discus 5, resp, lesson

1 9 8

L e a r n i n g O b j e c t i v e s

C H A P T E R 9

R E I M B U R S E M E N T

After completing this chapter, you should be able to do the following:

➤➤ Review➤the➤history➤of➤setting➤charges

➤➤ Understand➤the➤current➤concerns➤regarding➤charges

➤➤ Examine➤the➤various➤methods➤of➤setting➤charges

➤➤ Examine➤the➤future➤of➤setting➤charges

➤➤ Describe➤how➤cost➤shifting➤affects➤setting➤charges

➤➤ Review➤methods➤of➤reimbursement➤to➤providers

The economic “perfect storm” is coming to healthcare organizations: a rising tide

of uninsured and underinsured patients, aging baby boomers that will present

greater healthcare demands, a challenging economic climate, shifting eligibility

requirements, and cultural obstacles regarding healthcare payments.

DeLuca and Smith (2010)

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C o p y r i g h t 2 0 1 8 . H e a l t h A d m i n i s t r a t i o n 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 .

EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 3/14/2022 1:55 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 1839058 ; Michael Nowicki.; Introduction to the Financial Management of Healthcare Organizations, Seventh Edition Account: s4264928.main.eds

C h a p t e r ➤ 9 : ➤ R e i m b u r s e m e n t 1 9 9

In t r o d u c t I o n In response to a report by ABC’s PrimeTime Live on how charging practices affected ris- ing healthcare costs, Humana, which at the time was a large for-profit chain of hospitals, responded with the following statement (ABC News 1991):

Hospital➤charges➤are➤inaccurate➤measurements➤of➤the➤cost➤of➤healthcare➤to➤patients,➤ since➤the➤vast➤majority➤of➤patients➤and➤insurers➤no➤longer➤pay➤them➤in➤full.

Essentially, Humana was correct: Few patients or insurers pay what they are charged; most patients and insurers pay charges minus a negotiated discount.1 Discounting charges and other charging practices have resulted in charges that have little, if any, relationship to costs. How did charges in the healthcare industry arrive at such a nonsensical point? The answer can be found in the history of healthcare charging practices.

HI s t o r I c A l co n t e x t Healthcare charging practices have progressed through three distinct eras: consensus-driven charging, financial expediency–driven charging, and competition-driven charging. All of these have had a perverse effect on the relationship between charges and costs.

Prior to Medicare, charging was driven by consensus: Healthcare providers set charges consistent with other providers in the community. Providers sought consistent charges for fear that higher-than-average charges would signal inefficiencies to regulators or drive business to competing providers. Setting charges based on consensus resulted in cost shifting (i.e., the practice of shifting costs to some payers to offset losses from other payers). For instance, a new provider would set charges consistent with other providers in the community, even if the new provider had higher per-unit costs than its competitors. To make up the difference, the provider would charge more for procedures for which it had less competition from other providers (Finkler 1982).

With the advent of Medicare and Medicaid, charges became irrelevant for a sub- stantial portion of the provider’s business. Medicare—and usually Medicaid—paid hos- pitals on the basis of reasonable costs, not charges, and paid physicians on the basis of approved charge schedules. Realizing that only patients covered by commercial insurance and patients paying their own way (i.e., charge-based patients) would pay the provider based on charges, most providers set charges based on financial expediency—the financial needs of the provider. The financial needs of the provider obviously include the costs of provid- ing services to charge-based patients, but they also include other factors, such as losses to both Medicare and Medicaid, the cost of bad debt, and the cost of charity care. Problem 5.1 in chapter 5 demonstrates how these costs are identified and shifted to charge-based patients during the budget process. The recovery of shifted costs occurs at the procedural

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level using charge masters, which are lists of items (e.g., medications, procedures, supplies, rooms) for which providers charge. Providers developed software programs to show each item on the charge master and the item’s use by the patient. If the item was frequently used by cost-based payers (i.e., those on Medicare or Medicaid), the charge was set close to allowable cost because allowable cost was the amount the provider would be reimbursed. If the item was not often used by cost-based payers, the charge was increased to maximize the collection from the charge-based patients (i.e., those who had commercial insurance or paid the bills themselves). Because providers, especially hospitals, set charges in this manner every year, it is easy to understand how some charges, over time, were increased thousands of percent over cost (see appendix 9.1).

In the early 1980s, the consumer movement complicated charging based on financial expediency. Billing regulations mandated that Medicare patients receive a copy of their bill from the provider, even in cases where patients had no financial liability. In this way, patients could audit the bills to determine whether they had received the items listed on the bill. Patients often complained about high charges for items they could buy for less in their local drugstore (e.g., aspirin, facial tissues, toothbrushes), even when the charges were covered in part or entirely by Medicare. In response, many providers either reduced the charges for these consumer items or dropped the charges altogether. However, to recover the cost of these items, providers increased the charges for items that patients could not buy in their local drugstore.

Medicare’s prospective payment based on diagnosis-related groups (DRGs) did not change the way providers set charges; however, it did provide the impetus for providers to implement sophisticated cost accounting systems so that they could determine their profits or losses per DRG. This development proved to be an important precursor to the next era—competition-driven charging.

