Healthcare Reimbursement Methodologies 3

Introduction to HealthcareReimbursement
The healthcare system of the United States (U.S.)is complex. New payment methods and rules
con-tribute to the complexity. In 1999, this complexitywas listed as one of five trends
threatening thevery future of medicine (Washburn 1999, 34). Forexample, a physician’s office
might have “at leasta dozen separate contracts for providing healthcareservices” (Washburn
1999, 35). Surely, if “insid-ers” find the system confusing, “outsiders,” thepatients, confront a
veritable maze.
Health Insurance
Generally, reimbursement for healthcare servicesis dependent upon patients having
health insur-ance. Insurance is a system of reducing a person’sexposure to risk of loss by
having another party(insurance company or insurer) assume the risk. Inhealthcare, the risk the
healthcare insurance com-pany assumes is the unknown cost of healthcare fora person or
group of persons.However, the insurance company that assumesthe risk reduces its own risk
by distributing therisk among a larger group of persons (insureds).This group of persons has
similar risks of lossand is known as a risk pool. In healthcare, thevariability of health
statuses across many peopleallows the healthcare insurance company to makea better
estimate of the average costs of health-care.The insurance company, though, receives a pre-
mium payment in return for assuming the insureds’exposure to risk of loss. The premium
payments forall the insureds in the group are pooled. Insurersuse actuarial data to calculate
the premiums so thatthe pool is sufficiently large to pay losses of theentire group. Thus,
specific to healthcare, the riskis the potential that a person will get sick or requirehealth
services and will incur bills (costs) associ-ated with his or her treatment or services. The pre-
mium payments for health insurance are calculated
to pay for all the potential covered healthcare costsfor an entire group of patients.
Historical Perspectives
Health insurance in the U.S. has been made avail-able to help offset the expenses of the
treatment ofillness and injury. The first “sickness” clause wasinserted in an insurance
document in 1847. How-ever, health insurance did not become establisheduntil 1929, when
Blue Cross first covered schoolteachers in Texas. In 1932, a city-wide plan wasbegun in
Sacramento, California. As an industry,health insurance became widespread after WorldWar
II (Longest, Rakich, and Darr 2000, 89–90).
Health Insurance and Employment
In the U.S. health insurance is usually tied toemployment. Many larger employers as part of
apackage of employment benefits pay a portion ofthe health insurance premium. Employees
may berequired to pay extra for health insurance for theirspouse or children (dependent
coverage). Medicareis also considered insurance because payroll taxes,through both
employers’ and employees’ contribu-tions, finance one portion of Medicare
coverage.Premiums paid by eligible individuals and matchedby the federal government also
finance Medicare’ssupplemental medical insurance program.When people lose their jobs,
they often losetheir health insurance. Although people can con-tinue their health insurance by
paying for theinsurance entirely by themselves, the payments areexpensive, and people can
only extend their healthinsurance for a limited period. Therefore, peoplewithout jobs are
unlikely to have adequate healthinsurance.For some employed people, the adequacy ofthe
health insurance is an issue. Some health insur-ance plans require patients or their families to
pay20 percent or more of the costs of their healthcare.Healthcare costs can easily be in the
thousands ofdollars; 20 percent of $10,000 is $2,000—a sizablesum for many people. Other
employees work for
4 Chapter 1
employers that do not offer health benefits. Thesepersons must purchase their own insurance, at
anextremely high rate, or have no health insurance.Obtaining and retaining adequate health
insuranceare problems for many U.S. workers.
Compensation for Healthcare
Reimbursement is the healthcare term that refersto the compensation or repayment for health-
care services. Reimbursement is being repaid orcompensated for expenses already incurred
or, asin the case of healthcare, for services that havealready been provided. In healthcare,
services areoften provided before payment is made. Unlikethe car dealership, in which
customers pay fora car or arrange a loan before driving the car offthe lot, patients walk out of
the hospital treated.Therefore, the physicians and clinics must seek tobe paid back for
services that they have alreadyprovided and for expenses, such as supplies, thatthey have
already incurred. These physicians,clinics, hospitals, and other healthcare organiza-tions and
practitioners are requesting reimburse-ment for health services.
Third Party Payment
Experts in healthcare finance refer to third partypayment or third party payers. Who or what
arethese parties? The first party is the patient himselfor herself or the person, such as a parent,
respon-sible for the patient’s health bill. The second partyis the physician, clinic, hospital,
nursing home, orother healthcare entity rendering the care. Thesesecond parties are often
called providers becausethey provide healthcare. The third party is the unin-volved insurance
company or health agency thatpays the physician, clinic, or other second partyprovider for the
care or services to the first party(patient).
Characteristics of ReimbursementMethodologies
Three characteristics describe various methods ofhealthcare reimbursement. These
characteristics are
the unit of payment, the time orientation, and thedegree of financial risk for the parties
(Wouters,Bennett, and Leighton 1998, 3). The unit of pay-ment can range from a payment for
each service,such as a payment for each laboratory test, to ablock payment for an entire
population for a periodof time, such as a governmental budget transfer tothe state health
department. The time orientationis retrospective versus prospective. In retrospectivepayment
methods, the payer learns of the costsof the health services after the patient has
alreadyreceived the services. The provider also receivespayment after the services have been
provided. Ina prospective payment method, the payments arepreset before care is delivered.
Financial risk refersback to the definition of health insurance. When thecosts of health
services are learned after the care isprovided, the third party payer (health insuranceentity) is
at risk. When providers must project thecosts of treating patients into the future and con-tract
to provide all care for those estimated costs,the provider is at risk. Patients assume risk as
theymust pay higher and higher percentages of the costsas their share.
Types of HealthcareReimbursement Methodologies
This chapter discusses the fundamental conceptsin healthcare reimbursement methodologies.
Thechapter is organized by the two major types ofunit of payment: fee-for-service
reimbursementor episode-of-care reimbursement. Also brieflyaddressed are the other
characteristics of health-care payment methods—time frame and risk. Thechapter concludes
with a peek into the future ofhealthcare reimbursement.
Fee-for-Service Reimbursement
Fee-for-service reimbursement is a healthcarepayment method in which providers receive
pay-ment for each service rendered. Fee-for-service is