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Reimbursing Health Care Providers

It is all about striking the right balance between economic incentives for over-treatment and under-treatment

Yaseen Hayajneh, PhD

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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.

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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

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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 1998-2001 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

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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

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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)

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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?

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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

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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4) Payment per Time: Salary

One lump sum per month or yearly. No risk carried by the physician. Incentive ? Productivity ?

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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

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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

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FFS: Risk and Cost

Reasonable cost A system largely influenced by hospitals

Risk? Influence on cost?

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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).

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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

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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

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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.