Question

review managed care contracts for different payments plan( PPO, HMO, Fee for services, etc) and describe provider incentives and risks under each of the following reimbursement methods:
a. cost-based
b.charge-based (including discounted charges)
c. per procedure
d. per diagnoses
e. per diem
f. global pricing
g. capitation

Answer 1

A large proportion of provider revenues does not come directly from patients (the users of healthcare services) but from insurers, known collectively as third-party payers. Because a healthcare organization’s revenues are key to its financial viability.A large proportion of provider revenues does not come directly from patients (the users of healthcare services) but from insurers, known collectively as third-party payers. Because a healthcare organization’s revenues are key to its financial viability

Private Insurers- In the United States, the concept of public, or government, health insurance is relatively new, while private health insurance has been in existence since the early twentieth century. In this section, we discuss the major private insurers.

Commercial Insurers- Commercial health insurance traditionally was issued by life insurance and casualty insurance (home and auto) companies. Today, however, most health insurance is provided by companies that exclusively write health insurance. Examples of commercial insurers include Aetna, Humana, and UnitedHealth Group. Most commercial insurance companies are stockholder owned, and all are taxable entities. Commercial insurers moved strongly into health insurance following World War II. At that time, the United Auto Workers negotiated the first contract with employers in which fringe benefits were a major part of the contract. Like the Blues, the majority of individuals with commercial health insurance are covered under group policies with employee groups, professional and other associations, and labor unions.

Self-Insurers An argument can be made that all individuals who do not have some form of health insurance are self-insurers, but this statement is not accurate. Self-insurers make a conscious decision to bear the risks associated with healthcare costs and then set aside (or have available) funds to pay for costs they may incur in the future. Individuals, except the very wealthy, are not good candidates for self-insurance because, as discussed earlier, individuals who do not pool risks face much uncertainty in future healthcare costs. On the other hand, large organizations, especially employers, are good candidates for self-insurance. In fact, most large companies, and many midsized companies, are selfinsured. The advantages of self-insurance include the potential to reduce costs (cut out the middleman) and the opportunity to offer plans tailored to meet the unique characteristics of the organization’s employees. Organizations that self-insure typically pay an insurance company to administer the plan. For example, employees of the State of Florida are covered by health insurance, the costs of which are paid directly by the state, but the plan is administered by Blue Cross/Blue Shield of Florida.

Public Insurers -Government is both a major insurer and a direct provider of healthcare services. For example, the government provides healthcare services directly to qualifying individuals through Department of Veterans Affairs, Department of Defense, and Public Health Service medical facilities. In addition, it either provides or mandates a variety of insurance programs, such as workers’ compensation and TRICARE (health insurance for military members, their families, and uniformed services retirees). In this section, however, we focus on the two major government insurance programs—Medicare and Medicaid—that fund roughly one-third of all healthcare services provided in the United States. Group policy A single insurance policy that covers a common group of individuals, such as a company’s employees or a professional group’s members.

Medicare was established by Congress in 1965 primarily to provide medical benefits to individuals aged 65 or older. About 50 million people have Medicare coverage, which pays for about 20 percent of all US healthcare expenditures. Over the decades, Medicare has evolved to include four major types of coverage:

1. Part A provides hospital and some skilled nursing home coverage.

2. Part B covers physician services, ambulatory surgical services, outpatient services, and other miscellaneous services.

3. Part C is managed care coverage offered by private insurance companies. It can be selected in lieu of Parts A and B.

4. Part D covers prescription drugs. In addition, Medicare covers healthcare costs associated with selected disabilities and illnesses (such as kidney failure) regardless of age.

Medicaid began in 1965 as a modest program jointly funded and operated by the individual states and the federal government. The idea was to provide a medical safety net for low-income mothers and children and for elderly, blind, and disabled individuals.

Cost-Based Under cost-based reimbursement, the payer agrees to reimburse the provider for the costs incurred in providing services to the insured population. Cost-based reimbursement is retrospective in the sense that reimbursement is based on what has happened in the past. Costbased reimbursement is limited to allowable costs, usually defined as costs directly related to the provision of healthcare services. For all practical purposes, cost-based reimbursement guarantees that a provider’s costs will be covered by revenues.

Charge-Based When payers pay billed charges, they pay according to a rate schedule, called a chargemaster, established by the provider. To a certain extent, this reimbursement system places payers at the mercy of providers, especially in markets where competition is limited. In the very early days of health insurance, all payers reimbursed providers on the basis of charges. Now, the trend is toward other, less-generous reimbursement methods, and the only payers that are expected to pay the full amount of charges are self-pay (private-pay) patients. Even then, low-income uninsured patients often are given discounts from charges. Most insurers that still base reimbursement on charges now pay negotiated, or discounted, charges. Insurers with managed care plans, as well as conventional insurers, often have bargaining power because of the large number of patients they bring to a provider, so they can negotiate discounts that generally range from 20 percent to 50 percent (or more) of charges. The effect of these discounts is to create a system similar to hotel or airline pricing, where few people pay the listed rates (rack rates or full fares). Many people argue that chargemaster prices have become meaningless, and hence the entire concept should be abandoned. But old habits die hard, and chargemaster prices still play a role in some reimbursement methods, so we expect that they will be around for some time.

Prospective Payment In a prospective payment system, the rates paid by payers are determined by the payer before the services are provided. Furthermore, payments are not directly related to either costs or charges. Here are the common units of payment used in prospective payment systems:

◆ Per procedure. Under per procedure reimbursement, a separate payment is made for each procedure performed on a patient. Because of the high administrative costs associated with this method when applied to complex diagnoses, per procedure reimbursement is primarily used in outpatient settings.

Per diagnosis. In the per diagnosis reimbursement method, the provider is paid a rate that depends on the patient’s diagnosis. Diagnoses that require higher resource utilization, and hence are more costly to treat, have higher reimbursement rates. Medicare pioneered this basis of payment in its diagnosis-related group system, which it first used for hospital inpatient reimbursement in 1983. (See the Industry Practice box for examples of per procedure and per diagnosis reimbursement.)

◆ Per day (per diem). Some insurers reimburse institutional providers, such as hospitals and nursing homes, on a per day (per diem) basis. Here, the provider is paid a fixed amount for each day that service is provided. Often, per diem rates are stratified, which means that different rates are applied to different services. For example, a hospital may be paid one rate for a medical/surgical day, a higher rate for a critical care unit day, and yet a different rate for an obstetric day. Stratified per diems recognize that providers incur widely varied daily costs for providing different types of inpatient care.

CAPITATION As compared to fee-for-service, capitation is an entirely different approach to reimbursement. Under capitated reimbursement, the provider is paid a fixed amount per covered life per period (usually a month), regardless of the amount of services provided.