologies 7

of health insurance. When the costs of health services are learned after the care is provided, the third-party payer (health insurance entity) is at risk. When provid- ers must project the costs of treating patients into the future and contract to provide all care for those esti- mated costs, the provider is at risk. Patients assume risk because they must pay higher and higher percentages of the costs as their share.

Types of Healthcare Reimbursement Methodologies

This chapter discusses the fundamental concepts in healthcare reimbursement methodologies. The chapter is organized by the two major types of unit of payment: fee-for-service reimbursement and episode-of-care reimbursement (table 1.4). Also briefly addressed are the other characteristics of healthcare payment meth- ods: time frame and risk. The chapter concludes with a peek into the future of healthcare reimbursement.

Fee-for-Service Reimbursement Fee-for-service reimbursement is a healthcare payment method in which providers receive payment for each service rendered. Fee-for-service is a common method of calculating healthcare reimbursement.

A fee is a set amount or a set price. Fee-for-service means a specific payment is made for each specific service provided or rendered. In the fee-for-service method, the provider of the healthcare service (the second party) charges a fee for each type of service, and the health insurance company pays each fee for a covered service. These fees or prices are known as charges in healthcare. Sometimes, there is little rela- tionship between the actual costs to provide a service and its charge.

Typically, the physician, healthcare organization, or other practitioner bills for each service provided

on a claim that lists the fees or charges for each service. The claim is sent to the third-party payer (health insurance company or health agency). In healthcare, sending the claim to the third-party payer is known as submitting a claim. Within the stipula- tions of the health insurance policy (contract) or the governmental regulations, the third party pays the claim. The majority of US physicians, healthcare organizations, and other practitioners use this method of billing.

People who have health insurance that reimburses on the basis of fee-for-service have the advantage of great independence. Their health insurance plans allow them to make almost all health decisions about which physician to see and about which conditions to have treated. The patient or the provider submits a claim to the health insurance company, and, if the service is covered in the health insurance policy, the patient or provider receives reimbursement. For the patient, the disadvantage of fee-for-service is that fee-for-service plans often have higher deductibles or copayments than other types of health insurance, such as managed care plans.

For health insurance plans, fee-for-service has the disadvantage of uncertainty. The costs of reimburs- ing the providers are unknown because the services that patients will receive are unknown. Moreover, costs will increase if the providers increase the fees for each service, if patients receive more services than expected, or if more expensive services are substituted for less expensive services. Examples of fee-for-service reimbursement are self-pay, traditional retrospective payment, and managed care.

Self-Pay Self-pay is a type of fee-for-service because the patients or their guarantors (responsible persons, such as par- ents for children) pay a specific amount for each service received. The patients or guarantors make such pay- ments themselves to the providers, such as physicians, clinics, or hospitals that rendered each service. There are two situations in which self-pay occurs.

In the first situation, the patients or guarantors have health insurance. However, the patients or guarantors choose to pay the healthcare provider themselves and to subsequently seek reimbursement directly from their private health insurance or from the governmental agency that covers their health benefits.

Table 1.4. Major types of reimbursement methodologies

Fee-for-Service Episode-of-Care

Self-pay Capitated payment

Traditional retrospective payment Global payment

Managed care* Prospective payment

*Some forms.

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In the second situation, the patients or guarantors do not have health insurance (as previously discussed). These patients or guarantors have not made advance payments via an insurance premium. For these individ- uals, self-pay results because they lack health insurance or benefits under governmental health programs.

The outcome, though, in both situations is self-pay. Some patients and guarantors may seek recompense from a third-party payer and others may bear the bur- den of the costs of their healthcare themselves. Thus, in self-pay, the patients or guarantors directly pay their healthcare providers for the costs of their healthcare.

A related concept is the self-insured plan. A self- insured plan is one in which the employer eliminates the “middleman.” The employer administers its own health insurance benefits. Rather than shift the risk to a health insurance entity, the employer (or other entity, such as a professional association) assumes the costs of healthcare for its employees or members and their dependents.

Traditional Retrospective Payment The traditional retrospective payment method of reim- bursement pays providers after the services have been rendered. Retrospective reimbursement is a type of fee-for-service because the providers are reimbursed for each service rendered. Third-party payers reimburse providers for charges previously incurred. The reim- bursement payments are based on the charges for the services provided. This method has historically been the traditional method of reimbursement.

Fee Schedules In a fee-for-service environment, third-party payers establish a fee schedule. A fee schedule is a predeter- mined list of fees that the third-party payer allows for payment for all healthcare services. The allowable fee represents the average or maximum amount the third- party payer will reimburse providers for the service.

Discounted Fee-for-Ser vice Payments To begin to control costs, the third-party payers negoti- ated reduced fees for their members or insureds. The payment method using these reduced fees is known as discounted fee-for-service. Versions of the discounted fee-for-service payment method are the UCR, the CPR, and the resource-based relative value scale (RBRVS) (Blount and Waters 2001, 6).

UCR stands for usual, customary, and reasonable. This is defined as usual in the provider’s practice, customary in the community, and reasonable for the situation. CPR stands for customary, prevailing, and reasonable. The UCR and the CPR are methods of payment within the type of traditional retrospec- tive payment. Both methods are based on data from past claims. Private insurance companies use the UCR method. Prior to the implementation of its current pay- ment methods, Medicare employed CPR. Both UCR and CPR are becoming rare.

Established in 1992, the RBRVS is a discounted fee schedule that Medicare uses to reimburse physicians. The RBRVS is a payment method that classifies health services based on the cost of providing physician ser- vices in terms of effort, practice expenses (overhead), and malpractice insurance.

Uncertainty for Third-Party Payers For third-party payers, the retrospective fee-for-service payment method has the disadvantage of great uncer- tainty. The payers have no way of knowing the total charges that will be incurred and for which they must reimburse the providers.

Criticism of Fee-for-Ser vice Reimbursement Critics of fee-for-service reimbursement assert that the method provides few incentives to control costs. In a fee-for-service environment, providers are reimbursed for each service they provide. The more services a provider renders, the more reimbursement the provider receives. Moreover, critics state that there is little incentive to order less expensive services rather than more expensive services. Therefore, some experts con- tend that fee-for-service reimbursement inappropriately inflates the costs of healthcare because the payment method rewards providers for more services, whether or not these services are warranted.

Managed Care In managed care reimbursement methods (discussed fully in chapter 5), third-party payers “manage” both the costs of healthcare and the outcomes of care. By managing care, these methods begin to address the criticism of fee-for-service reimbursement. In man- aged care plans, the third-party payer has implemented some provisions to control the costs of healthcare while maintaining quality care.

