3 - 1 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 Copyright © 2013 by the Foundation of the American College of Healthcare Executives

3 - 2 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 Copyright © 2013 by the Foundation of the American College of Healthcare Executives

3 - 3 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 Copyright © 2013 by the Foundation of the American College of Healthcare Executives

3 - 4 There are two opposing positions that insurers can take regarding underwriting: Community rating Experience rating The Health Insurance Portability and Accountability Act (HIPAA) and Affordable Care Act (ACA) set national standards for underwriting. Preexisting condition clauses banned by 2014 Rights to purchase insurance Consumer protection Underwriting Provisions Copyright © 2013 by the Foundation of the American College of Healthcare Executives

3 - 5 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 Policy restrictions (ACA has placed limits on the ability of insurers to include unreasonable restrictions) Moral Hazard Copyright © 2013 by the Foundation of the American College of Healthcare Executives

3 - 6 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 Copyright © 2013 by the Foundation of the American College of Healthcare Executives

3 - 7 MCOs combine insurance and provider functions. Types of MCOs Health maintenance organizations (HMOs) Preferred provider organizations (PPOs) Various others In general, MCOs attempt to limit utilization. Is this bad? Managed Care Organizations (MCOs) Copyright © 2013 by the Foundation of the American College of Healthcare Executives

3 - 8 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). Here, payment is tied to the amount of services provided: Cost based Charge based Prospective payment Capitation. Here, payment is tied to the patient population (number of enrollees). Reimbursement Approaches Copyright © 2013 by the Foundation of the American College of Healthcare Executives

3 - 9 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 ( ). FFS: Cost-Based Reimbursement Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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 percent. FFS: Charge-Based Reimbursement Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Prospective payment methods have 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 (DRG) Per diem (per day) Global pricing (bundling) (episode of care) FFS: Prospective Payment Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Capitation is entirely 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 Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Many insurers are now developing reimbursement methods that reward “performance.” Most P4P plans provide extra amounts to providers that meet performance goals, usually related to quality. The idea is to create incentives for providers to improve quality of care and reduce costs. Medicare’s approach is called value-based purchasing.  Do P4P plans benefit insurers? Pay for Performance (P4P) Plans Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Inpatient Prospective Payment System is designed to: Reduce Medicare outlays Provide cost-containment incentives Maintain quality of care Hospitals are paid a fixed amount per admission on the basis of diagnosis. If cost is less than reimbursement, hospital keeps the difference. If cost is more than reimbursement, hospital bears the loss. Medicare Hospital Payments Copyright © 2013 by the Foundation of the American College of Healthcare Executives

IPPS payments are based on 334 base diagnosis related groups (DRGs), which are further subdivided into roughly 750 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, 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.) Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Outlier payments: Length of stay based Cost based Medical education payments Bad-debt loss payments Disproportionate share of low-income patients payments Other IPPS Features Copyright © 2013 by the Foundation of the American College of Healthcare Executives

The Outpatient Prospective Payment System consists of a fixed payment amount for each outpatient visit. There are about 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) Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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 component. The procedure RVU total is multiplied by a dollar conversion factor and geographic cost index to obtain the payment amount. Medicare Physician Payments Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Cost-based reimbursement: Maximize costs (quality) and service quantity. Charge-based reimbursement: Maximize charges (price) and service quantity as well as minimize costs. Per procedure: Maximize quantity of profitable procedures and minimize cost per procedure. Provider Incentives (FFS) Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Per diagnosis: Maximize quantity of profitable cases and minimize cost per case as well as upcode. Per diem: Maximize length of stay (LOS) and minimize cost per day. Global pricing: Maximize episodes of care and minimize cost per episode. Value-based purchasing: Improve quality and reduce costs. Provider Incentives (FFS) (Cont.) Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Capitation changes the playing field for providers. The incentive now is to: Increase the number of covered lives. Decrease the volume of services. Remember, under FFS the incentive is to increase the volume of more services. Provider Incentives (Capitation) Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Cost-based reimbursement: Risk is minimal. Charge-based reimbursement: Discounts will drive reimbursement below costs. Per procedure: Costs per procedure will exceed reimbursement. Per diagnosis: Costs per admission will exceed reimbursement. Provider Risks Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Per diem: Costs per day will exceed reimbursement. Global pricing: Costs per episode of care will exceed reimbursement. Value-based purchasing. Will neither increase quality nor reduce costs. Capitation: Costs per member will exceed reimbursement. (Provider costs are driven by both volume and cost of services.) Provider Risks (Cont.) Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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. Reimbursement risk cannot be avoided, so it must be managed. Provider Risk Summary Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Coding is the first step in the reimbursement process. Coding is performed by administrative personnel (coders) on the basis of clinicians’ notes. There are two different types of codes used by providers. ICD codes CPT codes Coding Copyright © 2013 by the Foundation of the American College of Healthcare Executives

International Classification of Diseases (ICD) codes are used to specify diseases, symptoms, or injuries. The codes consist of 3, 4, or 5 digits. The greater the number, the more detailed the information. For example, 410 is heart attack specifies the anterior wall ICD codes are used by hospitals to specify inpatient diagnoses. ICD Codes Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Current Procedural Terminology (CPT) codes are used to specify medical procedures (treatments). The codes are 5 digits. For example: is a simple (short) office visit is a complex (long) office visit CPT codes are used by physicians (and other clinicians) to specify procedures performed on patients. CPT Codes Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Healthcare reform refers to measures initially enacted by Congress in 2010 as part of the Patient Protection and Affordable Care Act (ACA). The basic purpose of the act was to increase the number of Americans having health insurance. Although much of the ACA pertains to insurance coverage, it contains many provisions that directly affect health services providers. Healthcare Reform Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Although many of the ACA provisions were immediately effective, others will not be fully implemented until The ba. Alth. Healthcare Reform (Cont.) Copyright © 2013 by the Foundation of the American College of Healthcare Executives

This concludes our discussion of Chapter 3 (Paying for Health Services). Although not all concepts were discussed in class, you are responsible for all of the material in the text.  Do you have any questions? Conclusion Copyright © 2013 by the Foundation of the American College of Healthcare Executives