During the competition-driven charging era, which began in the mid-1980s and continues today, providers set charges based on what the market will bear, or what the charge-based patients and their insurers will pay. However, two factors have led to lower charges: (1) managed care, which demands that providers discount their charges significantly in exchange for business, and (2) the prospective payment system (PPS), which means providers are no longer guaranteed to cover their costs.2, 3, 4

The practice of charging payers different prices for the same products and services— which could be construed to be a violation of the 1890 Sherman Antitrust Act (15 USC 2), the 1914 Clayton Act (15 USC 13), and the 1932 Robinson-Patman Act (15 USC 13–13b, 21a)—may be thought to be essentially the same as discounting charges to dif- ferent payers for the same products and services. However, third-party payers justified the demands for discounts on the basis of the high volumes of patients they brought to the providers. Because the third parties were a sure and predictable source of revenue, product costing became critical during the competition-driven era.5 Providers needed sophisticated methods of determining product costs so they could negotiate discounts without discount- ing below cost, or at least below variable costs.6

charge masters

Lists➤of➤items➤for➤which➤

providers➤charge.

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C h a p t e r ➤ 9 : ➤ R e i m b u r s e m e n t 2 0 1

During the early years of competition-driven charging, providers used price-driven costing, the practice of cutting costs to break even with charges, which were dictated by the insurer or determined by competition. However, price-driven costing, even when coupled with aggressive downsizing or reengineering strategies,7 ultimately arrives at a point at which additional cost cutting may affect quality.8 Furthermore, managing costs effectively is only half the strategy for economic survival. The other half is managing revenue effectively by making up for revenue lost as a result of discounting and competition.

Most healthcare organizations have pursued relatively conservative revenue manage- ment strategies that have included charging analysis, charge master enrichment, and charge capture assessment (Murray et al. 1994). Charging analysis ensures that the charge set for a specific item results in maximum reimbursement related to the payer classification. For example, elective plastic surgery, which is normally paid for by private insurance, is marked up considerably to maximize profits. On the other hand, hip replacement surgery, which is usually Medicare reimbursed, is not marked up because Medicare pays a predetermined amount, thus limiting the reimbursement. Charge master enrichment ensures that health- care organizations charge only for items that third-party payers recognize as legitimate charges. Charge capture assessment ensures that healthcare organizations do not lose charges within the organization. Charge capture assessment compares what patients receive, as documented by medical records, to what patients are billed, as documented in patient bills.

Cross (1997) believed that the healthcare industry was ready for more aggressive revenue management strategies, including charging strategies that have been commonplace in other service industries for a long time, and to a certain extent that has happened. For instance, airlines offer significant discounts to travelers who are willing to travel during off-peak periods and make their reservations in advance. In this way, the airlines are better off using their fixed costs (i.e., airplanes) while ensuring that their variable costs are still met by the discounted charges. The discounted charges have created a new market without hurting the old market. In most cases, business travelers who fly during peak periods are willing to pay the higher charges because their company is reimbursing the cost; vacation travelers who fly during off-peak periods want the lower charges because they pay the cost themselves. Some healthcare organizations enhance their market share by discounting to fill excess capacity, especially during the weekends, or create new markets by discounting procedures that patients are likely to pay out of pocket.

He A lt H c A r e Pr I c I n g co m e s un d e r Pu b l I c sc r u t I n y While most patients do not pay charges because their insurance company has negotiated a discount, patients without insurance have often been asked by healthcare organizations to pay the entire bill. Whether the organizations actually expect the uninsured patient to pay the entire bill is unclear (many of these bills ultimately become bad debt), but there is no doubt that the healthcare industry has been widely criticized for these charges, especially by increasing numbers of uninsured middle-class individuals and families with political and

charging analysis

An➤examination➤of➤

charges➤to➤make➤

sure➤maximum➤

reimbursement➤is➤being➤

received.

charge master

enrichment

An➤analysis➤of➤charges➤

to➤make➤sure➤every➤

item➤is➤recognized➤by➤

third-party➤payers➤as➤a➤

legitimate➤charge.

charge capture

assessment

A➤comparison➤of➤

medical➤records➤

to➤patient➤invoices➤

to➤make➤sure➤the➤

organization➤is➤not➤

missing➤billable➤items.

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business clout. Why haven’t hospitals offered the uninsured the same discounts offered to insurance companies? Historically, hospitals have not offered discounts to the uninsured because of concerns about Medicare payment and compliance. For example, if a hospital offered a big discount to everybody except Medicare, the hospital could run afoul of Medi- care rules regarding charges that are “substantially in excess” of “usual charges” (Barry and Keough 2005). However, this situation may change. As noted in chapter 4, the Affordable Care Act (ACA) requires nonprofit hospitals to limit charges to patients eligible for assis- tance to no more than the lowest amount billed to insured patients.

In addition to amending policies to allow additional write-offs to charity care, hos- pitals also revised their pricing policies and prices. Amending prices is difficult because of the number of managed care agreements that have negotiated discounts on the previous price. HFMA introduced the following strategy for rational pricing in 2005 (Clarke 2006):

1. Using a cost accounting system, identify and measure the costs associated with the product or service to be priced.

2. Gather data on prices for similar products and services offered by competitors.

3. Address contractual considerations to ensure that the new price will result in the same or improved net revenue for the product or service.