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Healthcare Reimbursement Methodologies 9

Features of Managed Care Common features of managed care include

• Comprehensiveness

• Coordination and planning

• Education of patients and providers

• Assessment of quality

• Control of costs

Purposes of Managed Care The two purposes of the management or control are to reduce the costs of healthcare for which the third-party payer must reimburse the providers and to ensure con- tinuing quality of care.

Managed care payers have instituted many means to control the costs and quality of healthcare. One example of a provision is the requirement that patients obtain prior approvals for surgeries. Another example is a hybrid of the discounted fee-based system in which the payer reimburses the provider up to a percentage of the allowable fee and the insured must pay the remain- ing percentage (Koch 2002, 109). Finally, having one primary care provider to coordinate all aspects of healthcare supports the quality of healthcare by reduc- ing fragmentation and enhancing integration.

Forms of Managed Care There are numerous forms of managed care. These forms include health maintenance organizations (HMOs), exclusive provider organizations (EPOs), point-of-service plans (POSs), and preferred provider organizations (PPOs). One can imagine these forms as a continuum of control, with the HMOs representing the most controlled and the PPOs representing the least controlled.

Criticisms of Managed Care Some critics of managed care argue that managed care too severely limits the following capabilities:

• Patients’ access to care and their freedom to choose healthcare providers

• Providers’ ability to order diagnostic tests and therapeutic procedures

These critics contend that administrators rather than medical and health personnel are making deci- sions about patients’ health futures.

Episode-of-Care Reimbursement Episode-of-care reimbursement is a healthcare pay- ment method in which providers receive one lump sum for all the services they provide related to a condition or disease. In the episode-of-care payment method, the unit of payment is the episode, not each individual health service. Therefore, the episode-of-care pay- ment method eliminates individual fees or charges. The episode-of-care payment method is an attempt to correct perceived faults in the fee-for-service reimbursement method. Thus, the episode-of-care reimbursement method controls costs on a grand or systematic scale.

An episode of care is the health services that a patient receives

• For a particular health condition or illness

• During a period of relatively continuous care from a provider

In the episode of care, one amount is set for all the care associated with the condition or illness. Forms of episode-of-care reimbursement are the capitated pay- ment method, the global payment method, and the prospective payment method.

Occasionally, an episode of care is defined as a specific number of days. The federal government’s payment method for home care services is an example. The per-episode home health payment covers all home care services and nonroutine medical supplies delivered to the patient during a 60-day period.

Capitated Payment Method The capitated payment method, or capitation, is a method of payment for health services in which the third-party payer reimburses providers a fixed, per capita amount for a period. “Per capita” means “per head” or “per person.” A common phrase in capitated contracts is “per member per month” (PMPM). The PMPM is the amount of money paid each month for each individual enrolled in the health insurance plan. Capitation is characteristic of HMOs.

In capitation, the actual volume or intensity of services provided to each patient has no effect on the payment. More services do not increase the payment, nor do fewer services decrease the payment. If the pro- vider contracts with a third-party payer to provide services to a group of workers for a capitated rate, the provider receives the payments for each member of the

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group regardless of whether all the members receive the provider’s services. There are no adjustments for the complexity or extent of the health services.

Example:

Z Company has a health insurance plan for its workers and their families through Wellness HMO. Wellness HMO has contracted with Dr. T to provide health services (care) to members of the Z Company group for the capitated rate of $15 per month ($15 PMPM).

Dr. T is under contract to receive $15 per month for every member of the Z group. The members of the Z group total 100. Each month Dr. T receives $1,500 ($15 × 100 members) from Wellness HMO for the Z group. Dr. T receives $1,500 whether no members of the group see him in the clinic or all the members of the group see him in the clinic. Dr. T receives $1,500 whether all the members receive complex care for cancer or all the members receive simple care for preventive flu shots.

The advantages of capitated payment are that the third-party payer has no uncertainty and that the pro- vider has a guaranteed customer base. The third-party payer knows exactly what the costs of healthcare for the group will be, and the providers know that they will have a certain group of customers. However, for the provider, there is also great uncertainty because the patients’ usage of provider services is unknown and the complexity and cost of the services are unknowns.

Global Payment Method In the global payment method, the third-party payer makes one combined payment to cover the services of multiple providers who are treating a single episode of care. Thus, this payment method consolidates pay- ments. A block grant is a fixed amount of money given or allocated for a specific purpose. For example, in a block grant there is a transfer of governmental funds to cover health services. In the global payment method, there is no additional payment for higher volumes of services or more expensive or complex services.

Medicare’s payment system for home health ser- vices is an example of a global payment method. Vari- ous types of home health services are consolidated into the single payment. These services include all speech therapy, physical therapy, and occupational therapy; skilled nursing visits; home health aide visits; medical social services, and nonroutine medical supplies.

The most comprehensive version of the global payment system is the total-episode-of-care. For an episode of care, the total-episode-of-care payment rate is a single price that covers costs across the continuum of care, which could include all of the following:

• Facility costs across the continuum of care, such as hospital, nursing home, clinic, and outpatient rehabilitation

• Technical and professional components of procedures in radiology, pathology, and the laboratory

• Physician professional fees for anesthesia, surgery, and consultation

• Home care costs

Less comprehensive versions of the global payment method exist. For example, some global payment methods include only ambulatory costs or only inpatient costs. These methods are termed ambulatory- episode-of-care and inpatient-episode-of-care, respec- tively. Another less comprehensive version is a global surgical package. The global surgical package encom- passes the operation, local or topical anesthesia, a pre- operative clinic visit, immediate postoperative care, and usual postoperative follow-up. In outpatient dialysis facilities, bundling combines, into a single prospec- tive payment, the costs of dialysis services, injectable drugs, laboratory tests, and medical equipment and supplies (Medicare Payment Advisory Commission 2010, 1–2). In the special-procedure package, all the costs associated with a diagnostic or therapeutic pro- cedure are included in the payment. Examples include extracorporeal shock wave lithotripsy and vasectomy. Another common package is for obstetrical services. An ambulatory-visit package includes all ambulatory services, including the physicians’ charges, laboratory tests, x-rays, and other ambulatory services associated with one clinic visit. The per-episode home health payment is also a less comprehensive global payment rate. The single payment covers all home care services and nonroutine medical supplies that a patient receives during a 60-day period.

As can be seen, third-party payers and providers have created multiple variations of the global payment method. The multiple variations, however, have added to the complexity of healthcare reimbursement.

