Code Blue Introduction to Terms Reimbursement and Managed Care Chapters One through Seven Accounting Version

Question Why is it important for students to understand a little about managed care? Because controls placed on the healthcare industry by government, insurance companies and businesses influence the way the healthcare is delivered. Every one from the hospital administrator to the floor nurse is impacted in one way or another.

Chapter Two Terms Prospective Payment --a hospital payment system where the price of a product or service is established in advance of rendering services Retrospective Payment--synonymous with Cost Reimbursement. The price is established after the product or service has been rendered.

Health Maintenance Organizations (HMOs) HMOs were one of the first organizations to use prospective reimbursement to control physician behavior. HMOs attempt to shift economic risk from the patient to the healthcare provider. –This will be discussed in more detail in chapters eight through fourteen

Payment Systems A prospective payment system, in which the price is determined before the product is delivered is analogous to a fixed price contract in the construction industry A retrospective payment system is analogous to a cost reimbursement contract

Incentives for Cost Control Fixed price contracts provide more incentives for cost control as the provider absorbs the difference between estimated costs and actual costs.

Payment Systems We will discuss payment systems in more detail in chapters eight through fourteen At this point we need to understand –In the early 1980s many insurance programs changed from retrospective payment systems to prospective payment systems –This changed physician cost behavior –This also created a need for cost accounting

Chapter 3--Prospective Reimbursement In the textbook/novel, the board thinks PBCH has been hurt by prospective (or fixed-price) reimbursement. They are not certain, however... –Without a cost accounting system they don’t know the actual costs of their products.

What do they know? Their financial accounting system gives them –Total revenues and total costs by department –Total revenues and total costs by patient day

How is that possible? In Supplement One, Helen Ingersol, a board member, challenges the Controller’s assertion that the hospital does not know the actual costs of the individual products and procedures it provides. “I have trouble believing that’s true,” Helen said. “Whenever I’ve had a family member in the hospital, I’ve received a bill itemizing costs down to the last aspirin!” How could the hospital provide an itemized bill if it didn’t know the true cost what it was billing for?

Answer Prior to the implementation of cost accounting charges were not based on costs. –Prices were set based upon what competition was doing and what the market would bear –Total hospital revenues had to exceed total hospital costs, but individual prices didn’t necessarily reflect actual costs

Traditional Pricing Systems Billed charges--not necessarily based on individual product costs Cost reimbursement--costs per patient day were calculated in the aggregate and reimbursed by some organizations such as Medicare

Why was cost reimbursement initially used by Medicare and Blue Cross? Since most hospitals were non-profit organizations, insurance companies reasoned they should receive full cost plus a percentage for capital. The problem was that it provided no incentive for cost control!

Cost reimbursement incentives If a hospital receives an “excess” of 6% over costs, how does it increase its “profit”? –By allowing costs to increase.

Do non-profits need a profit? Remember that even non-profit organizations have to earn more than costs to cover –Inflation on buildings and equipment that must be replaced periodically –Future building and equipment needs attributable to growth in patient volumes

How could hospitals get away with this? There was no price competition Costs were not that high Insurance companies paid what was billed without auditing individual product costs Some products subsidized others –Without price competition no one seemed to care

Wes Douglas was initially hired as a consultant to install a cost accounting system that would allow administration and the board to know... Actual product and service costs The actual amount of money Peter Brannan Community Hospital (PBCH) was making or losing by –Product –Physician –Customer (e.g employer or insurance company)

Review of Homework Questions

End of Chapters 1 - 7