4. Prepare for public scrutiny. Under consumer-driven healthcare, consumers are more financially responsible for their healthcare. As a result, they demand prices and information on how the prices were set. What most patients need is a detailed explanation of benefits that identifies what their out-of-pocket expense will be.

Many state legislatures have passed pricing transparency laws. New York passed such a law in 2007. The New York law, dubbed Manny’s Law after a 24-year-old patient who died as a result of surgery postponed because he did not have insurance, requires New York hospitals to establish financial-aid policies for low-income and unin- sured patients. The law prohibits hospitals from charging patients earning less than 300 percent of the federal poverty level more than private or gov- ernment insurers pay. California passed a similar law in late 2006. California’s Hospital Fair Pricing Law prohibits hospitals from charging self-pay patients who earn less than 350 percent of the federal poverty level more than what Medicare

MINI-CASE STUDY✓

Suppose➤that➤you➤are➤the➤business➤office➤manager➤of➤a➤26-bed➤

rural➤hospital.➤The➤chair➤of➤your➤governing➤body,➤who➤has➤served➤

in➤that➤role➤for➤more➤than➤30➤years,➤is➤discussing➤with➤you➤possi-

ble➤ways➤to➤improve➤the➤hospital’s➤financial➤position.➤During➤the➤

discussion,➤he➤asks➤you➤why➤you➤cannot➤increase➤the➤charges➤

to➤ Blue➤ Cross➤ to➤ cover➤ the➤ losses➤ to➤ Medicare,➤ Medicaid,➤ and➤

charity➤care.➤He➤goes➤on➤to➤say➤that➤this➤strategy➤was➤used➤in➤

the➤1970s➤and➤1980s,➤and➤he➤does➤not➤understand➤why➤it➤will➤

not➤work➤in➤2017.➤What➤do➤you➤tell➤him?

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C h a p t e r ➤ 9 : ➤ R e i m b u r s e m e n t 2 0 3

and other government-sponsored programs pay for care (Benko 2006). The National Conference of State Legislatures disclosed a summary of signed laws and proposed state legislation relating to transparency and disclosure of health and hospital charges. Included are details concerning 31 state measures affecting disclosure, transparency, and reporting and/or publication of healthcare provider and hospital charges and fees (NCSL 2009).

The ACA includes requirements for hospitals to publicize an annual updated list of standard charges, including Medicare severity diagnosis-related groups (MS-DRGs; see AHA 2010). The laws also require tax-exempt hospitals to limit their charges for emergency or other medically necessary care to patients eligible under the facility’s financial assistance policy (char- ity care policy) to not more than the amounts billed to insured patients who receive the same care. According to the regulations (IRS 2012, 5), the financial assistance policy must include

◆ eligibility criteria for financial assistance and whether such assistance includes free or discounted care;

◆ the basis for determining amounts charged to patients;

◆ the method for applying for financial assistance;

◆ in the case of an organization that does not have a separate billing and collections policy, the actions the hospital organization may take in the event of nonpayment; and

◆ measures to widely publicize the financial assistance policy within the community served by the hospital organization.

Subsequent to the 2012 Supreme Court decision on the ACA, states have been encour- aged to expand eligibility criteria for Medicaid from 100 percent to 138 percent of the federal poverty level. To encourage states to expand Medicaid, the federal government was scheduled to pay all of the expansion costs for the first three years and 90 percent for the next seven years. States that have resisted the expansion have expressed concern about its effects on the federal debt and the federal government’s ability to keep its funding promise for ten years. Hospital associations have generally supported the expansion, even though Medicaid seldom pays the full cost of providing care to its beneficiaries. These associations projected that increases in Medicaid volumes, even at a reimburse- ment less than cost, would be more than offset by the decline in charity care that would result from the expansion of Medicaid eligibility. This projection is especially true for safety-net hospitals that care for higher-than-average Medicaid loads (Betbeze 2013).

MINI-CASE STUDY✓

Imagine➤that➤you➤are➤the➤CEO➤of➤a➤nonprofit➤community➤hospi-

tal➤located➤in➤a➤small➤city.➤An➤influential➤patient➤is➤in➤your➤office➤

with➤a➤hospital➤bill➤that➤she➤received➤recently➤for➤a➤one-day➤stay➤

in➤your➤hospital➤(most➤of➤the➤time➤was➤spent➤in➤the➤emergency➤

room).➤The➤bill,➤excluding➤physician➤charges,➤was➤$17,000.➤The➤

patient➤thinks➤this➤is➤outrageous,➤and➤she➤wants➤to➤know➤what➤

the➤care➤actually➤cost➤the➤hospital.➤What➤do➤you➤tell➤her?