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Healthcare Reimbursement Methodologies 11

Prospective Payment Methods In the prospective payment method, payment rates for healthcare services are established in advance for a specific time period. The predetermined rates are based on average levels of resource use for certain types of healthcare. It is important to note that prospective pay- ment methods are based on averages. On individual patients, providers can lose money or make money, but over time, providers should come out even. Payment is determined by the resource needs of the average patient for a set period of time or given set of conditions or dis- eases. Prospective payment methods representing these two situations are per diem payment and case-based payment, respectively.

Providers are paid the preestablished rates regard- less of the costs they actually incur. Therefore, prospec- tive payment is another method in which the actual number or intensity of the services does not affect a preestablished compensation. The intent of prospec- tive payment methods is to reduce the likelihood that charges will increase because limits on payments are preset for the future time period.

Per Diem Payment Per diem, or per day (daily rate), is a limited type of prospective payment method. The third-party payer reimburses the provider a fixed rate for each day a covered member is hospitalized. The Indian Health Service and some supplemental health insurance plans use per diem methods. Traditionally, the per diem pay- ment method has been used to reimburse providers for inpatient hospital services.

Third-party payers set the per diem rates using historical data. For example, to establish an inpatient per diem, the total costs for all inpatient services for a population during a period are divided by the sum of the lengths of stay in the period. To determine the payment, the per diem rate is multiplied by the number of days of hospitalization. In the absence of historical data, third-party payers and providers must consider several factors to establish per diem rates. These factors include costs, lengths of stay, volumes of service, and patients’ severity of illness.

Critics of the per diem payment method contend that the method encourages providers to increase the number of inpatient admissions, to extend the lengths of stay, or both. These strategies would result in increased reimbursements. Another prospective payment method,

case-based reimbursement, corrects the flaws perceived in the per diem payment method.

Case-Based Payment In the case-based payment method, providers receive a fixed, preestablished payment for each case. Cases are patients, residents, or clients who receive health services for a condition or disease. Third-party payers reimburse providers for each case rather than for each service (fee-for-service) or per diem.

Example:

Two patients were hospitalized with pneumonia. One patient was hospitalized for three days, and the other patient was hospitalized for 30 days. Each patient is a case. The third-party payer has established a payment rate for cases with pneumonia. The hospital would receive two payments, exactly the same, for the two cases.

The payment is determined by the historical resource needs of the average patient for a given set of conditions or diseases. Case-based payment can be one flat rate per case or can be multiple rates that represent categories of cases (sets of conditions or diseases).

An example of the case-based payment system built on categories of cases is Medicare’s method of payment for inpatient hospital services (prospective payment system, or PPS). This method of payment is based on categories of payment called Medicare- severity diagnosis-related groups (MS-DRGs). Each MS-DRG categorizes patients who are homogeneous in terms of clinical profiles and requisite resources. Thus, patients classified to the same group have similar diagnoses and treatments, consumption of resources, and lengths of stay. Each MS-DRG has a payment rate called a weight. Weights are relative to one another. Higher weights are associated with groups in which patients require more resources for care and treat- ment. Higher resource consumption is related to higher intensity of services due to the severity of illness or the types of services needed for care and treatment, such as expensive equipment or medications. Higher weights translate into higher payments.

MS-DRGs are sensitive to resource complexity and severity of illness (Bowman 2007, 16). To make MS-DRGs sensitive to resource complexity and sever- ity of illness, diagnosis codes were classified into three

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12 Chapter 1

Check Your Understanding 1.1

1. Insurers pool premium payments for all the insureds in a group, then use actuarial data to calculate the group’s premiums so that a. Premium payments are lowered for insurance plan

payers b. The pool is large enough to pay losses of the entire

group c. Accounting for the group’s plan is simplified d. All of the above are reasons for using the data

2. Where and when did health insurance become established in the United States?

3. All of the following are types of episode-of-care reimbursement except a. Global payment b. Prospective payment c. Capitation d. Self-insured plan

4. What discounted fee schedule does Medicare use to reimburse physicians?

5. Name and describe some versions of the global payment method.

Trends in Healthcare Reimbursement

Four trends affect the entire healthcare sector. The first trend is federal dominance in providing innovative healthcare payment methods (Mayes and Berenson 2006, 2). The second trend is continued increased spending in the sector. This trend underlies two other trends: efforts to reform the healthcare system and initiatives to extend the sector’s adoption and use of health information and communication technologies. This section addresses these trends.

Dominance of Federal Healthcare Payment Methods The federal government is the dominant player in the healthcare sector. The federal Medicare program is the largest single payer for health services (Mayes and Berenson 2006, 2). Medicare is a health insurance pro- gram for senior citizens, people with disabilities, and people with end-stage kidney disease (see chapter 4 for full description). In addition, “Medicare provides significant funds for medical education, research, and the care of disadvantaged and vulnerable people”

hierarchical levels in terms of their severity. The extent to which these diagnoses increased consumption of hospital resources was then evaluated. Next, the MS-DRGs’ weights were aligned to their consumption of resources due to their resource complexity or severity of illness. Higher weights were assigned to MS-DRGs that required higher resource consumption, with lower weights being assigned to MS-DRGs that required fewer resources.

Several US federal payment methods are case- based prospective payment methods. For example, in table 1.2, the following payment systems are some of the case-based prospective methods: inpatient acute- care hospital, skilled nursing facility, home health agency, outpatient hospital services, inpatient rehabili- tation facility, and long-term care hospital.

In summary, the relatively weighted group is the basic unit of payment. Higher relative weights link to higher payment rates.

Criticisms of Episode-of-Care Reimbursement The impact of the case-based payment method is that it rewards effective and efficient delivery of health ser- vices and penalizes ineffective and inefficient delivery. The case-based payment rates are based on averages of costs for patients within the group. Generally, costs for providers that treat patients efficiently and effectively are beneath the average costs. The providers make money in this situation. On the other hand, providers that typically exceed average costs lose money. Ineffi- ciencies include duplicate laboratory work, scheduling delays, and lost reports. Many healthcare organiza- tions have implemented procedures to streamline the delivery of health services to offset inefficiencies. Poor clinical diagnostic skills are an example of inef- fectiveness. Thus, the more efficiently and effectively a provider delivers care, the greater its operating mar- gin will be.

Some consumer advocates have voiced concerns about episode-of-care reimbursement. These advocates have noted that the payment method creates incentives to substitute less expensive diagnostic and therapeutic procedures and laboratory and radiological tests and to delay or deny procedures and treatments. Health- care analysts, on the other hand, point out the savings associated with eliminating wasteful or unnecessary procedures and tests and that volume and expense do not necessarily define quality.

