Forthis weeks assignment, please make sure you are reviewing and understand the example given at the end of chapter 9. You need to understand the terminology to accurately complete this assignment. Go

– Payment basis – Unit of payment Payment Basis • The basis of payment defines how the actual payment will be made. There are three primary methods:

1. Cost 2. Fee schedules – e.g., DRGs 3. Price - related – e.g., 75% of billed charges Unit of Payment • Unit of payment defines how the services provided are consolidated into an actual claim. There are two primary methods:

1. Specific services – Individual items that are listed in a claim are paid 2. Bundled services – Specific services listed in a claim are paid on some aggregated basis, such as a DRG or per diem Healthcare Payment Methods Factors Influencing Pricing • Pricing includes the establishment of CDM prices and the negotiation of managed - care contracts. • Three factors drive pricing policies:

– Desired net income – Competitive position – Market structure Factors Influencing Pricing, cont. FIGURE 6 -1 Factors Influencing Pricing Setting Actual CDM Prices • There are four factors that must be “mathematically” reflected in prices. • Failure to incorporate these four factors will impact financial survival. Four Elements of Pricing • Average costs • Losses on third - party fee - schedule payments  Medicaid  Medicare  Other • Write - offs on billed - charge patients  Self - pay  Commercial • Reasonable return on investment  Sustainable growth Pricing Example Given the specified volumes, costs, desired profit, and other assumptions, what is the required charge per visit (i.e., price)?Total cost $100,000 Total volume 1,000 Average cost $100 Payer volumes Medicare (payment rate = $95) 400 Medicaid (payment rate = $75) 100 Managed Care # 1 (payment rate = $110) 300 Managed Care # 2 (pay 80% of charges) 100 Uni nsured (pay 10% of charges) 100 Total all payers 1,000 Desired net income $5,000 Pricing Example, Income Statement Approach Given the specified volumes, costs, desired profit, and other assumptions, what is the required charge per visit (i.e., price)? Solve for thisRevenue Computation Amount Medicare 400 x $95 $38,000 Medicaid 100 x $75 7,500 Managed Care # 1 300 x $110 33,000 Managed Care # 2 100 x 80% x $294.44 23,555 Uni nsured 100 x 10% x $294.44 2,944 Total $105,000 less Costs 100,000 Profit $5,00 0 Pricing Formula General Pricing Formula Pricing Formula Applied to Example Average cost + Required net income + Loss on fee -schedule payers Price = Volume of charge payers 1 – Average discount experienced on charge payers $100 + $5,000 + $1,500 Price = 200 = $294.44 1 – 0.55 1. Increase in costs 2. Governmental programs that pay less than cost 3. Managed -care plan fee schedules that do not pay at levels above cost 4. Increases in required profit, such as debt - service obligations or capital replacement 5. Reductions in charge -paying patients 6. Increases in uninsured patients Factors That Tend to Increase Prices Assessing Reasonableness of Prices • Many healthcare providers, especially hospitals, have been criticized for unreasonable prices. 1. Return - on - Investment (ROI) adequacy 2. Comparison with other healthcare firms Reasonableness of Charges Two generic ways of assessing :  Is ROI at Case Hospital reasonable?  Are costs at Case Hospital reasonable?  Is investment at Case Hospital reasonable? ROI Method, Case Hospital Example Three Issues : Investment Cost Revenue Investment on Return   Return on Assets (Net Income/Assets) 5 - Year Average – 2012 to 2016 FIGURE 6 -6 Return on Assets (Net Income/Assets) Return on Equity (Net Income/Equity) 5 - Year Average – 2012 to 2016 FIGURE 6 -7 Return on Equity (Net Income/Equity) Reasonableness of Costs, Case Hospital Example Cost Assessment Methodology :1. Medicare cost per discharge: Case -mix and wage -index adjusted (MCPD) 2. Medic are cost per outpatient claim: R elative -weight and wage -index adjusted (MCPC) The hospital cost index (HCI) is then constructed as follows: avg US MCPC x revenue Outpatient % avg US MCPD x revenue Inpatient % HCI   Hospital Cost Index – 2016 FIGURE 6 -8 Hospital Cost Index — 2016 Medicare Cost per Discharge (CMI & WI Adj) – 2008 FIGURE 6 -9 Medicare Cost per Discharge (CMI and W I Adj.) — 2016 Cost per Medicare Visit (RW & WI Adj) – 2016 FIGURE 6 -10 Cost per Medicare Visit (RW and W I Adj.) — 2016 Fixed Asset Turnover (Net Revenue/Net Fixed Assets) – 2016 FIGURE 6 -11 Fixed Asset Turnover (Net Revenue/Net Fixed Assets) — 2016  Case Hospital is not realizing excessive profits.  Costs at Case Hospital are consistent with expected values and are reasonable.  Investment at Case Hospital is reasonable and not excessive.  Therefore, prices must be reasonable. ROI Method: Summary, Case Hospital Example Conclusions :  Compare with similar hospitals, and/or  Compare with hospitals in the same region Comparison - of - Charges Method, Case Hospital Example General methodology :  Compare with all academic centers in California  Compare with regional average for academic medical centers (cost -of -living adjusted) Case Hospital : Hospital Charge Index – 2016 FIGURE 6 -12 Hospital Charge Index — 2016 Medicare Charge per Discharge (CMI & WI Adj) – 2016 FIGURE 6 -13 Medicare Charge per Discharge (CMI and W I Adj.) — 2016 Average Charge per APC (RW & WI Adj) – 2016 FIGURE 6 -14 Average Charge per APC (RW and W I Adj.) — 2016 Medicare Inpatient DSH Percentage Average Value – 2016 FIGURE 6 -9 Medicare Cost per Discharge (CMI and W I Adj.) — 2016 Negotiating Managed Care Contracts • Contract negotiation is critical to continued financial solvency. • Contract negotiation involves two key areas:

