1 Reimbursing Health Care Providers It is all about striking the right balance between economic incentives for over-treatment and under- treatment Yaseen Hayajneh, PhD

2 Financial Risk Is the potential to lose money, earn less money, or spend more time or effort without additional payment on a reimbursement transaction. Out-of-Pocket – Patient carries all the risk Health insurance Traditional – Insurer carries the risk New paradigm – Providers share the risk Whenever providers or patients are bearing little risk, the system encourages higher levels of use of resources.

3 Health Insurance and Cost Health insurance Was an attempt by society to solve the problem of unaffordable health care under out-of-pocket system. Rapid rises in the cost of health care. Reimbursing health care providers by Insurance companies and governmental programs Other reasons… Technology, Malpractice Litigation, Fraud/Abuse, Inflation

4 Rising HC Costs: Reasons …USA Health insurance coverage Prescription drug use is rising, and the cost of new drugs is increasing rapidly National prescription drug spending rose 11.1 percent between 1998 and 2001 Utilization of hospital services and medical technology is rising Outpatient hospital care spending grew 15% from Inpatient hospital care jumped 5.9 % during the same period Medical technologies and treatments are becoming more advanced…and more expensive Use of specialty care is on the rise Specialty physician services increased 6.7 % in 2001 Emergency rooms are over utilized for non-emergency care

5 Implications of Rising HC Costs Direct Implications Increased spending burden on the government (taxpayers and other resources) Increased competitive pressures on businesses Increased financial burden on families and individuals

6 Implications of Rising HC Costs Indirect Implications Slower workforce growth Additional part-time versus full-time workers Reduction in health coverage and other benefits Slower cash-wage growth Additional off-shoring pressures (weaker economy)

7 Reimbursing as A Way to Reduce Cost Different Methods of reimbursement were have been tried … As one way to lower the growth rate in health care costs. This module describe the different ways providers are paid What is the unit of payment used in each way?

8 Methods of Physician Payments 1. Payment per procedure: Fee-for-Service 2. Payment per episode of illness 3. Payment per patient: Capitation 4. Payment per time: Salary

9 Payment per Procedure: Fee-for-Service The traditional method of reimbursing physicians, hospitals and other health care providers for their services. A payment system for health care where the health-care provider is paid for each procedure or service rendered. Each service provided to the patient is associated with a corresponding fee to be paid to the provider.

10 1) Payment per Procedure: Fee-for-Service The fees increase as more services are provided or as more expensive services are substituted for less expensive ones. In FFS payment systems, physicians have an economic incentive to perform more services. In the US, this system contribute to the rapid rise in health care costs in the US.

11 From Provider-determined to Payer-determined Fee Schedules Usual, customary, and Reasonable (UCR) Provider-determined fee schedules Amounts charged by health care providers that are consistent with charges from similar providers for the same or nearly the same services in a given area. For cost containment purposes, payer- determined fee schedules replaced UCR.

12 Resource Based Relative Value Scale (RBRVS) Payer-determined fee schedule A fee schedule used as the basis of the physician reimbursement system by Medicare. The RBRVS assigns relative values to each CPT code for services on the basis of the resources related to the procedure. RBRVS includes 2,700 codes, covering 95 percent of Medicare allowed charges.

13 2) Payment per Episode of Illness In payment by episode of illness or case, physicians have the economic incentive to reduce the volume of services provided per illness episode or case.

14 Risk Is the potential to lose money, earn less money, or spend more time or effort without additional payment on a reimbursement transaction. FFS Payer absorbs all the risk Payment per Episode Transfers portion of the risk to the provider Example Appendicitis episode

15 3) Payment per Patient: Capitation Method of payment for services in which the insurer pays physicians a fixed amount for each covered person regardless of the type and number of services used. The physician is responsible for delivering or arranging the delivery of services needed by the covered person under the conditions of a contract.

16 Capitation: Risk Shifting This payment structure shifts the financial risk from the insurer to the physician accepting payment. In this arrangement, physicians have the financial incentives to limit the use of services and the use of expensive resources and services. Rewards go to physicians who limit referrals, stay within formularies, lessen laboratory use and reduce average hospitalization.

17 Payment per Patient: Capitation UK Each person enrolls with a GP (physician) who becomes the primary care physician (PCP). For each patient listed the PCP receives a monthly capitation payment. For all non-emergency needs, patients must go through the PCP.

18 4) Payment per Time: Salary One lump sum per month or yearly. No risk carried by the physician. Incentive ? Productivity ?

19 Methods of Hospital Payment 1. Payment per procedure: Fee-for-Service 2. Payment per day: Per Diem 3. Payment per episode of hospitalization: DRG 4. Payment per patient: Capitation 5. Payment per institution: Global Budget

20 1) Payment per procedure: Fee-for-Service The traditional method of reimbursing hospitals for their services. A payment system for health care where the hospitals are paid for each procedure or service rendered. Each service provided to the patient is associated with a corresponding fee to be paid to the hospital. Long Itemized bills

21 FFS: Risk and Cost Reasonable cost A system largely influenced by hospitals Risk? Influence on cost?

22 2) Payment per Day: Per Diem In this system the hospital receives a lump sum for each day the patient is in the hospital, regardless of services provided. Bundling of services by day. Risk? Who is at risk? Discourage the utilization of expensive services. Encourage prolonging of length of stay (LOS) (distribution of services over a longer period of time).

23 3) Payment per Episode of Hospitalization: DRG DRG= Diagnosis Related Group 1983 Medicare pays lump sum for each hospitalization Size of payment is dependent on diagnosis. Bundling of services by hospitalization. Risk? Who is at risk? Number of admissions Length of stay and use of resources

24 4) Payment per Patient: Capitation Method of payment for services in which the insurer pays hospitals a fixed amount for each covered person regardless of the type and number of services used. Very rare. Risk? Who bears the risk Number of Admissions Length of Stay Resource use

25 5) Payment per Institution: Global Budget Global Budget: A fixed payment is made for all hospital services for 1 year. The hospital must figure out how to stay within budget The most extensive bundling of services.