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Healthcare Reimbursement Methodologies 13

(Mayes and Berenson 2006, 2). In addition, the federal government pays about two-thirds of the costs of the joint state–federal Medicaid program. Medicaid provides reimbursement for health services received by low-income persons and families (see chapter 4 for full description). In 2009, the federal portion of Medicaid was $243.2 billion (Kaiser Family Founda- tion n.d.). Moreover, the federal government also pays for health services for other populations, including active-duty and retired military personnel and their families, veterans, American Indians, and injured and disabled workers (Knickman 2011, 55). Thus, much of the healthcare sector relies on the federal government for reimbursement.

Given the size of the federal role in healthcare reim- bursement, any changes that the federal government makes in its reimbursement methods profoundly affect providers, other health insurers, and the healthcare system. For instance, other payers follow Medicare’s lead in changes to payment methods (Mayes and Berenson 2006, 2). Many current healthcare reimburse- ment methodologies are refinements and derivations of Medicare’s PPS for inpatient hospital services. The federal government is the first mover in the US health- care system (Mayes and Berenson 2006, 2).

Constantly Increasing Healthcare Spending Each year, national spending on healthcare increases. This increased spending is a concern because money is a limited resource. As spending on healthcare increases, the money available for other sectors of the economy, such as education or roads, decreases.

The trend of increased spending on healthcare has been consistent for more than a decade. Table 1.5 shows the percentage increases for selected years. Although the percentages appear small, they represent billions of dollars. For example, in 2002, $1.67 trillion was spent on healthcare, which equaled $5,440 per person in the United States (Levit et al. 2004, 147). In 2009, $2.5 tri llion was spent on healthcare, which equaled $8,086 per person (Martin et al. 2011, 11). At this rate of increase, healthcare spending is projected to reach 19.6 percent of the gross domestic product (GDP) by 2019, up from 13.7 percent in 1993 (Sisko et al. 2010, 1937).

Over the past decade, the rate of increase has grad- ually decelerated. This slightly slowed rate of increase is shown by the decreasing percentage of increase per

year (table 1.5). Primary factors in this slowing rate of increase are the economic recession (Martin et al. 2011, 11) and declining expenditures on prescriptions (Catlin et al. 2007, 143; Hartman et al. 2009, 246). It should be emphasized, however, that despite this decel- eration, the trend of increasing healthcare expenditures continues.

Healthcare Reform The belief that continued increases in healthcare spend- ing are unsustainable keeps policy makers focused on the issue of healthcare reform. In addition the economic crisis beginning in 2008 stimulated discussion of healthcare reform as a means to save money at multiple levels: federal and state governments, employers, and individuals. The exact parameters and framework of healthcare reform are an ongoing debate.

Potential Models Policy makers have multiple models of healthcare systems to consider as they weigh provisions of health- care reform. Healthcare personnel should be aware of these models because they are often referenced during discussions of healthcare reform. Healthcare policy makers compare the US model to these models and, depending on the policy maker’s view, the compari- son reflects negatively or positively on the US model. For example, the Canadian system is “considerably” simpler than the US system (Sessions and Detsky 2010, 2078). On the other hand, “one-fourth or more of Canadian … adults reported having to wait six days

Table 1.5. Percentage increase in total national healthcare spending over time (selected years)

2002 2005 2006 2007 2008 2009

9.3%a 6.9%b 6.7%c 6.1%d 4.7%e 4.0%f

aSmith, C., et al. 2005. Health spending slows in 2003. Health Affairs 24(1):185–194. bCatlin, A., et al. 2007. National health spending in 2005: The slowdown continues. Health Affairs 26(1):142–153. cCatlin, A., et al. 2008. National health spending in 2006: A year of change for prescription drugs. Health Affairs 27(1):14–29. dHartman, M., et al. 2009. National health spending in 2007: Slower drug spending contributes to lowest rate of overall growth since 1998. Health Affairs 28(1):246–261. eMartin, A., et al. 2011. Recession contributes to slowest annual rate of increase in health spending in five decades. Health Affairs 30(1):11–22. fIbid.

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14 Chapter 1

or more to see a doctor or nurse when sick,” compared with US adults, who reported “quick access” (Schoen et al. 2010, 2328). The models vary on the sources of funding, number and type of payers involved, and the levels of healthcare services.

• Social insurance model or Bismarck model. Introduced in 1883 by German Chancellor Otto von Bismarck, this model is the oldest in the world (Frogner et al. 2011, 72). The foundation of this model is universal coverage for a set of benefits defined by the national government. In this model, every worker and employer must contribute to sickness funds. Sickness funds are agencies that collect and redistribute money per government regulations; they are a form of social security. The amounts of the contributions are proportionate to workers’ and employers’ incomes. Workers can choose among competing sickness funds (Frogner et al. 2011, 72). With varying modifications, France, Japan, the Netherlands, and many other countries have adopted this German model.

• National health service model or Beveridge model. In 1946, Sir William Beveridge cre- ated the national health service model for the United Kingdom (Frogner et al. 2011, 72). In the United Kingdom, the government owns the clinics and hospitals and pays the doctors and health personnel who work in these pub- lic facilities. This government-run model is a single-payer health system—the UK govern- ment is the only payer. The healthcare system is financed by the country’s general revenues. The general revenues come from taxes that increase in proportion to income (progressive tax) (Frogner et al. 2011, 72). With varying modifications Spain and the Scandinavian countries have adopted this model.

• National health insurance model. This model combines various aspects of the Bismarck and Beveridge models. Canada, South Korea, and other countries have adopted this hybrid model. For example, in terms of one hybrid, Canada uses a single-payer (not multiple sick- ness funds), but it has many private providers of health services (Frogner et al. 2011, 72).

• Private health insurance model. In this model, many private health insurance companies exist. The private health insurance companies col- lect premiums to create a pool of money. This pool of money is used to pay health claims (see chapter 3). Similar to the Bismarck model, workers and employers contribute to the pool. Unlike the Bismarck system, the insurance company determines the contribution and this contribution is not based on the employees’ incomes (Frogner et al. 2011, 73). The United States and Switzerland use the private health insurance model. In Switzerland, governmental regulation of health insurance is greater than in the United States (Frogner et al. 2011, 73).

Universal Healthcare Coverage The US healthcare reform legislation was modeled after the healthcare reforms enacted in Massachusetts in 2006 (Long and Stockley 2010, 1234). The Massachusetts model is a version of universal healthcare coverage. Universal healthcare is a system of healthcare that pro- vides a basic level of healthcare for everyone (Rashford 2007, 4). A basic level of healthcare includes family physician or general practitioner services; preventive, specialty, and surgical care; hospitalization; rehabili- tative services; long-term care; and prescription drug coverage (Rashford 2007, 4).