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me t H o d s o f se t t I n g cH A r g e s Many influences affect the charge-setting decision. Thus, the initial charge, before com- parisons to other facilities and before discounts, should reflect the healthcare organization’s true cost of providing the product or service.9 Three methods of setting charges based on costs—the RVU method, the hourly rate method, and the surcharge method—are well established in the literature (Suver, Neumann, and Boles 1995; Berman, Kukla, and Weeks 1994). These three methods are described in the following sections.

rvu m e t H o d

The first method of setting charges is called the relative value unit (RVU) method (see chapter 8 for an explanation of how RVUs are created). The RVU method is used in departments that have an established RVU schedule, such as laboratory and radiology. RVU schedules are recalculated every three to five years. Costs per RVU and corresponding charges per procedure are calculated more often, usually every year.10 After full costs per procedure have been established (see problems 8.2 and 8.3 in chapter 8), charges can be set to break even (i.e., charge the full cost only) or to realize a gain (i.e., charge the full cost plus a percentage) (see problem 9.1).

RVU schedule

A➤list➤of➤charges,➤

such➤as➤procedures➤

performed➤by➤the➤

laboratory➤or➤the➤

radiology➤department,➤

based➤on➤relative➤value➤

units➤(RVUs).

PROBLEM 9.1 RVU Method of Setting Charges

Using➤job-order➤costing➤and➤activity-based➤costing➤from➤problems➤8.2➤and➤8.3,➤calculate➤

the➤charge➤necessary➤to➤realize➤a➤5➤percent➤gain➤at➤the➤diagnostic➤center.➤

Using Job-Order Costing:

(This➤example➤is➤a➤continuation➤of➤problem➤8.2➤in➤chapter➤8,➤where➤earlier➤steps➤are➤shown):➤

Step➤2,➤Part➤3➤(repeated➤here➤from➤problem➤8.2):

Calculate➤the➤cost➤per➤procedure➤by➤multiplying➤the➤cost➤per➤RVU➤by➤the➤RVUs➤in➤each➤

procedure.

Cost/ Procedure Cost/RVU × RVU = Procedure

➤ A➤ $100➤ 18➤ $1,800

➤ B➤ ➤➤➤100➤ 14➤ 1,400

➤ C➤ ➤➤➤100➤ 7➤ 700

➤ D➤ ➤➤➤100➤ 5➤ 500➤

*

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C h a p t e r ➤ 9 : ➤ R e i m b u r s e m e n t 2 0 5

PROBLEM 9.1 RVU Method of Setting Charges (continued)

Step➤2,➤Part➤4:➤

Calculate➤the➤charge➤necessary➤to➤realize➤a➤5➤percent➤gain➤at➤the➤diagnostic➤center.

Cost/ Procedure Procedure + 5 Percent = Charge

➤ A➤ $1,800➤ 90➤ $1,890

➤ B➤ ➤➤➤1,400➤ 70➤ 1,470

➤ C➤ ➤➤➤➤➤➤700➤ 35➤ 735

➤ D➤ ➤➤➤➤➤➤500➤ ➤➤25➤ ➤➤➤➤➤➤525➤

Using Activity-Based Costing:

(This➤example➤is➤a➤continuation➤of➤problem➤8.3➤in➤chapter➤8):➤

Step➤2,➤Part➤7➤(repeated➤here➤from➤problem➤8.3):

Calculate➤the➤total➤cost➤per➤procedure➤by➤adding➤the➤direct➤cost➤per➤procedure➤and➤the➤

indirect➤cost➤per➤procedure.

Direct Cost/ Indirect Cost/ Total Cost/ Procedure Procedure + Procedure = Procedure

➤ A➤ $1,080➤ $540.54➤ $1,620.54

➤ B➤ ➤➤➤➤➤➤840➤ 540.54➤ 1,380.54

➤ C➤ ➤➤➤➤➤➤420➤ 360.36➤ 780.36

➤ D➤ ➤➤➤➤➤➤300➤ ➤➤➤180.18➤ 480.18➤

Step➤2,➤Part➤8:➤

Calculate➤the➤charge➤necessary➤to➤realize➤a➤5➤percent➤gain➤at➤the➤diagnostic➤center.

Cost/ New Procedure Procedure + 5 Percent = Charge

➤ A➤ $1,620.54➤ 81.03➤ $1,701.57

➤ B➤ ➤➤➤1,380.54➤ 69.03➤ 1,449.57

➤ C➤ ➤➤➤➤➤➤780.36➤ 39.02➤ 819.38

➤ D➤ ➤➤➤➤➤➤480.18➤ 24.01➤ 504.19➤

*

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H o u r ly r At e m e t H o d

The second method of setting charges is called the hourly rate method; it is used in depart- ments that charge per hour (or per modality or segment of time) for their services. Respira- tory therapy, physical therapy, and surgery are three examples of departments that use this method for setting charges. Problem 9.2 demonstrates the calculations involved in using the hourly rate method.

s u r c H A r g e m e t H o d

The third method of setting charges is the surcharge method. It is used in departments that know the cost of their products and add a surcharge to cover overhead. Pharmacy and central supply are two examples of departments that use the surcharge method for setting charges. This method is demonstrated in problem 9.3.

st r At e g I c cH A r g e se t t I n g In 1987, Eastaugh predicted that increasing competitive pressures would drive healthcare organizations into the same strategic pricing options that other service industries were using at the time. Referring to Porter’s 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Eastaugh identified the competitive pressures as they relate to the healthcare industry:

PROBLEM 9.2 Hourly Rate Method of Setting Charges

Using➤ the➤ hourly➤ rate➤ method➤ of➤ setting➤ charges,➤ calculate➤ the➤ charge➤ per➤ modality➤

necessary➤to➤recover➤total➤costs➤at➤ABC➤Physical➤Therapy➤Clinic➤given➤that:

