1. Chapter 3 Financial Environment of Health Care Organizations

2. Learning Objectives Questions to answer –What is the basic business structure of a Healthcare Organization (HCO)? Viability –Payers –Payees –How are HCO’s paid? Types of payment systems –Medicare payment

3. Basic Business Structure of a HCO SuppliersHCO Community Resources Services Resources Services In the long-run…you can’t pay out more than you make

4. SuppliersHCO Community Resources Services Resources Services WHO? Employees Equipment suppliers Service contractors Consumable goods suppliers Lenders Etc. Basic Business Structure of a HCO

5. SuppliersHCO Community Resources Services Resources Services WHO? Hospital Nursing Home Physician Group ASC Clinic Etc. Basic Business Structure of a HCO

6. SuppliersHCO Community Resources Services Resources Services PATIENTS 1.Self-payer 2.Third-party 1.Blue Cross & Blue Shield 2.Commercial insurance 3.Medicare 4.Medicaid 5.Self-insured employer 6.Other WHO? NONPATIENTS 1.Grants 2.Contributions 3.Tax support 4.Miscellaneous Basic Business Structure of a HCO

7. Source of funds  Revenues 1. Public (Medicare, Medicaid) 2. Private insurance (BC/BS, self- insured, commercial insurance) 3. Direct payment 4. Non-operating revenues Basic Business Structure of a HCO Capital 1. Taxable debt 2. Tax-exempt debt 3. Equity (stock, partnership) Gifts

8. Uses of funds  Expenses 1. Salaries 2. Supplies 3. Insurance  Capital 1. Interest 2. Debt principal 3. Dividends/partner distributions Basic Business Structure of a HCO Investment 1. Working capital 2. Buildings and equipment 3. Replacement reserves

9. Sources of funds for All Health Expenses (by percentage) Year Total Out-of-Pocket Payments Third-Party Payments Total Private Health Insurance Other Private Funds Government Total Federal State and Local 1980 100.0 27.272.7 28.4 4.3 40.0 28.9 11.1 2000 100.0 16.983.1 35.4 5.0 42.7 32.5 10.2 2005 100.0 15.085.0 35.9 4.1 45.0 34.2 10.7 Observation? Basic Business Structure of a HCO

10. Sources of funds for US hospitals (by percentage) Year Total Out-of-Pocket Payments Third-Party Payments Total Private Health Insurance Other Private Funds Government Total MedicareMedicaid 1980 100.0 5.494.6 36.6 5.0 53.0 26.1 9.1 2000 100.0 3.396.7 34.6 5.2 56.9 29.9 17.0 2005 100.0 3.396.8 35.5 4.5 56.8 29.5 17.3 Observation? Basic Business Structure of a HCO

11. Sources of funds for Physician & Clinical Services (by percentage) Year Total Out-of-Pocket Payments Third-Party Payments Total Private Health Insurance Other Private Funds Government Total MedicareMedicaid 1980 100.0 30.469.5 35.5 3.9 30.1 17.0 5.2 2000 100.0 11.288.9 47.4 7.7 33.8 20.2 6.6 2005 100.0 10.190.0 48.3 6.4 35.3 21.2 7.1 Observation? Basic Business Structure of a HCO

12. How HCO’s Are Paid 1. Cost Reimbursement Most prominent form of reimbursement by Medicare for hospitals until early 1980’s Most payers have abandoned this form today Two key components: Reasonable cost Apportioned cost ADVANTAGES? DISADVANTAGES?

13. 2. Specific Services (Charge payment) In essence, this is payment via the hospital/HCO’s “list price.” FOR HOSPITALS The “list price” can be found in a hospital’s ‘Charge Description Master’ (CDM) When a patient receives services, all of those services are logged onto that patient’s ‘bill.’ These claims would contain all of the items from the CDM and can be very long. How HCO’s Are Paid

14. Hospitals use a standard billing format developed by CMS called a ‘Uniform Bill – 1992’, more commonly referred to as an ‘UB-92’ – now the ‘UB-04.’ The UB-04 is often more condensed than a complete claim because all of the items from the CDM are typically ‘rolled-up’ to a higher level (usually by revenue code) on the inpatient side (outpatient not rolled up with some exceptions). These revenue codes coincide with functional areas within the organization (ie, pharmacy, or emergency room)

15. 2. Specific Services (Charge payment) FOR PHYSICIANS The uniform billing format for a physician is called a CMS- 1500. PAYERS WHO PAY VIA THIS ARRANGEMENT FALL INTO THREE GROUPS 1.Patients without insurance 2.Patients with insurance from a firm that does not have a contract with that HCO 3.Insurance firms that negotiate a ‘discount-of-charge’ contract with the HCO ADVANTAGES? DISADVANTAGES? How HCO’s Are Paid

16. 3. Capitated Rates A negotiated arrangement between payer and provider to cover specific services for a defined population over an established period of time. An example would be for an insurance company to contract with OSU Medical Center to cover all hospital care for its beneficiaries for a given year. The insurance company would pay OSU a fixed amount of money per month, knowing that hospital service utilization could fluctuate each month. Capitated arrangements gained popularity in the mid-1990’s but have been declining. ADVANTAGES? DISADVANTAGES? How HCO’s Are Paid

17. 4. Bundled Services Two key features Payments to the provider are not necessarily tied to the services provided to the patient as recorded on the UB-04 or CMS-1500. These arrangements have a fixed fee specified per unit of service. How HCO’s Are Paid

18. Examples: –Hospital Medicare DRGs, APCs Per diem rates (per day) Case rates –Physician Resource Based Relative Value Scale (RBRVS) –Skilled Nursing Facilities Resource Utilization Groups (RUGs) –Home Health Agencies Home health resource groups (HHRGs) ADVANTAGES? DISADVANTAGES?