Massachusetts’ model is an incremental reform effort because it does not mandate a single payer. Unlike fundamental healthcare reform, incremental healthcare reform preserves the basic (fundamen- tal) structures of a system. Thus, in Massachusetts’ incremental healthcare reform, the structure of mul- tiple payers stayed intact. In Massachusetts’ model, small group and individual insurance companies are under the oversight of a connector. A connector is an independent state agency that regulates the policies (contracts) for healthcare insurance coverage offered by the small group and individual healthcare insurance companies (Brennan and Mello 2009, 1815).

The goal of this reform effort is for 99 percent of the state’s residents to have health insurance coverage (figure 1.1). In one step to achieve this goal, Massachu- setts mandated that all people 18 years and older have a minimum level of healthcare insurance (Hart 2009, 77). This minimum level of healthcare insurance is known as minimum creditable coverage and includes coverage

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Healthcare Reimbursement Methodologies 15

for preventive and primary care, hospitalization, mental health benefits, and prescription drugs (Hart 2009, 77). In another step to achieve the goal, the state’s healthcare reform law requires that employers with 11 or more full- time employees offer group health insurance to their employees and pay a fair share of the monthly premi- ums (Community Resources Information, Inc., 2011). The law assesses tax penalties for individuals who do not obtain health insurance. Employers in noncompli- ance are assessed a fair share contribution (Community Resources Information, Inc., 2011). Phased in gradually, Massachusetts’ universal healthcare plan began in 2006 with subsidized coverage and, in each subsequent year, expanded access and increased assessments for non- compliance (Massachusetts Health Insurance Connector Authority 2008, 1). The next phase of Massachusetts healthcare reform is payment reform (Massachusetts Health Insurance Connector Authority 2011, 30).

In the summer of 2008, two years into the reform effort, 97.4 percent of Massachusetts’ residents had health insurance coverage (Long et al. 2008). Despite the recession, during which workers lost their jobs and thus their employer-based health insurance, the percentage of insured residents increased to 98.1 percent in 2010 (Massachusetts Division of Health Care Finance and Policy 2010, 1). This increase was mostly related to expanded health insurance coverage for children (Massachusetts Division of Health Care Finance and Pol- icy 2010, 1). Thus, in terms of coverage, Massachusetts’

model has been successful; Massachusetts has the highest percentage of residents with healthcare insur- ance in the United States (Massachusetts Division of Health Care Finance and Policy 2010, 6).

Residents’ support for the state program has increased from 61 percent in September 2006 to 69 percent in June 2008 and was sustained dur- ing the economic recession (Massachusetts Health Insurance Connector Authority 2008, 2, 6; Long and Stockley 2010, 1239). Notably, 70 percent of practic- ing Massachusetts physicians support the state’s health care reform law and 75 percent want the law to remain (SteelFisher et al. 2009, e39[2]).

Critics of Massachusetts’ model note that Massachusetts had relatively few uninsured before the reform. Therefore, they do not believe that Massachusetts’ model would work in states with many uninsureds (Brennan and Mello 2009, 1815). Plus, in Massachusetts, most of the healthcare insurance com- panies are local and nonprofit. In some other states, the healthcare insurance companies are national and for- profit. These national healthcare insurance companies may decide not to participate in a state-run program (Brennan and Mello 2009, 1815).

Finally, though, Massachusetts’ healthcare reform was the model for the nation’s healthcare reform. Therefore, health professionals should monitor events in Massachusetts. Massachusetts’ experiences may indicate the future progression of the nation’s healthcare reform.

Affordable Care Act In 2010, healthcare reform legislation passed the US Congress and was signed by the president. This legisla- tion was the Patient Protection and Affordable Care Act of 2010 (P.L. 111–148), as amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111–152). Collectively, these two acts are known as the Affordable Care Act (ACA or PPACA; sometimes they are erroneously referred to as the Accountable Care Act).

Passing the ACA legislation evolved from the consensus that policy makers reached in 2008 that the US healthcare system was too expensive (Aaron 2009, W184; Grassley 2009, 2397). US citizens and third-party payers were not getting what they paid for (Connolly 2008, A01). For example, in 2007, the US economy lost $207 billion because of poor health and shorter life spans of the uninsured (Cortese and Korsmo 2009, W173). Thus, the groundwork was laid for the ACA.

Figure 1.1. Provisions of universal health care in Massachusetts

Poorest individuals with incomes at or below 150 percent of the federal poverty level enroll in government-funded plans for free.

Low-income individuals and families with incomes between 151 and 300 percent of the federal poverty level purchase health insurance with government subsidies based on a sliding scale (varying to match income and ability to pay).

Companies with 11 or more employees must provide insurance or establish accounts allowing employees to purchase health insurance with pretax dollars (noncompliance results in a penalty of $295 per worker per year).

Individuals who fail to obtain insurance with incomes above 150 percent of the federal poverty level and for whom health insurance was deemed affordable, pay tax penalties based on income, age, and family size for each month of noncompliance.

Source: Community Resources Information, Inc. 2011. Massachusetts health insurance requirements: Health Care Reform Act. http://www. massresources.org/health-reform.html.

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16 Chapter 1

Purposes The ACA builds on existing systems to address three core problems of the US health system: cost, access, and quality (Ricketts and Nielsen 2010, 214; Silberman et al. 2011, 155). Therefore, the purposes of the ACA are to

• Decelerate the rate of increase in health- care costs

• Improve population health, healthcare access, and healthcare quality (Silberman et al. 2011, 155)

The first purpose is easily understood given the chap- ter’s previous discussion on the ever-increasing health- care spending and policy makers’ consensus. The second purpose is the result of many observations of unsafe and poor-quality care, inequitable care, and lack of access to care in the US health system. Selected examples of these observations are provided in the next few paragraphs.

Two reports from the Institute of Medicine (IOM) particularly highlighted unsafe and poor-quality care in the US health system. In its 2000 report To Err Is Human, the IOM reported that research studies had shown that between 44,000 and 98,000 people die per year as a result of medical errors (Institute of Medicine 2000, 1). More people died from medical errors than from motor vehicle accidents (43,458) or from breast cancer (42,297) (Institute of Medicine 2000, 1). The IOM’s second landmark report, Crossing the Quality Chasm, showed that thousands of Americans frequently do not receive medical care to meet their needs or care based on the best scientific knowledge (Institute of Medicine 2001, 1). Per the report, “quality problems are everywhere and affecting many patients” (Institute of Medicine 2001, 1). More than a gap, a chasm exists between the care that Americans should receive and what they actually receive (Institute of Medicine 2001, 1). The two reports did have an impact on the US healthcare delivery system. In the decade since the publication of To Err Is Human, health- care organizations have slightly progressed in reducing harm and increasing patient safety (Wachter 2010, 172). Similarly, slight progress has been made in bridging the quality chasm. There are “pockets of excellence … in particular services at individual health care facilities” (Chassin and Loeb 2011, 562). However, “maintain- ing consistently high levels of … quality over time and across all healthcare services and settings” has eluded the health system (Chassin and Loeb 2011, 562).