Total➤projected➤cost➤per➤year➤of➤physical➤therapy➤=➤$800,000

Total➤projected➤hours➤of➤use➤per➤year➤=➤20,000➤hours

Modality➤=➤15➤minutes

Charge➤ per➤ modality➤ is➤ calculated➤ as➤ total➤ projected➤ cost➤ divided➤ by➤ total➤ projected➤

modality➤in➤hours➤(in➤this➤case,➤hours➤multiplied➤by➤4,➤the➤modality➤per➤hour),➤therefore:

Charge➤per➤modality➤=➤$800,000➤÷➤80,000➤=➤$10➤per➤modality

*

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C h a p t e r ➤ 9 : ➤ R e i m b u r s e m e n t 2 0 7

◆ Rivalry among existing competitors

◆ Potential new entrants to the market

◆ Bargaining power of buyers (e.g., Medicare, Medicaid, managed care)

◆ Bargaining power of suppliers (e.g., physicians)

◆ Rivalry from substitute products (e.g., holistic medicine, natural cures, self-care)

These pressures ultimately forced healthcare organizations to review all of the fol- lowing strategic pricing options:

◆ Predatory pricing: The practice of pricing products and services low in the short term to gain market share.

◆ Slash pricing: The practice of pricing products and services low in the long term by making fundamental changes in the product or service.

◆ Follower pricing: The practice of pricing products and services relative to the market leader.

PROBLEM 9.3 Surcharge Method of Setting Charges

Using➤the➤surcharge➤method➤of➤setting➤charges,➤calculate➤the➤charge➤necessary➤to➤cover➤

total➤costs➤for➤100,000➤admission➤kits➤at➤XYZ➤Women’s➤Hospital➤given➤that:

Overhead➤allocated➤to➤the➤admission➤kits➤project➤=➤$50,000

Total➤projected➤cost➤of➤admission➤kits➤=➤$100,000

Step➤1:➤ Overhead➤+➤Cost➤of➤kits➤=➤Total➤cost

$50,000➤+➤$100,000➤=➤$150,000

Step➤2:➤ Total➤cost➤÷➤Number➤of➤kits➤=➤Charge➤per➤kit➤to➤break➤even

$150,000➤÷➤100,000➤=➤$1.50

*

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◆ Phaseout pricing: The practice of pricing products or services high to eliminate poor quality or underused products and services.

◆ Preemptive pricing: The practice of pricing products and services low to discourage new entrants in the market.

◆ Skim pricing: The practice of pricing products and services high because of high quality or low availability in the market.

◆ Segment pricing: The practice of pricing products and services high relative to their “snob appeal,” such as high charges for birthing centers.

◆ Loss-leader pricing: The practice of pricing products and services low to attract customers to complementary products or services that are priced high.

The ongoing changes occurring in the healthcare environment will require close attention to rate setting and pricing strategies. Sound pricing decisions remain critical to the successful operation of healthcare organizations.

me t H o d s o f re I m b u r s e m e n t t o Pr o v I d e r s Common methods of reimbursement to providers include the following:

◆ Charges: Retrospective reimbursement based on charges submitted by the provider to the patient or to the insurer on behalf of the patient.

◆ Charges minus a discount: Retrospective reimbursement based on charges minus a discount negotiated between the provider and the insurer (the usual method of reimbursement for preferred provider organizations).

◆ Cost plus: Retrospective reimbursement based on a cost report submitted by the provider to the insurer. The insurer reimburses the provider for reasonable cost plus a percentage for growth.

◆ Cost: Retrospective reimbursement based on a cost report submitted by the provider to the insurer (the predominant method of Medicare and Medicaid reimbursement from 1966 to 1982).

◆ Per diem: Prospective reimbursement based on a per-day rate established by the insurance company (the predominant method of reimbursement to nursing homes).

◆ Per diagnosis: Prospective reimbursement based on a per-diagnosis rate established by the insurer (the predominant method of Medicare and Medicaid reimbursement from 1983 to the present).

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C h a p t e r ➤ 9 : ➤ R e i m b u r s e m e n t 2 0 9

◆ Per head, or capitation: Prospective reimbursement based on a per-head rate negotiated between the provider and the insurer. The provider receives the capitation each month regardless of whether the patient is sick.

Most providers agree that reimbursement based on charges is the most favored method, while reimbursement based on capitation is the least favored method of reim- bursement. Under charges, charges minus a discount, cost plus, and cost, the strategy for successful providers is containing costs. Under per diem, per diagnosis, and capitation, the strategy for successful providers is not only containing cost but also controlling utilization. Capitation has a successful history of containing both costs and utilization in health main- tenance organizations, and many observers believe that capitation can reduce healthcare costs in integrated delivery systems and accountable care organizations.

re I m b u r s e m e n t un d e r t H e AcA o f 2010 The Affordable Care Act ushered in new initiatives in reimbursement designed to incentiv- ize institutional providers for quality of care to Medicare beneficiaries. Called value-based programs, they are part of a larger government effort to pay providers for quality rather than quantity by providing better care for individuals, better health for populations, and lower costs. The first value-based programs initiated by the Centers for Medicare & Medicaid Services (CMS) include the following (CMS 2016b):

◆ Hospital Value-Based Purchasing (HVBP) Program, initiated in 2012, rewards acute care hospitals for the quality of care delivered to Medicare beneficiaries.

