Please answer the following questions in essay format:1. What is the main difference between the fee-for-service and capitation reimbursement methods?What is the key to profitability? 2. What is the p

Employees Equipment suppliers Service contractors Consumable goods suppliers Lenders Basic Business Structure of HCOs, cont. Suppliers HCO Community Resources Services Resources Services WHO?

Hospital Nursing home Physician group ASC Clinic Basic Business Structure of HCOs, cont. Suppliers HCO Community Resources Services Resources Services PATIENTS 1. Self -payer 2. Third -party 1. Blue Cross & Blue Shield 2. Commercial insurance 3. Medicare 4. Medicaid 5. Self -insured employer 6. Other WHO? NONPATIENTS 1. Grants 2. Contributions 3. Tax support 4. Miscellaneous Basic Business Structure of HCOs, cont. • Sources of funds  Revenues • Public (Medicare, Medicaid) • Private insurance (BC/BS, self -insured, commercial insurance) • Direct payment • Nonoperating revenues  Capital • Taxable debt • Tax -exempt debt • Equity (stock, partnership)  Gifts Basic Business Structure of HCOs, cont. • Uses of funds  Expenses • Salaries • Supplies • Insurance  Capital • Interest • Debt principal • Dividends/partner distributions  Investment • Working capital • Buildings and equipment • Replacement reserves Basic Business Structure of HCOs, cont. • Sources of funds for U.S. hospitals (by percentage) Year Out -of -Pocket Payments Third -Party Payments Private Health Insurance Other Private and Government Sources Government Medicare Medicaid 2014 3.2 37.3 10.3 25.8 17.3 2025 3.0 35.6 9.6 27.0 18.6 Observation ? Basic Business Structure of HCOs, cont. • Sources of funds for physicians (by percentage) Observation? Basic Business Structure of HCOs, cont. Year Out -of -Pocket Payments Third -Party Payments Private Health Insurance Other Private and Government Sources Government Medicare Medicaid 2014 9.0 42.2 11.2 25.1 10.6 2025 7.7 39.3 10.7 29.0 13.3 How HCOs Are Paid 1. Cost Reimbursement • Most prominent form of reimbursement by Medicare for hospitals until early 1980s • Most payers have abandoned this form today • Two key components:

• Reasonable cost • Apportioned cost ADVANTAGES?

DISADVANTAGES? 2. Specific Services (Charge Payment) • In essence, this is payment via the hospital/HCO’s “list price.” FOR HOSPITALS • The “list price” can be found in a hospital’s “Charge Description Master ” (CDM) • When a patient receives services, all of those services are logged onto that patient’s “bill.” These claims would contain all of the items from the CDM and can be very long. How HCOs Are Paid, cont. How HCOs Are Paid, cont. • Hospitals use a standard billing format developed by CMS called “Uniform Bill – 1992,” more commonly referred to as a “ UB -92 ,” and now the “UB -04 .” • The UB -04 is often more condensed than a complete claim because all of the items from the CDM are typically “rolled -up” to a higher level (usually by revenue code) on the inpatient side (outpatient not rolled up, with some exceptions).

These revenue codes coincide with functional areas within the organization (i.e., pharmacy, emergency room) . 2. Specific Services (Charge payment) FOR PHYSICIANS • The uniform billing format for a physician is called a CMS -1500. PAYERS WHO PAY VIA THIS ARRANGEMENT FALL INTO THREE GROUPS 1. Patients without insurance 2. Patients with insurance from a firm that does not have a contract with that HCO 3. Insurance firms that negotiate a ‘discount -of -charge’ contract with the HCO ADVANTAGES?

DISADVANTAGES? How HCOs Are Paid, cont. 3 . Capitated Rates • A negotiated arrangement between payer and provider to cover specific services for a defined population over an established period of time. An example would be for an insurance company to contract with OSU Medical Center to cover all hospital care for its beneficiaries for a given year. The insurance company would pay OSU a fixed amount of money per month, knowing that hospital service utilization could fluctuate each month. How HCOs Are Paid, cont. 3 . Capitated Rates • Capitated arrangements gained popularity in the mid -1990s, but have been declining in favor of ACOs. ACOs represent groups of providers that come together to give coordinated patient care, so that the payer has more control over the global costs of care for an enrolled population. ADVANTAGES?

DISADVANTAGES? How HCOs Are Paid, cont. 4. Bundled Services • Two key features:

– Payments to the provider are not necessarily tied to the services provided to the patient as recorded on the UB -04 or CMS -1500. – These arrangements have a fixed fee specified per unit of service. How HCOs Are Paid, cont. How HCOs Are Paid, cont. • Examples:

– Hospital • Medicare DRGs, APCs • Per diem (per day) rates • Case rates – Physician • Resource -Based Relative Value Scale (RBRVS) – Skilled Nursing Facilities • Resource Utilization Groups (RUGs) – Home Health Agencies • Home health resource groups (HHRGs) ADVANTAGES?

DISADVANTAGES? 4. Bundled Services: Medicare • Medicare primarily pays hospitals on a bundled service arrangement. This is referred to as the Prospective Payment System (PPS), which was officially launched in 1983.