International comparisons support this assessment of the US healthcare system’s quality. Annually, the Organization for Economic Cooperation and Develop- ment (OECD) monitors the performance of the health systems of 34 industrialized countries (Squires 2011, 1). A recent analysis was conducted of the OECD’s data on population health status, health resources, and utilization for 12 countries (Australia, Canada, European countries, New Zealand, and the United States). On quality mea- sures, the performance of the US healthcare system is variable (Squires 2011, 2). The US system ranks very highly on five-year cancer survival, in the middle for in- hospital case-specific mortality, and poorly on hospital admissions for chronic diseases and amputations due to diabetes (Squires 2011, 2). As indicated by these analy- ses, the US healthcare system, despite being the most expensive among these 12 countries, does not result in superior outcomes and, instead, could be improved.

Health disparities represent an inequity in the US healthcare system. Health disparities are defined as “population-specific differences in the presence of disease, health outcomes, quality of healthcare and access to healthcare services—that exist across racial and ethnic groups” (National Conference of State Legislatures 2012, n.p.). A significant body of research prompted the Congress to request that the IOM assess the extent of racial and ethnic differences in healthcare and evaluate potential sources of these differences. The result was the IOM’s 2003 report, Unequal Treatment: Confronting Racial and Ethnic Disparities in Health Care (Smedley et al. 2003, 3–4). Factors associated with health disparities are inadequate access to care, poor quality of care, genetics, residence in an under- served community, and personal behaviors (National Conference of State Legislatures 2012, n.p.) (see also discussion in chapter 5). One recent study assessed progress in the Veterans Health Administration health- care system toward reducing health disparities since the 2003 IOM report (Trivedi et al. 2011, 707). The veterans healthcare system is the largest integrated health delivery system in the United States (US Department of Veterans Affairs 2011). Its progress toward reducing health disparities could be indicative of what lies ahead for the entire country. Analysis of the study’s results showed that, between 2000 and 2009, racial disparities were minimal for some aspects of care. However, significant reductions in health disparities in the control of blood pressure, glucose (diabetic blood sugar), and cholesterol did not occur (Trivedi et al. 2011, 713). Health disparities represent

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Healthcare Reimbursement Methodologies 17

inefficiencies in the healthcare delivery system and result in unnecessary costs to all patients, providers, and payers (National Conference of State Legislatures 2012, n.p.). Between 2003 and 2006, these unnec- essary costs totaled $229.4 billion in direct medi- cal expenditures (LaVeist et al. 2011, n.p.). When adding the direct medical expenditures and indirect costs, such as premature death, the overall com- bined costs for health disparities were $1.24 trillion (LaVeist et al. 2011, n.p.).

Lack of access to care can result from many factors (Department of Health and Human Services, n.d.). One factor is a lack of healthcare insurance. People who lack healthcare insurance may either be uninsured (no insurance) or underinsured (insurance is inadequate with limited benefits or very high premiums or other fees). In 2010, the number of uninsured and underin- sured people totaled 81 million (44 percent of adults 19 to 64), with 52 million uninsured and 29 million underinsured. This number is an increase from 2003, which reported 61 million uninsured and underinsured, and 2007, which reported 75 million (Schoen et al. 2011, 1764). Although the number of uninsured has been an ongoing concern, there also was a signifi- cant increase in the number of underinsured (Schoen et al. 2011, 1769). Finally, overall, between 2001 and 2010, the number of uninsured increased 37 percent (Collins et al. 2011, xi).

The number of uninsured and underinsured people is related to the level of uncompensated care that hos- pitals, physicians, dentists, and other health providers render. Uncompensated care is an overall measure of services provided for which no payments were received from the patient, client, or third-party payer (American Hospital Association 2010, 1). It is the sum of the healthcare organization’s bad debts and charity care (American Hospital Association 2010, 1). Bad debts are services for which healthcare organizations expected, but did not receive, payment (American Hospital Association 2010, 2). Charity care consists of services for which healthcare organizations did not expect payment because they had previously determined the patients’ or clients’ inability to pay (American Hospital Association 2010, 2). Uncompensated care represents a significantly increasing cost to health- care organizations. For example, between 2005 and 2006, uncompensated care increased 8.3 percent, from $28.9 billion to $31.2 billion (American Hospital Association 2010, 4; Evans 2007, 8–9). The American Hospital Association reported a similar increase

between and 2009 and 2010. Between 2008 and 2009, uncompensated care increased from $36.4 billion to $39.1 billion (7 percent) (Carlson 2010, 10). Uncom- pensated care is healthcare organizations’ total costs for unreimbursed services to medically indigent or underinsured patients and clients (American Hospital Association 2010, 2). These data detail only the costs to inpatient acute-care hospitals; across the healthcare delivery system, providers in other settings, such as physician and dental practices, are also bearing the costs of uncompensated care.

Provisions The Patient Protection and Affordable Care Act as amended by the Health Care and Education Recon- ciliation Act has 10 titles (chapters) (US Government Printing Office 2010a, 2010b). These 10 titles are subdivided into subtitles, parts (only occasionally), and sections. The number of subdivisions among the titles varies, depending on the extent and complexity of the title’s content. The requirements in the titles and their subdivisions will be phased in between 2010 and 2020 (National Rural Health Association, n.d.). Brief over- views of key points in the titles are provided:

• Title I: Quality, Affordable Health Care for All Americans ° Makes purchasing health insurance easier

and more affordable for many people and small businesses.

° Defines an essential benefits package (Kaiser Family Foundation 2011, 5).

° Requires most US citizens and legal residents to have health insurance (tax penalties for noncoverage begin in 2014).

° Extends health insurance benefits to dependent children up to age 26 (Kaiser Family Foundation 2011, 1, 4).

° Includes premium and cost-sharing credits (subsidies) for eligible poor individuals and families.

° Creates state-based health insurance exchanges (American Health Benefit Exchanges and Small Business Health Options Program-SHOP-Exchanges).

° Strengthens the system of employer-based health insurance (assesses penalty against employers with 50 or more full-time employees who do not offer health insurance benefit beginning 2014).

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18 Chapter 1

° Provides a tax credit to employers with less than 25 employees and average annual wages of less than $50,000 that purchase health insurance for employees (Kaiser Family Foundation 2011, 3).