– Contract language – Payment rates Managed - Care Contract Negotiation 1. Remove contract ambiguity 2. Eliminate retroactive denials 3. Establish a reasonable appeal process 4. Define clean claims 5. Remove most favored nation (MFN) clauses 6. Prohibit silent PPO arrangements 7. Include terms for outliers or technology -driven cost increases 8. Establish ability to recover payment after termination 9. Preserve the ability to be paid for services 10. Minimize health plan rate differentials 10 Important Areas of Managed -Care Contract Language : Average Commercial Contract Rates to Hospitals 2016 Services Averag e INPATIENT SERVICES All IP services paid at % 77.7% MS -DRG $10,879 Medical –per diem $3,127 Surgical –per diem $3,377 Psych $1,225 SNF $1,049 Normal vaginal delivery case rate (or 2 -day stay) $5,109 C-section case rate (or 3 -day stay) $6,177 Nursery level 1 -boarder -per diem $947 Stop loss: threshold $145,93 6 Stop loss charges paid at %: 58.3% Rate increase limit % 4.6% Courtesy of Cleverley & Associates Average Commercial Contract Rates to Hospitals 2016 Outpatient Services All OP services paid at % 76.5% Emergency department paid at % 72.3% Emergency department -case rate $975 Observation paid at % 71.5% Observation case rate -per hour $93 Physical therapy paid at % 72.6% PT case rate -per visit $180 MRI OP paid at % 56.7% MRI op -case rate $1,321 Outpatient surgery paid at % 73.4% OP surg group 1 -case rate $1,707 OP surg group 2 -case rate $2,269 OP surg group 3 -case rate $3,000 OP surg group 4 -case rate $3,697 OP surg group 5 -case rate $4,505 OP surg group 6 -case rate $4,982 OP surg group 7 -case rate $6,184 OP surg group 8 -case rate $6,995 OP surg group 9 -case rate $9,107 Courtesy of Cleverley & Associates Summary • Revenue generation is critical to financial solvency. • Revenue generation is impacted by three areas:

– Pricing – Contract negotiation – Coding and billing • Inadequate payments by many government payers force healthcare providers to “cost shift.”