1. Introduction to Health Care and Public Health in the U.S.
Financing Health Care, Part 2
Welcome to Introduction to Health Care and Public Health in the U.S.: Financing Health Care, Part 2. This is lecture b.
The component, Introduction to Health Care and Public Health in the U.S., is a survey of how health care and public health are organized and how services are delivered in the U.S. It covers public policy, relevant organizations and their interrelationships, professional roles, legal and regulatory issues, and payment systems. It also addresses health reform initiatives in the U.S.
Lecture b
This material (Comp 1 Unit 5) was developed by Oregon Health & Science University, funded by the Department of Health and Human Services, Office of the National Coordinator for Health Information Technology under Award Number 90WT0001.
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2. Financing Health Care, Part 2 Learning Objectives - 1
Describe the revenue cycle and the billing process undertaken by different health care enterprises. (Lecture a)
Explain the billing and coding processes, and standard code sets used in the claims process. (Lecture a)
The learning objectives for Financing Health Care, Part 2 are to:
Describe the revenue cycle and the billing process undertaken by different health care enterprises.
Explain the billing and coding processes, and standard code sets used in the claims process.

3. Financing Health Care Part 2 Learning Objectives - 2
Identify different fee-for-service and episode-of-care reimbursement methodologies used by insurers and health care organizations in the claims process. (Lecture b)
Review factors responsible for escalating health care expenditures in the United States. (Lecture c)
Discuss methods of controlling rising medical costs. (Lecture d)
Identify different fee-for-service and episode-of-care reimbursement methodologies used by insurers and health care organizations in the claims process.
Review factors responsible for escalating health care expenditures in the U.S.
And discuss methods of controlling rising medical costs.

4. Reimbursement Methodologies
Revenue Cycle
Claims submitted and adjusted by payor
Examine different methodologies used by payors to reimburse providers.
This lecture completes the discussion of the revenue cycle by explaining claims submission. It also examines the various methodologies by which payors reimburse providers.
Payment requests can be submitted to an insurance payor either on paper or electronically. Payors enter into contracts with organizations and providers to manage the amounts reimbursed for health care services. Payors review and adjust submitted claims and pay the balance to the provider. The methodology used to adjust the claim involves either a fee-for-service approach or episode-of-care method, which is a function of the provider-payor contract.
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5. Claim Submission - 1 Claim: Demographic and insurance information
Diagnosis and procedure codes
Time intervals
Charges
Provider identifiers
After coding, a claim is prepared for submission to a third-party payor for reimbursement using a standard format. Included on a claim are demographic and insurance information, diagnosis codes, procedure codes with time intervals, charges, and practice and provider unique identifiers.

6. Claim Submission - 2 Submission: Paper EDI: 837 Transaction
Physicians – CMS Form 1500
Facility – CMS Form 1450
EDI: 837 Transaction
Claims may be submitted on paper or electronically. The paper forms are called the CMS form 1500 and CMS form 1450, for physicians and institutions, respectively. Information submitted via an 837 transaction through an Electronic Data Interchange, or EDI, electronically transmits the same information found on a paper claim.

7. Electronic Claims Transactions
American National Standards Institute
Electronic Data Interchange (EDI)
HIPAA privacy rules/Transactions Rule
837 Health care claims or equivalent encounter information
835 Health care payment and remittance advice
270/271 Eligibility for a health plan
276/277 Health claims status
278 Referral certification and authorization
The American National Standards Institute, or ANSI, oversees the development of standards for products, services, processes, systems, and personnel in the U.S. The Accredited Standards Committee X12, or ASC X12, chartered by ANSI, develops EDI standards.
This slide lists some of the ASC X12-specific HIPAA EDI transaction sets used to transmit information and claims electronically for eligibility status, claim submission, claim status, claim remittance, and referral certification and authorization.

8. Remittance Reimbursement received Final settlement with patient
Reduced amount due to coinsurance, copayments, or contract
Challenges
Non-payment by payor
Incorrect reimbursement
Final settlement with patient
coinsurance
After processing by an examiner or adjuster at the payor, reimbursement is sent to the provider. In most cases, reimbursement is less than the amount billed, due to co-payments, co-insurance, or contractual arrangements.
While most providers expect reductions in the amount billed, challenges occur when payment is less than anticipated, since this results in lower than expected revenue. There are few industries or other types of insurance where this occurs. After receiving payment from the payor, a final bill is prepared for settlement with the patient. In most cases, this represents co-insurance amounts.