• Title II: Role of Public Programs ° Extends Medicaid coverage to uninsured

people, such as low-income adults (up to 133 percent of federal poverty level) who had previously been excluded from Medicaid coverage (see chapter 4 for full discussion of Medicaid) (Kaiser Family Foundation 2011, 1; Silberman et al. 2011, 155).

° Requires states to maintain current income eligibility levels for children in Medicaid and Children’s Health Insurance Program (CHIP) until 2019 and extend funding for CHIP through 2015 (Kaiser Family Foundation 2011, 2).

° Provides states with new options for offering home and community-based health services through Medicaid (Kaiser Family Foundation 2011, 11).

° Includes protections for American Indians and Alaska Natives.

• Title III: Improving the Quality and Efficiency of Health Care ° Focuses on enhancing Medicare by improv-

ing quality and controlling costs. ° Links quality outcomes and payment across

the continuum of care. ° Gradually closes gap (donut hole) for

coverage of prescription drugs (closed 2020) (Jackson 2010, 244).

° Expands Medicare coverage for screenings and preventive services (Jackson 2010, 244).

° Incrementally reduces higher payments of Medicare managed care until they equal fee-for-service payments (Jackson 2010, 243).

° Establishes, as an investigation into controlling costs, a national pilot program on payment bundling that includes inpatient physician services, outpatient hospital services, and post-acute-care services (Silberman et al. 2010, 228).

° Establishes a national strategy to improve the delivery of healthcare services, patient health, and population health, which includes redesignating the National Center on Minority Health and Health Disparities as the National Institute on Minority Health and Health Disparities (NIMHD) (Department of Health and Human Services 2011).

° Establishes a shared savings program through accountable care organizations (ACOs). (ACOs are primary care–led physician and hospital organizations that voluntarily form networks.) ACOs will provide coordinated care for at least 5,000 Medicare fee-for-service beneficiaries (Meyer 2011, 1227). ACOs “receive a share of the savings they produce for Medicare if they meet quality and cost targets” (Meyer 2011, 1227).

• Title IV: Prevention of Chronic Disease and Improving Public Health ° Creates Prevention and Public Health Fund

to expand prevention, wellness, and public health activities (funds increase from $500 million in 2010 to $2 billion in 2015) (Silberman et al. 2010, 226).

° Includes initiatives related to improving population health, particularly as recom- mended by the US Preventive Services Task Force (Silberman et al. 2010, 226).

° Supports innovation in prevention and pub- lic health, including data collection and analysis to understand health disparities.

• Title V: Health Care Workforce ° Expands existing sections of the Public

Health Service Act to further increase supply of health workforce (Ricketts and Walker 2010, 251).

° Provides, through the Departments of Labor, Education, and Treasury, a combination of grants, loans, work-study, tax credits, and student loan forgiveness (Department of Health and Human Services 2010).

° Establishes commission to coordinate supply and demand of health workforce (Ricketts and Walker 2010, 251).

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Healthcare Reimbursement Methodologies 19

° Primary care physicians and general surgeons practicing in underserved areas (federally designated as having too few primary care physicians) receive 10 percent bonus (2011 through 2015) (Silberman et al. 2010, 219).

• Title VI: Transparency and Program Integrity ° Requires disclosure of ownership or

investment interests. ° Enhances federal integrity programs

to eliminate fraud, waste, and abuse in Medicare, Medicaid, and Children’s Health Insurance Program.

° Creates new research institute that evaluates and funds research that compares outcomes, effectiveness, and risks of medical treatments, services, drugs, biological, and medical devices (Silberman et al. 2010, 227).

• Title VII: Improving Access to Innovative Medical Therapies ° Includes provision for approval of biosimi-

lars (generic biological agents) and expands the affordable medicines program.

• Title VIII: CLASS (Community Living Assis- tance Services and Support) Act ° Establishes a national, voluntary health

insurance program for purchasing community living assistance and supports (Kaiser Family Foundation 2011, 11).

• Title IX: Revenue Provisions ° Includes provisions that affect the Internal

Revenue Code, such as excise taxes on high-cost, employer-based health insurance plans; inclusion on W-2 forms; use of health savings and flexible spending accounts; fees on health insurance providers; and hospital insurance tax on high-income taxpayers.

• Title X: Strengthening Quality, Affordable Care for All Americans ° Is known as the manager’s amendment

(Slifkin 2010, 5). ° Is a legislative mechanism in which

a package of numerous, individual, previously agreed-upon amendments is added to a bill (Mandal 2007, 278).

° With the Health Care and Education Reconciliation Act, Title X amends and supersedes the previous titles (Slifkin 2010, 5).

The ACA is comprehensive framework to address the core problems of the healthcare sector. As some experts state, the ACA is “the most sweeping piece of healthcare legislation since the enactment of Medicare and Medicaid in 1965” (Silberman et al. 2010, 215). Yet, the ACA is still a work in progress (Gorin 2011, 83; Silberman et al. 2011, 215). Federal agencies must develop regulations to implement the ACA. The details of these regulations will be worked out over several years. The ACA is not “perfect”; it “does not address all of our current health system woes” (Silberman et al. 2010, 230). Revisions should be expected as providers, analysts, and policy makers learn what works and what needs to be changed (Silberman et al. 2010, 230).

Full implementation of the healthcare reforms in the ACA is not ensured. The United States has a 90-year history of failure in healthcare reform (Fuchs 2009, W183). As early as 1912, President Theodore Roosevelt’s Bull Moose Party had universal health insur- ance as a plank in its campaign platform (Cansler 2011, 152). Prior to President Obama, Presidents Franklin Roosevelt, Truman, Eisenhower, Kennedy, Johnson, Nixon, Carter, and Clinton have all participated in the national healthcare debate (Cansler 2011, 152).

A leading obstacle to healthcare reform is that Americans lack an understanding of their healthcare system. “Most Americans do not have a good under- standing of how the health care system works, how the new legislation will affect them, which provisions will be implemented when, and how the expanding system will be financed” (Sparer 2011, 43). A second important obstacle is the sheer size and complexity of the US healthcare system. These characteristics make single, across-the-board changes difficult to implement without unintended consequences. Other experts also list “partisan bickering,” obstructionism by special interest groups, and the public’s fear of “big govern- ment” as potential obstacles (Cooper and Castle 2009, W170–W171). Other significant obstacles include the lingering economic recession, constitutional chal- lenges, and lack of appropriations (funding). Finally, the ACA may be repealed if Republican members of the House of Representatives succeed in their vow (Dalen 2011, 575; Goldstein and Aizenman 2011).

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20 Chapter 1

Use of Health Information and Communication Technologies Throughout the world, US tourists can use automated teller machines (ATMs) to get cash from their US bank accounts. On the other hand, in their hometowns, US patients must repeatedly provide their health informa- tion as they seek health services from different physician offices or the hospital. Little linkage and exchange of health information exists. Linkage among healthcare pro- viders in different health information systems (interoper- ability) is still an unrealized goal (Jha et al. 2009, 1636).