◆ Hospital Readmission Reduction (HRR) Program, initiated in 2012, provides financial incentives to hospitals for reducing unnecessary hospital readmissions for Medicare beneficiaries.

◆ End-Stage Renal Disease (ESRD) Quality Initiative Program, initiated in 2012, rewards outpatient dialysis facilities for the quality of care delivered to Medicare beneficiaries.

◆ Hospital-Acquired Condition (HAC) Reduction Program, initiated in 2014, rewards hospitals that improve patient safety by reducing their number of hospital -acquired conditions, such as pressure sores and hip fractures after surgery.

◆ Value Modifier (VM) or Physician Value-Based Modifier (PVBM) Program, initiated in 2015, measures the quality and cost of care provided to Medicare beneficiaries under the Medicare Physician Fee Schedule (PFS) and rewards physicians based on quality performance and lower costs.

value-based programs

Programs➤that➤reward➤

healthcare➤providers➤

with➤incentive➤

payments➤for➤the➤

quality➤of➤care➤they➤

deliver➤to➤Medicare➤

beneficiaries.

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re I m b u r s e m e n t un d e r t H e PAmA o f 2014 The Protecting Access to Medicare Act of 2014 (PAMA) initiated one new value-based program. The Skilled Nursing Facility Value-Based Program (SNFVBP), to be initiated in 2019, rewards skilled nursing facilities for the quality of care delivered to Medicare beneficiaries (CMS 2016b).

re I m b u r s e m e n t un d e r mAcrA o f 2015 The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) continues the value-based programs established by ACA and PAMA by implementing the Quality Payment Program. Certain clinicians (physicians, physician assistants, nurse practitioners, clinical nurse specialists, and certified registered nurse anesthetists) who bill Medicare more than $30,000 a year and provide care to 100 or more Medicare patients per year, or who cur- rently participate in an Advanced Alternative Payment Model, are required to participate in the Quality Payment Program starting in 2017. Additional clinicians may be required to participate in the Quality Payment Program in 2021. Clinicians can choose one of two tracks in the Quality Payment Program (CMS 2016b):

◆ Merit Incentive Payment System (MIPS), to be initiated by certain clinicians no later than 2019, provides a performance-based payment adjustment based on quality, resource use, advancing care information (which replaces meaningful use criteria), and cost. Most clinicians will start in MIPS.

◆ Alternative Payment Models (APMs) are fundamental changes to reimbursement and generally include moving providers away from low-risk fee-for-service payment to risk-assuming (both cost risk and utilization risk) methods of payment. If clinicians participate in an Advanced Alternative Payment Model, they will be exempt from participation in MIPS. Not only does an Advanced Alternative Payment Model (Advanced APM) move the clinician away from low-risk fee-for-service to risk-assuming methods of payment, but the Advanced APM also must be CMS certified and must include certified electronic health record technology, report quality measures similar to MIPS, and bear financial risk.

➤➤ A➤healthcare➤manager➤must➤understand➤the➤relationship➤between➤costs,➤studied➤in➤

chapter➤8,➤and➤charges,➤discussed➤in➤this➤chapter,➤to➤make➤sound➤financial➤decisions.

Merit Incentive

Payment System

(MIPS)

A➤government-

mandated➤program➤that➤

provides➤a➤Medicare➤

performance-based➤

payment➤adjustment➤

based➤on➤quality,➤

resource➤use,➤advancing➤

care➤information,➤and➤

cost➤to➤physicians➤and➤

certain➤other➤clinicians,➤

to➤be➤initiated➤no➤later➤

than➤2019.

advancing care

information

Programs➤that➤reward➤

healthcare➤providers➤

with➤incentive➤

payments➤for➤the➤

quality➤of➤care➤they➤

deliver➤to➤Medicare➤

beneficiaries.

Alternative Payment

Models (APMs)

Fundamental➤changes➤

to➤reimbursement➤

that➤generally➤include➤

moving➤providers➤away➤

from➤low-risk➤fee-for-

service➤payment➤to➤

risk-assuming➤methods➤

of➤payment.

c H A P t e r k e y P o I n t s

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C h a p t e r ➤ 9 : ➤ R e i m b u r s e m e n t 2 1 1

➤➤ Knowing➤the➤history➤of➤setting➤charges➤in➤healthcare➤helps➤managers➤understand➤

current➤practices.

➤➤ Healthcare➤pricing➤has➤come➤under➤public➤scrutiny.➤Effective➤managers➤need➤to➤be➤

able➤to➤articulate➤why➤this➤scrutiny➤has➤come➤about➤and➤what➤can➤be➤done➤to➤restore➤

the➤public’s➤faith.

➤➤ Managers➤should➤know➤how➤healthcare➤prices➤are➤established➤both➤academically➤and➤

in➤practice.

➤➤ Pricing➤in➤other➤industries➤may➤have➤relevance➤to➤healthcare➤in➤the➤future.