9. 3rd Party reimbursement
Reimbursement Methodology
Fee-for-service (FFS): Separate payments made for each individual service provided
Episode-of-care: Payment of one sum for providing all services or care during a illness or time frame
Example:
Patient with cough and fever is treated at urgent care
The payment a provider receives from a third party payor depends on the methodology applied to a specific claim. After submission to the payor, a medical claims examiner or adjuster processes it according to the insurance plan’s guidelines and the terms of the policy. Third party payors use different methodologies to determine the amount to pay for a specific claim. Payments for claims are based on one of two methodologies: fee-for-service or episode-of-care, both of which describe a unit of payment.
Fee-for-service refers to separate payments made for each individual service provided, whereas episode-of-care refers to one payment for all care provided during an illness or time frame.
For example, a patient with a cough and fever is examined and treated at an urgent care center. The center provides three services for this patient: the doctor’s professional fees, an x-ray, and a blood test. With fee-for-service reimbursement, the provider receives payment for each of the three services individually. With episode-of-care payment, the center receives one payment for all three services – the same pre-determined amount whether one, two, or all three of the services are performed. This single fee for all services is negotiated by the provider with the payor in advance as part of managed care arrangements.
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10. Reimbursement Methodology
Fee-for-service (FFS)
Traditional retrospective
Self-pay
Episode-of-care (EOC)
Capitation
Prospective payment
Global payment
Managed care may involve either methodology
There are two types of fee-for-service payments: traditional retrospective and self-pay. There are three types of episode-of-care, or EOC, payments - capitation, prospective payment, and global payment.
Managed care, when referring to reimbursement, may involve either fee-for-service or episode-of-care methodology.
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11. FFS: Traditional Retrospective - 1
Payment made after services have been provided
Method used by commercial or indemnity insurance policies
Fee schedule
Developed using historical claims data
Lists allowable services and procedures and amounts payable for each
A traditional retrospective fee-for-service payment refers to the payment by third-party payors, usually under a commercial or indemnity plan, after services have been provided. Payments are based upon a fee schedule developed from historical claim data using the average of the usual, customary, and reasonable charges that have been submitted by providers over time.
A fee schedule is the third party payor equivalent of the provider’s charge description master. It is a list of allowable services and procedures, and the amounts payable for each. Some medical services may not be allowable or payable, for example cosmetic plastic surgery.

12. FFS: Traditional Retrospective - 2
Resource-Based Relative Value Scale (RBRVS)
Used by Medicare and other third-party payors
Payments are based on cost of services in terms of effort, overhead, and malpractice insurance
Another type of retrospective fee-for-service payment is the resource-based relative value scale, or RBRVS, used by Medicare and other third-party payors. Payments are based on the cost of services in terms of effort, overhead, and malpractice insurance.

13. FFS: Self-pay Self-pay
Patient responsible for payment for health care services
Uninsured subset of self-pay
May seek reimbursement afterwards
Self-insured plan: Large employers (ERISA)
Costs possibly higher
The second form of fee-for-service payment, self-pay, is when patients pay directly for the services they receive. For true self-pay patients, providers may offer a discount. Those without insurance are considered a subset of self-pay, since they are responsible for all expenses.
One self-pay scheme involves large employers who self-insure under the Employee Retirement Income Securities Act, or ERISA. With ERISA, the employer agrees to pay for an employee's medical care. The employer assumes all the risk for the cost of care, and administers and pays for all of an employee’s health care costs, or in some cases, employees may share some of the costs with the employer. This scheme usually involves a third party administrator, which may be an insurance company, to assist in processing employee claims. Covered individuals may appear to have commercial insurance.
As a reimbursement methodology, self-pay costs tend to be higher for services provided than other methodologies.

14. EOC: Capitation - 1
Health care organization receives fixed sum per person enrolled in the plan
Same amount paid regardless of the number of plan patients requiring care, frequency of visits, or severity of illness
PMPM: per member per month
Payor knows costs in advance
Provider assumes some risk, but has guaranteed income
Moving now from the fee-for-service payment methodology to the episode of care, or ECO, methodology, we encounter Capitation.
Capitation payments are typically paid by Health Maintenance Organizations, or HMOs. The provider or health care organization receives the same amount from the third-party payor per length of time, usually a month, for the care provided at the health care organization to all of its members. Regardless of the number of patients enrolled in the plan who require care, the frequency of their visits, or the severity of an illness, the provider receives a preset amount per enrolled patient each month. The term used to describe this approach to payment is per member per month, or PMPM.
The advantage of this method of payment for the payor is that the third-party payor knows the total costs in advance and places some of the risk on the provider.
The advantage to the provider is a guaranteed stream of payments or income. However, the disadvantage is that the provider must assume the risk of loss should the cost of care exceed the payments received.
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15. EOC: Capitation - 2 Group practice agreement with payor
Payor pays the practice $25 per 100 members per month
If costs of care are less than $25 per 100, the practice makes money
If costs of care are greater than $25 per 100, the practice loses money
Provider must balance provision of care with the costs
To illustrate this, consider a group practice that enters into an agreement with a payor to receive twenty-five dollars per member per month. For every 100 members assigned to the practice, the provider receives 2,500 dollars per month even if none of the member patients are seen. If during a single month, the cost of care for all 100 members is actually 3,500 dollars, then the group practice loses 1,000 dollars that month and must absorb the expense of the additional cost of care. The payor makes no additional payments to the provider. The provider must balance provision of care with the costs.
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16. EOC: Prospective Payment Method
Payors establish reimbursement rates in advance for services to be provided over a specified time
Based upon average resource use required to provide a level of care for a given set of conditions or a disease
Same amount paid regardless of the costs incurred
Another type of episode-of-care methodology is the prospective payment method in which payors establish reimbursement rates in advance for packages of health care services for specific problems. The rates are established based on average resource use for the level of care and the services provided. Individual patients may require different levels of resources that correspond to different costs; however, the total resource use should average out over time.