• Some facilities are exempt from PPS, including psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long -term -care hospitals, distinct psych and rehab units, hospitals outside the 50 states, hospitals in states with an approved waiver, critical access hospitals, and comprehensive cancer clinics. How HCOs Are Paid, cont. 4. Bundled Services: Medicare • Medicare has three “insurance plans” for beneficiaries:

• PART A: hospital inpatient, SNF, hospice, home health, and inpatient blood coverage (all persons older than 65 years, some other groups) • PART B: optional coverage for physician services, hospital outpatient, labs, durable medical equipment (DME), and other coverage (all persons older than 65 years who choose to pay monthly premium) • PART D (NEW): prescription drug coverage (all persons older than 65 years who choose to join) How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment • Hospital inpatient • Hospital outpatient • Physicians • Skilled nursing facilities • Home health agencies How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Hospital Inpatient How HCOs Are Paid, cont. FIGURE 3 -2 Breakdown of Medicare 4. Bundled Services: Medicare — Calculating Payment for Hospital Inpatient DRG Operating Payment = (Hospital Dollar Rate) x (DRG Case Weight) Determined by:

1. Labor 2. Nonlabor components (Labor component should be multiplied by the hospital’s wage index ) Determined by:

1. Weight of DRG How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Hospital Inpatient • Additional payment can be obtained by Medicare payments to cover: 1. Indirect medical education: separate from salaries 2. Disproportionate share: for hospitals treating large percentage of Medicare/Medicaid patients 3. Outlier: for those patients with unusually large bills • When threshold limit is reached, Medicare pays percentage (less than 100%) of difference between threshold and actual cost How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Hospital Inpatient Medicare pays “reasonable costs” for the following:

1. Direct medical education 2. Organ acquisition costs 3. Bad debts for copayments and deductibles of Medicare beneficiaries How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Hospital Outpatient • Based on the BBA of 1997: PPS was initiated on the outpatient side for Medicare • Provided services are grouped into “Ambulatory Payment Classifications” (APCs) • Payment rates are established for each APC: Hospitals can have more than one APC per encounter (different from the DRG system where only one DRG is assigned per discharge) • Not all outpatient services have an assigned APC; some are paid on a fee -schedule basis (Ex: labs) and some are not paid at all (some items that are deemed incidental; ex: certain drugs and medical supplies) How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Hospital Outpatient • 838 APC groups (2010): anything that says “APC Payment” – Medical – Surgical – reducible – Significant procedures – Ancillary • Each CPT/HCPCS code is assigned to one APC group • Each CPT/HCPCS code has an indicator that tells how that procedure will be reimbursed by Medicare How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Hospital Outpatient Indicator Example of Service Status A clinical laboratory, ambulance, physical & occup therapy fee schedule B nonrecognized codes not paid C inpatient procedure not paid D discontinued codes not paid E nonallowed item or service not paid F acquisition of corneal tissue reasonable cost G current drug/biological pass -through additional PPS payment H device pass -through cost -based pass - through How HCOs Are Paid, cont. Indicator Example of Service Status K non -pass -through drug/biological Additional PPS payment L vaccine reasonable cost M not billable not paid N incidental service packaged P partial hospitalization paid per diem Q packaged pps payment R blood and blood products APC rate S significant procedure APC rate T significant procedure, reduced when multiple APC rate U brachytherapy sources APC rate V clinic or ED visit APC rate X ancillary service APC rate Y nonimplant DME not paid under OPPS Indicator list, continued How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Hospital Outpatient Total Payment per Encounter = 1. APC (used for example) 2. Fee schedule payments 3. Outlier payments How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Hospital Outpatient Total Payment = [0.60 (labor) x APC Payment Rate x Wage Index] + [0.40 (nonlabor) x APC Payment Rate] Coinsurance = [0.60 (labor) x National Median APC Coinsurance x Wage Index] + [0.40 (nonlabor) x National Median APC Coinsurance] 1. APC Payment APC Payment Rate = Current Conversion Factor x Relative Weight How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Physicians • Physicians are either participating or nonparticipating Participating physicians:

• Agree to accept Medicare’s assigned fees for services and agree to only charge patient for copayment (usually 20% of total assigned fee) • Are included in directory of participants • Have access to electronic claim transmission • Receive payment at 100% of prevailing charge versus 95% for nonparticipating physicians How HCOs Are Paid, cont. 4. Bundled Services: Medicare — Calculating Payment for Physicians Doctor charge Medicare approved x participating factor Medicare allowed x MAC (max allowable charge) factor Max allowed charge Medicare payment (80%) Patient payment Total allowed $500 $400 1.0 $400 1.0 $400 $320 80 $400 $500 $400 0.95 $380 1.0 $380 $304 76 $380 $500 $400 0.95 $380 1.15 $437 $304 133 $437 Participating Assigned Nonparticipating Unassigned 0.95 is max allowed for “nonparticipati ng” doc 1.15 is max allowed for “un -assigned” case How HCO’s Are Paid, cont.