➤➤ Capitation➤and➤other➤methods➤of➤payment➤that➤transfer➤risk➤to➤the➤providers➤will➤gain➤

in➤popularity➤among➤payers➤of➤healthcare➤services.

➤➤ Value-based➤programs➤will➤continue➤to➤reward➤providers➤for➤quality➤of➤care➤delivered➤

to➤Medicare➤beneficiaries.

1.➤ Is➤there➤a➤relationship➤between➤cost➤and➤price➤for➤any➤given➤product➤or➤service➤in➤ healthcare?➤Should➤there➤be?

2.➤ Many➤observers➤would➤concede➤that➤healthcare➤prices➤are➤currently➤irrational.➤How➤ did➤prices➤get➤that➤way?

3.➤ The➤public➤and➤those➤that➤represent➤the➤public➤(legislatures,➤insurance➤companies,➤ consumer➤groups)➤have➤concluded➤that➤healthcare➤prices➤are➤outrageous.➤What➤can➤ the➤healthcare➤industry➤do➤to➤restore➤public➤confidence?

4.➤ Healthcare➤prices➤are➤not,➤and➤perhaps➤should➤not➤be,➤set➤like➤prices➤in➤other➤ industries.➤How➤are➤healthcare➤prices➤set➤as➤compared➤with➤how➤automobile➤prices➤ are➤set?

5.➤ From➤the➤provider’s➤perspective,➤how➤would➤you➤evaluate➤the➤common➤methods➤of➤ reimbursement?

6.➤ From➤the➤provider’s➤perspective,➤what➤are➤the➤implications➤of➤value-based➤programs?

1.➤ Charge,➤price,➤and➤rate are➤often➤used➤synonymously.

2.➤ Eastaugh➤(1987)➤compares➤the➤healthcare➤industry➤to➤the➤airline➤industry➤in➤ explaining➤the➤competitive➤pressures➤brought➤about➤by➤the➤PPS.➤In➤the➤airline➤ industry,➤routes➤were➤deregulated,➤resulting➤in➤airlines➤competing➤for➤the➤more➤

d I s c u s s I o n Q u e s t I o n s

n o t e s

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favorable➤routes.➤The➤competition➤resulted➤in➤inefficient➤airlines➤going➤out➤of➤ business➤and➤efficient➤airlines➤gaining➤market➤share➤and➤reducing➤prices.➤In➤the➤ healthcare➤industry,➤the➤guarantee➤of➤reimbursed➤cost➤to➤hospitals➤ended➤in➤1983➤and➤ to➤physicians➤in➤1992;➤as➤a➤result,➤inefficient➤hospitals➤and➤group➤practices➤went➤out➤ of➤business,➤and➤the➤remaining➤hospitals➤and➤group➤practices➤gained➤market➤share.

3.➤ Some➤healthcare➤organizations➤and➤physicians➤have➤refused➤to➤discount➤their➤ charges.➤Reid➤Hospital➤in➤Richmond,➤Indiana,➤refused➤to➤discount,➤citing➤the➤hospital’s➤ pricing➤policy,➤which➤states➤that➤“prices➤should➤be➤fair➤and➤reflective➤of➤the➤resources➤ used➤to➤produce➤the➤services➤performed➤and➤uniformly➤applied”➤(Pallarito➤1997a).➤ Under➤this➤policy,➤which➤has➤since➤been➤changed,➤the➤hospital➤considered➤it➤unfair➤to➤ discount➤to➤one➤payer➤and➤shift➤the➤costs➤to➤another➤payer.

4.➤ The➤Center➤for➤Healthcare➤Industry➤Performance➤Studies➤reported➤that➤wage-adjusted➤ and➤case➤mix–adjusted➤hospital➤prices➤increased➤only➤0.6➤percent➤during➤1995,➤down➤ from➤2.4➤percent➤the➤previous➤year➤(Pallarito➤1997b).

5.➤ Courts➤have➤consistently➤found➤that➤such➤practices➤did➤not➤lessen➤competition➤and➤ therefore➤were➤not➤violations➤of➤antitrust➤law.

6.➤ If➤fixed➤costs➤are➤covered,➤effective➤charges➤can➤be➤negotiated➤down➤to➤variable➤costs➤ without➤realizing➤a➤relevant➤loss.

7.➤ Downsizing—that➤is,➤reducing➤resources➤to➤meet➤reduced➤demand—was➤an➤ appropriate➤strategy➤for➤healthcare➤organizations➤that➤were➤losing➤business➤or➤ had➤too➤many➤resources.➤Reengineering—that➤is,➤“the➤fundamental➤rethinking➤ and➤radical➤redesign➤of➤business➤processes➤to➤achieve➤dramatic➤improvements➤in➤ critical➤contemporary➤measures➤of➤performance,➤such➤as➤cost,➤quality,➤service,➤and➤ speed”➤(Hammer➤and➤Champy➤2001)—was➤an➤appropriate➤strategy➤for➤healthcare➤ organizations➤that➤were➤experiencing➤the➤same➤or➤greater➤demand➤but➤at➤greatly➤ reduced➤effective➤charges.