17. Prospective Payment Types
Per-diem: Fixed payment made for each day of hospitalization
i.e. based on unit of time
Case-based: Fixed amount for providing health services for a condition or disease (case)
There are two prospective payment types. The first is per-diem payment, in which a fixed amount is paid for each day of hospitalization, where the day represents the episode of care. The second type of prospective payment is case-based payment where the same amount is paid regardless of the length of stay and total resource use.
For example, two patients with pneumonia are admitted to the hospital on the same day. The first requires five days of hospitalization and the second requires nine days of hospitalization. With per-diem payments, the hospital receives five times the per diem payment for the first patient, and nine times the per diem rate for the second patient. Under case-based payment, the organization receives the same amount for both patients, even though one required additional days of care.

18. Diagnosis Related Groups (DRGs)
Payments to hospitals for inpatient services for Medicare patients
Payments based on:
Diagnosis, procedures, age, sex, comorbidities, complications, and discharge status
Comorbidity: The presence of 2 or more conditions or diseases in the same patient which complicates a patient’s hospital stay leading to more resource use or longer length of stay
An example of a prospective payment system is the Centers for Medicaid and Medicare Services diagnosis related group system, or DRGs, used for payment to hospitals for inpatient services provided to Medicare patients. Payments are made based upon the age, sex, diagnosis, any existing comorbidities that may affect the length of stay, the number of procedures necessary, expected complications, and discharge status.
A comorbidity is the presence of two or more conditions or diseases in the same patient, which complicates the patient's hospital stay, and may lead to more resource use or longer lengths of stay.

19. EOC: Global Payment
Payor makes one payment for multiple providers treating a single episode of care
Extends the concept of capitation to a larger group
The final episode-of-care method is global payment. Under the global payment model, the third-party payor makes one payment for an episode of care for a patient who receives care from multiple providers within a fully-integrated delivery system.

20. Managed Care Reimbursement
Contract with providers to limit fees
Fee-for-service: Discounted fee schedules
Episode-of-care: Prospective payment
Patient utilization control through
Financial incentives to use network resources
Offer lower in-network costs
Increase out-of-pocket expenses for non-network use
Finally, in managed care reimbursement, Managed Care Organizations, or MCOs, contract with providers to limit fees. The MCO may use a fee-for-service methodology in which payments are made according to a discounted fee schedule, or an MCO may use an episode-of-care reimbursement, such as a prospective or global payment. MCOs provide an incentive to patients to use resources effectively, by either lowering in-network costs, or by raising costs for non-network care.

21. Financing Health Care, Part 2 Summary
Revenue cycle
Unique process
Charge capture
Services & diagnosis
Claims coded
Claim submitted and adjusted by payor
Reimbursement methods
Fee-for service
Episode-of-care
This concludes lecture b of Financing Health Care, Part 2.
In summary, the revenue cycle for health care organizations is a unique process that requires submission of medical bills or claims describing the services provided. During the preparation of claims, information about the type of medical service, the diagnosis associated with the service, and the fee for the service is gathered and coded into a claim using standardized codes. This data, along with identifying information about the patient and organization, is submitted for payment to an insurance payor either on paper or electronically. Payors enter into contracts with organizations and providers to manage the amounts reimbursed for health care services. Payors review and adjust submitted claims and pay the balance to the provider. The methodology used to adjust the claim involves either a fee-for-service approach or episode-of-care method, which is a function of the provider-payor contract.

22. Financing Health Care Part 2 References – Lecture b
Castro, A. B. and Layman, E (2006). Principles of Healthcare Reimbursement. In CPT Current Procedural Terminology (Standard ed., Ch , 8). Chicago, IL: The American Health Information Management Association.
Code Sets Overview. (n.d.). Retrieved January 24, 2017, from
Current Procedural Terminology. (n.d.). Retrieved March 30, 2016, from Wikipedia website:
References slide. No audio.

23. Introduction to Health Care and Public Health in the U. S
Introduction to Health Care and Public Health in the U.S. Financing Health Care, Part 2 Lecture b
This material was developed by Oregon Health & Science University, funded by the Department of Health and Human Services, Office of the National Coordinator for Health Information Technology under Award Number 90WT0001.
No audio
Health IT Workforce Curriculum Version 4.0