19. 4. Bundled Services - MEDICARE Medicare primarily pays hospitals on a bundled service arrangement. This is referred to as the Prospective Payment System – officially launched in 1983. Some facilities are exempt from PPS, including: psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long-term care hospitals, distinct psych and rehab units, hospitals outside the 50 states, hospitals in states with an approved waiver, critical access hospitals, and comprehensive cancer clinics. How HCO’s Are Paid

20. 4. Bundled Services - MEDICARE Medicare has three ‘insurance plans’ for beneficiaries PART A – hospital inpatient, snf, hospice, home health, and inpatient blood coverage (all persons over 65, some other groups) PART B – optional coverage for physician services, hospital outpatient, lab, durable medical equipment (DME), and other coverage (all persons over 65 who choose to pay monthly premium) PART D – prescription drug coverage (NEW) (all persons over 65 who choose to join) How HCO’s Are Paid

21. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians Skilled Nursing Facilities Home Health Agencies How HCO’s Are Paid

22. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians How HCO’s Are Paid Figure 3–2 Breakdown of Medicare Inpatient Payments to a Hospital

23. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians DRG Operating Payment = (Hospital Dollar Rate) X (DRG Case Weight) Determined by: 1.Labor & 2.Non-labor components (labor component should be multiplied by the hospital’s wage index) Determined by: 1.Weight of DRG How HCO’s Are Paid

24. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians Additional payment can be obtained by Medicare payments to cover: 1.Indirect medical education – separate from salaries 2.Disproportionate share – for hospitals treating large percentage of Medicare/Medicaid patients 3.Outlier – for those patients with unusually large bills 1.When threshold limit is reached – Medicare pays percentage (less than 100%) of difference between threshold and actual cost How HCO’s Are Paid

25. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians Medicare pays ‘reasonable costs’ for the following: 1.Direct Medical Education 2.Kidney Acquisition Costs 3.Bad debts for copayments and deductibles of Medicare beneficiaries How HCO’s Are Paid

26. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians Based on the BBA of 1997 – PPS was initiated on the outpatient side for Medicare Provided services are grouped into “Ambulatory Payment Classifications” (APCs) Payment rates are established for each APC – hospitals can have more than one APC per encounter (different from the DRG system where only one DRG is assigned per discharge) Not all outpatient services have an assigned APC – some are paid on a fee schedule basis (lab as example) and some are not paid at all (some items that are deemed incidental – ex: certain drugs and medical supplies) How HCO’s Are Paid

27. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians  838 APC groups (2010) – Anything that says ‘APC Payment’ Medical Surgical – reducible Significant procedures Ancillary  Each CPT/HCPCS code is assigned to one APC group  Each CPT/HCPCS code has an indicator that tells how that procedure will be reimbursed by Medicare How HCO’s Are Paid

28. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians IndicatorExample of ServiceStatus A clinical laboratory, ambulance, physical & occup therapy fee schedule Bnon-recognized codesnot paid Cinpatient procedurenot paid Ddiscontinued codesnot paid Enon-allowed item or servicenot paid Facquisition of corneal tissuereasonable cost Gcurrent drug / biological pass-through additional pps payment Hdevice pass-through cost-based pass through How HCO’s Are Paid

29. IndicatorExample of ServiceStatus Knon-pass-through drug / biological additional pps payment Lvaccinereasonable cost Mnot billablenot paid Nincidental servicepackaged Ppartial hospitalizationpaid per diem Qpackagedpps payment Rblood and blood productsAPC rate Ssignificant procedureAPC rate Tsignificant procedure, reduced when multipleAPC rate Ubrachytherapy sourcesAPC rate Vclinic or ED visitAPC rate Xancillary serviceAPC rate Ynon-implant DME not paid under OPPS Indicator list, continued How HCO’s Are Paid

30. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians Total Payment per Encounter = 1)APC (used for example) 2)Fee schedule payments 3)Outlier payments How HCO’s Are Paid

31. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians Total Payment = [.60 (labor) X APC Payment Rate X Wage Index] + [.40 (non-labor) X APC Payment Rate] Coinsurance = [.60 (labor) X National Median APC Coinsurance X Wage Index] + [.40 (non-labor) X National Median APC Coinsurance] 1) APC Payment APC Payment Rate = Current Conversion Factor X Relative Weight How HCO’s Are Paid

32. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians Physicians are either participating or nonparticipating Participating physicians: Agree to accept Medicare’s assigned fees for services, and agree to only charge patient for copayment (usually 20% of total assigned fee) Are included in directory of participants Have access to electronic claim transmission Receive payment at 100% of prevailing charge vs. 95% for nonparticipating physicians How HCO’s Are Paid

33. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians Doctor charge Medicare approved x participating factor Medicare allowed x MAC (max allowable charge) factor Max allowed charge Medicare payment (80%) Patient payment Total allowed $500 $400 1.0 $400 1.0 $400 $320 80 $400 $500 $400 0.95 $380 1.0 $380 $304 76 $380 $500 $400 0.95 $380 1.15 $437 $304 133 $437 Participating Assigned Non-participating Un-Assigned.95 is max allowed for ‘non- participating’ doc 1.15 is max allowed for ‘un- assigned’ case How HCO’s Are Paid

34. 4. Bundled Services – MEDICARE – Calculating Payment Hospital Inpatient Hospital Outpatient Physicians Fees are region-specific based upon Work (RVW) Practice expense (RVP) Malpractice (RVM) Fee formula conversion factor (‘I’ stands for indexed value) [(RVW x IW) + (RVP x IP) + (RVM x IM)] Total Payment [Above Formula Result for Geographic Area] X Current Conversion Factor Rate How HCO’s Are Paid