8.➤ Anti–managed care laws➤(laws➤designed➤to➤control➤the➤growth➤and➤decision➤making➤ of➤managed➤care➤organizations),➤length-of-stay laws➤(those➤that➤mandate➤minimum➤ lengths➤of➤stay➤for➤certain➤diagnoses➤such➤as➤obstetric➤delivery),➤and➤any-willing- provider laws➤(patient➤protection➤laws➤that➤allow➤patients➤to➤receive➤care➤from➤ providers➤outside➤a➤network)➤are➤examples➤of➤patient➤reactions➤to➤cost-savings➤ endeavors.➤Opponents➤of➤these➤laws➤are➤quick➤to➤point➤out➤that➤such➤laws➤would➤ increase➤costs➤and,➤as➤a➤result,➤charges➤and➤premiums➤to➤patients.

9.➤ True cost is➤a➤widely➤disputed➤term➤based➤largely➤on➤the➤Medicare➤interpretation➤of➤ cost➤during➤the➤cost-based➤reimbursement➤days.➤Medicare➤“disallowed”➤portions➤ of➤some➤costs➤because➤the➤costs➤were➤higher➤than➤the➤community➤standard➤and➤ “unallowed”➤some➤costs➤in➤their➤entirety➤because➤the➤program➤did➤not➤recognize➤the➤

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C h a p t e r ➤ 9 : ➤ R e i m b u r s e m e n t 2 1 3

nature➤of➤the➤cost➤(e.g.,➤bad➤debt➤in➤the➤early➤days➤and➤shift➤differentials➤in➤the➤latter➤ days➤of➤cost-based➤reimbursement).➤True➤cost➤is➤still➤important➤under➤prospective➤ payment➤because➤the➤payment➤formulas➤for➤DRGs➤were➤determined➤on➤the➤basis➤of➤ Medicare’s➤interpretation➤of➤true➤cost.➤True➤costs➤could➤vary➤considerably➤between➤ facilities➤on➤the➤basis➤of➤volume➤because➤high-volume➤healthcare➤organizations➤have➤ a➤lower➤fixed➤cost➤per➤unit➤than➤low-volume➤healthcare➤organizations.

10.➤ For➤the➤purpose➤of➤setting➤charges,➤the➤use➤of➤the➤same➤RVU➤schedule➤for➤several➤ facilities➤or➤the➤adoption➤of➤a➤national➤RVU➤schedule➤could➤constitute➤price➤fixing.

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I n t r o d u c t i o n ➤ t o ➤ t h e ➤ F i n a n c i a l ➤ M a n a g e m e n t ➤ o f ➤ H e a l t h c a r e ➤ O r g a n i z a t i o n s2 1 4

Appendix 9.1 Cost-Shift Pricing

This➤problem➤demonstrates➤how➤cost-shift➤pricing,➤also➤referred➤to➤as➤financial➤ expediency–driven➤pricing,➤works.➤For➤the➤sake➤of➤simplicity,➤this➤example➤uses➤only➤ three➤procedures➤and➤only➤two➤types➤of➤reimbursement.➤The➤projected➤volume➤for➤ each➤procedure➤is➤ten.➤Procedure➤A➤is➤reimbursed➤at➤allowable➤cost➤($100)➤for➤all➤ten➤ procedures.➤Five➤of➤Procedure➤B’s➤procedures➤are➤reimbursed➤at➤allowable➤cost,➤and➤the➤ other➤five➤are➤reimbursed➤at➤the➤price➤charged.➤Procedure➤C➤is➤reimbursed➤at➤the➤price➤ charged➤for➤all➤ten➤procedures.

Percentage Projected Cost/ Price/ Procedure Cost-Based Volume Procedure Procedure Total Collections

A 100 10 $100 $105 10 × $100 = $1,000 B 50 10 $100 $105 5 × $100 + 5 × $105 = $1,025 C 0 10 $100 $105 10 × $105 = $1,050

Average price $105 Total true cost $3,000 Total collections $3,075

To➤generate➤collections➤that➤would➤cover➤costs➤without➤raising➤the➤average➤price,➤the➤ healthcare➤organization➤could➤use➤cost-shift➤pricing.➤Doing➤so➤would➤involve➤lowering➤the➤ price➤of➤the➤cost-based➤Procedure➤A➤to➤$100➤(without➤affecting➤the➤amount➤collected),➤ lowering➤the➤price➤of➤Procedure➤B➤to➤$100➤(with➤a➤minimal➤effect➤on➤collections),➤and➤ raising➤the➤price➤of➤Procedure➤C➤to➤$115➤(with➤a➤moderate➤effect➤on➤collections).➤In➤so➤ doing,➤the➤average➤markup➤for➤all➤three➤procedures➤is➤0➤percent,➤while➤the➤effect➤on➤ collections➤can➤be➤more—in➤this➤case,➤2.4➤percent.

Percentage Projected Cost/ Price/ Procedure Cost-Based Volume Procedure Procedure Total Collections

A 100 10 $100 $100 10 × $100 = $1,000 B 50 10 $100 $100 5 × $100 + 5 × $105 = $1,000 C 0 10 $100 $115 10 × $115 = $1,150

Average price $105 Total true cost $3,000 Total collections $3,150

00_Nowicki (2339) Book.indb 214 5/17/17 10:57 AM

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