Chapter 3: Paying for Health Services

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CHAPTER 3 Paying for Health Services

Basic insurance concepts

Third-party payers

Reimbursement (payment) approaches

Medicare payment methods

Impact of reimbursement approach on provider incentives and risk

Coding

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For insurance to “work,” it must have these basic characteristics:

Pooling of losses

Payment only for random losses

Risk transfer

Indemnification

However, two problems often arise in insurance programs:

Adverse selection

Moral hazard

Insurance Concepts

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Adverse selection means those with greater risk are more likely to purchase insurance.

The problem exists because of asymmetric information.

Insurance companies use underwriting provisions to minimize adverse selection.

Cross-subsidies may exist among different groups.

Adverse Selection

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There are two opposing positions that insurers can take regarding underwriting:

Community rating

Experience rating

Insurers also typically include preexisting condition clauses.

The Health Insurance Portability and Accountability Act (HIPAA) sets national standards for underwriting:

Limits on preexisting conditions

Rights to purchase insurance

Consumer protection

Underwriting Provisions

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Moral hazard is the overuse of health services or forgoing of prevention because the individual does not bear the full cost of the consequences.

Insurers protect themselves by

deductibles,

copayment,

coinsurance,

stop-loss limits, and

policy restrictions.

Moral Hazard

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For the most part, provider revenues come from third-party payers rather than from patients.

Private insurers:

Blue Cross/Blue Shield

Commercial insurers

Self-insurers

Public insurers:

Medicare

Medicaid

Third-Party Payers

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MCOs combine insurance and provider functions.

Types of MCOs:

Health maintenance organizations (HMOs)

Provider panel

Gatekeeper

Preferred provider organizations (PPOs)

Less restrictive than HMOs

Various others

In general, MCOs attempt to limit utilization. Is this bad?

Managed Care Organizations (MCOs)

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Regardless of the payer, there are only a limited number of approaches to reimbursement (payment for services).

There are two broad categories:

Fee-for-service (FFS): Payment is tied to the amount of services provided:

Cost based

Charge based

Prospective payment

Capitation: Payment is tied to the patient population (number of enrollees).

Reimbursement Approaches

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Payer pays all allowable costs incurred in providing services.

Typically, periodic interim payments are made, with a final reconciliation at the end of each year.

Medicare used this method for hospital payment in its early years (1966–1983).

FFS: Cost-Based Reimbursement

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Payer pays billed charges for services rendered to covered patients.

Historically, all third-party payers paid for services on the basis of charges (chargemaster prices).

Some payers still use charges as the payment method but often negotiate a discount from full charges that usually ranges from 20 to 50 percent.

FFS: Charge-Based Reimbursement

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Prospective payment methods charge a fixed amount determined beforehand that is, at least in theory, unrelated to either costs or charges.

Prospective payment may be

per procedure,

per diagnosis (diagnosis-related group),

per diem (per day), or

bundled (global pricing) (episode of care).

FFS: Prospective Payment

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Capitation is different from FFS reimbursement.

Payment is not tied to utilization but rather to the number of covered lives.

Payment to providers usually is made on a per member per month (PMPM) basis.

It is used primarily by managed care organizations.

Capitation

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Many insurers are developing reimbursement methods that reward “performance.”

Most P4P plans provide extra amounts to providers that meet performance goals that are usually related to quality.

The idea is to incent providers to improve quality of care.

Do P4P plans benefit insurers?

Pay for Performance (P4P)

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Inpatient Prospective Payment System (IPPS) is designed to

reduce Medicare outlays,

provide cost-containment incentives, and

maintain quality of care.

Hospitals are paid a fixed amount per admission on the basis of diagnosis.

If cost is less than reimbursement, the hospital keeps the difference.

If cost is more than reimbursement, the hospital bears the loss.

Medicare Hospital Payments

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IPPS payments are based on 334 base diagnosis-related groups (DRGs), which are further subdivided into 745 MS-DRGs based on complications. (MS stands for medical severity.)

Each MS-DRG has an assigned relative weight. The more complex the diagnosis and complications are, the higher the weight.

The DRG weight is then multiplied by an adjusted base rate (dollar amount for the hospital) to obtain the reimbursement amount.

Medicare Hospital Payments (cont.)

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Outlier payments:

Based on length of stay

Based on cost

Medical education payments

Bad-debt loss payments

Disproportionate share of low-income patients payments

Other IPPS Features

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The Outpatient Prospective Payment System (OPPS) consists of a fixed payment amount for each outpatient visit.

There are 350 ambulatory payment classifications (APCs) for surgical and nonsurgical procedures, visits to clinics and emergency departments, and ancillary services.

Payment calculation is similar to that for inpatient services.

Medicare Outpatient Payments (Facility)

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Payments are made according to a resource-based relative value system with three components:

Physician work

Practice (overhead) expenses

Malpractice insurance expense

Roughly 8,000 procedures have been assigned relative value units (RVUs) for each of the three components.

The procedure RVU total is multiplied by a dollar conversion factor and geographic cost index to obtain the payment amount.

Medicare Physician Payments

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Cost-based reimbursement: maximizes costs (quality) and service quantity

Charge-based reimbursement: maximizes charges (price) and service quantity and minimizes costs

Per procedure: maximizes quantity of profitable procedures and minimizes cost per procedure

Provider Incentives (FFS)

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Per diagnosis: maximizes quantity of profitable cases and minimizes cost per case and up-coding

Per diem: maximizes length of stay (LOS) and minimizes cost per day

Global pricing: maximizes episodes of care and minimizes cost per episode

Provider Incentives (FFS) (cont.)

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Capitation changes the playing field for providers.

The incentive now is to

increase the number of covered lives, and

decrease the volume of services.

Remember that under FFS, the incentive is to increase the volume of services.

Provider Incentives (Capitation)

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Cost-based reimbursement: Risk is minimal.

Charge-based reimbursement: Discounts may drive reimbursement below costs.

Per procedure: Costs per procedure may exceed reimbursement.

Per diagnosis: Costs per admission may exceed reimbursement.

Provider Risks

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Per diem: Costs per day may exceed reimbursement.

Global pricing: Costs per episode of care may exceed reimbursement.

Capitation: Costs per member may exceed reimbursement. Here, provider costs are driven by both volume and cost of services.

Provider Risks (cont.)

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Different payers use different reimbursement methods, so providers face conflicting incentives and risks.

Prospective payment transfers cost risk from insurers to providers.

Capitation transfers both cost risk and volume (utilization) risk.

Risk cannot be avoided, so it must be managed.

Provider Risk Summary

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Coding is the first step in the reimbursement process.

Coding is performed by administrative personnel (coders) on the basis of clinicians’ notes.

Providers use two types of codes:

ICD codes

CPT codes

Coding

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International Classification of Diseases (ICD) codes are used to specify diseases, symptoms, and injuries.

The codes consist of three to five digits. The greater the number is, the more detailed the information. For example:

410 means heart attack.

410.0 specifies the anterior wall.

Hospitals use ICD codes to specify inpatient diagnoses.

ICD Codes

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Current Procedural Terminology (CPT) codes are used to specify medical procedures (treatments).

The codes consist of five digits. For example:

99211 is a simple (short) office visit.

99215 is a complex (long) office visit.

Physicians (and other clinicians) use CPT codes to specify procedures performed on patients.

CPT Codes

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This concludes our discussion of Chapter 3 (Paying for Health Services).

Although not all concepts were discussed, you are responsible for all of the material in the text.

Do you have any questions?

Conclusion

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