The US healthcare industry has not adopted infor- mation and communication technologies at the same rate as other developed nations. Significant diffusion of electronic health records (EHRs) has occurred in Europe, although the rate does vary among countries. For example, the Netherlands has one of the highest rates of diffusion. In the Netherlands, about 98 percent of general practitioners use EHRs (Jha et al. 2008, 850). In the United Kingdom, between 89 and 97 percent of general practitioners use clinical documentation systems (Jha et al. 2008, 850). About half of German general practitioners use an EHR (Jha et al. 2008, 850). Usage rates of EHRs among general practitioners in Australia and New Zealand are similar to the rate in the United Kingdom. Contrast this diffusion of health information and communication technologies with the situation in the United States in 2008 and 2009. A national survey of physicians revealed that 4 percent had fully functional EHR systems and 13 percent had basic EHR systems (DesRoches et al. 2008, 50). Similarly, a national survey of hospitals revealed that 1.5 percent of hospitals had comprehensive EHR systems and 7.6 percent had basic EHR systems (Jha et al. 2009, 1628).

To address this lack of significant diffusion, full implementation of health information and communica- tion technologies became a national priority (Fleming et al. 2011, 481). In 2009, Congress passed the Health Information Technology for Economic and Clinical Health (HITECH) Act as part of the American Rein- vestment and Recovery Act (ARRA). The HITECH Act promoted the adoption and use of EHRs and other health information and communication technologies. The ACA built upon the HITECH Act. The ACA rec- ognizes that health information technology (IT) is criti- cal to achieving improvements in the quality of care, the system’s efficiency, and the overall health of the US population (Office of the National Coordinator for Health Information Technology 2011, 21).

The HITECH Act included $19.2 billion for health IT (Blumenthal 2009, 1477). Of the $19.2 billion, $17.2 billion was for financial incentives to physicians and hospitals. These incentives are processed through the federal reimbursement systems for physicians and hospitals (additional details in chapters 7 and 10). For related grants and loans, an additional $2 billion was administered through the Office of the National Coordinator (ONC) for Health Information Technology (Steinbrook 2009, 1058).

The HITECH Act also required that the ONC for Health Information Technology update the 2008 federal strategic plan for health IT (Office of the National Coor- dinator for Health Information Technology 2011, 4). Therefore, in 2011, the ONC, partnering with other federal agencies, published an updated plan for 2011 through 2015. The federal strategic plan for health IT includes the following goals (Office of the National Coordinator for Health Information Technology 2011, 4–5):

• Goal I: Achieve Adoption and Information Exchange through Meaningful Use of Health IT

• Goal II: Improve Care, Improve Population Health, and Reduce Health Care Costs through the Use of Health IT

• Goal III: Inspire Confidence and Trust in Health IT

• Goal IV: Empower Individuals with Health IT to Improve their Health and the Health Care System

• Goal V: Achieve Rapid Learning and Technological Advancement

National progress on these goals will result in a future, beyond 2015, in which healthcare is transformed. Characteristics of the transformed healthcare system include the following (Office of the National Coordinator for Health Information Technology 2011, 4):

• Enhanced ability to study the delivery of healthcare and its payment systems

• Empowered individuals and increased transparency

• Improved care, efficiency, and population health outcomes

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Healthcare Reimbursement Methodologies 21

A recent study provides insights into the great magnitude of this task. Central to achieving Goal I is the linkage and exchange of health information. To facilitate the exchange of health information, policy makers have focused on the establishment of regional health information organizations (RHIOs) (Adler-Milstein et al. 2011, 666; Department of Health and Human Services 2008). Exchanging health information is believed to be key to coordinating health services, thereby improving the quality of care and reducing its cost. In 2010, a survey found that 14 percent of acute-care hospitals and 3 percent of ambulatory practices participated in 75 operational RHIOs. However, of the 75 operational RHIOs, only 13 supported the core criteria of meaningful use (Adler-Milstein et al. 2011, 669). Participating in these 13 RHIOs were 3 percent of all acute-care hospitals and 0.9 percent of all US physician practices. Meaningful use is providers’ use of EHRs to achieve significant improvements in health services. Meaningful use includes entering basic patient data; using software applications to improve safety and quality, such as order entering and electronic prescriptions; exchanging health information; and submitting clinical quality and other measures (Blumenthal and Tavenner 2010, 501, 503). Finally, of these 13 RHIOs, only six were financially viable. The likelihood of RHIOs’ success in improving care and reducing costs is questionable based on these findings (Adler-Milstein et al. 2011, 670).

The authors of the federal strategic plan for health IT recognize that the healthcare environment is dynamic. They have taken into account that the plan may require future updating based on experiences in implementing meaningful use (Office of the National Coordinator for Health Information Technology 2011, 4).

Chapter Summary

The US healthcare system is complex, partially because health insurance and employment are closely linked. Multiple methods exist to reimburse hospi- tals, physicians, and other health providers for the healthcare they render patients. Because recompense occurs after the healthcare has been provided, the term used is reimbursement. Two major types of payment methodologies—fee-for-service reimbursement and episode-of-care reimbursement—are based on the unit of payment. Other descriptive characteristics of health- care payment methods are time frame and bearer of risk.

Important contemporary reimbursement methods are retrospective fee-for-service, managed care, capitation, global payments, and prospective payment systems. Healthcare reform was begun in 2010 with the passage of the ACA. The ACA is complex and comprehensive, and it has far-reaching consequences on healthcare reimbursement. Healthcare professionals need to moni- tor the continuing evolution of healthcare reimburse- ment methodologies.

Chapter 1 Review Quiz 1. Who are the first, second, and third parties in

healthcare situations?

2. Compare the UCR and CPR payment systems.

3. Describe the two purposes of managed care.

4. Why have many insurers replaced retrospective health insurance plans with group plans such as HMOs and PPOs?

5. What are advantages of capitated payments for providers and payers?

6. How do third-party payers set per diem payment rates?

7. Describe the major benefits of episode-of-care reimbursement according to its advocates and the major concerns about episode-of-care reimbursement expressed by its critics.

8. Why is the federal government a dominant player in the healthcare sector?

9. Why is the constant trend of increased national spending on healthcare a concern?

10. The national health service (Beveridge) model is different from the social insurance (Bismarck) model because the Beveridge model is financed by general revenue funds from fiscal taxes, whereas the Bismarck model is financed by workers’ and employers’ compulsory payroll contributions into sickness funds. True or false?

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