Module 4 – Home

PAYING FOR HOSPITAL AND PHYSICIAN SERVICES

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

• Case
  • Break down the formulas for reimbursing hospital services.
  • Break down the formulas for reimbursing physician services.
  • Calculate operating, capital, and total payments for services.
• SLP
  • Elaborate on the provider risks and incentives under the various reimbursement structures.
  • Explain the differences between insurance-negotiated rates and the private pay (cash) fees charged to uninsured patients for health care services.
• Discussion
  • Investigate the potential costs associated with a single-payer system, and how this would affect all stakeholders.
  • Reflect upon and integrate course concepts.

Module Overview

Part I – Paying for Hospital Services – Overview

By contract, third-party payers reimburse hospital inpatient services based on a predetermined, fixed amount for a particular service. For example, Section 1886(d) of the Medicare Act established a classification system for inpatient charges (called diagnosis related groups or DRGs). The DRGs are assigned by a grouping program, which takes into account the patient’s diagnosis, procedures, age, gender, discharge status, and comordibities. Medicare uses this prospective payment system to pay for hospital services on a rate-per-discharge basis that varies according to the DRG which is assigned to a particular patient’s hospital stay.

The reimbursement formula that is used calculates the payment for each specific case, multiplied by the hospital’s payment rate by the weight of the DRG of the case. Adjustment factors such as geographical location and outliers are considered as well. Every DRG weight serves to represent the average amount of resources required to care for that particular DRG case, relative to the average amount of resources used to treat the cases in all DRGs. There are currently over 740 Medicare DRGs, with these classifications and relative weights reviewed a minimum of annually. Other third-party payers have developed similar systems by which payment is calculated for inpatient services. Here are some examples of DRGs:

DRG	Description	Case Weight	Outlier
001	Craniotomy Age>17 Years, Except for Trauma	3.0932	32
037	Orbital Procedures	0.8821	26
072	Nasal Trauma	0.6419	26
115	Permanent Cardiac Pacemaker	3.5513	33
191	Pancreas, Liver, Shunt Procedure	3.6598	36
302	Kidney Transplant	4.1370	35
418	Post-Operative Infections	0.9777	29
441	Hand Procedure/Surgery	0.8785	25
488	HIV Extensive O.R. Procedure	4.2177	37

This system of prospective payment determines the pay rates for care, even before the care is provided to the patient. We now need to consider operating payments, capital payments, and outlier payments:

Operating payments are a central part of Medicare’s prospective payment system. However, if a patient’s serious condition requires additional services or a longer stay in the hospital, Medicare makes what are called “outlier” payments (discussed below). These payments may be more than the base operating and capital payments. The elements of the
operating payment are calculated as follows: DRG relative weight x ((labor related large urban standardized amount x core based statistical area [CBSA] wage index) + (nonlabor related national large urban standardized amount x cost of living adjustment)) x (1+ indirect medical education + disproportionate share hospital).

In 1992, Medicare also began reimbursing hospitals for their capital costs associated with care and treatment of a patient, on a prospective basis. The elements of a capital payment are as follows: DRG relative rate x federal capital rate x large urban add-on x geographic cost adjustment factor x cost of living adjustment x (1+ indirect medical education + disproportionate share hospital).

Outlier payments are provided as occasional additional payments to encourage high-quality inpatient care for seriously ill patients who are identified as care outliers (these are the extremely costly cases producing losses that are often too large for hospitals to offset with other less costly cases in the same DRG). Because of the significant cost of such cases, a fixed loss amount is set each year to adjust for common pricing levels in the hospital’s local market area. The background reading links provide more information on the outlier payment formula as well as the process for calculation.

Part II – Paying for Physician Services – Overview

Until 1991, Medicare paid physicians based on the concept of reasonable charges. These charges were defined as the lowest of three factors: the actual cost of the service provided, the physician’s usual/customary charge, or the prevailing charge for the cost of the service in that particular community.

The physician payment system changed in 1992, moving to a resource-based relative value scale (RBRVS) system. This new system took into account three new components of care resources: the physician’s work (skill level, time, stress, other work-related factors), overhead/practice expenses (nonphysician costs, excluding cost of malpractice insurance), and the actual cost of malpractice insurance.

In this module, we will explore how to calculate physician reimbursements based on this newer RBRVS model. Each of the over 8,000 procedure codes are given relative value units (RVUs) for each of the three care resource components. After additional adjustments for geographic cost differentials, the units are added to calculate the total number of RVUs for the care provided. That number is then multiplied by a conversion factor that equals the dollar value of one unit, to arrive at the dollar amount of the reimbursement.

The following table should help you better understand how rates are calculated:

Categories	RVU	Geographic Cost Index	Product	Conversion Factor
Work	27.36	1.089	29.80	–
Practice Expense	33.59	1.473	49.48	–
Malpractice	6.82	0.646	4.41	–
Total	–	–	83.69	69.87

The product values are added up and multiplied by the conversion factor. Using the above figures, the payment rate would be $5,847.42. Now that we know the Medicare approved rate, we can move on to:

How are Physicians Reimbursed?

The following should help you better understand the distinction made between participating physicians and non-participating physicians:

Participating physicians:

• Accept assignment on each and every patient case
• Bill Medicare and the patient 100% of the Medicare-approved fee for a procedure
• Receive payment from Medicare equal to 80% of the Medicare-approved fee, and patient pays 20% of the approved fee

Non-participating physicians who accept assignment on a case-by-case basis:

• Bill Medicare and the patient 95% of the Medicare-approved fee for a procedure
• Receive payment from Medicare equal to 80% of the Medicare-approved fee for non-participating physicians (95%), and patient pays 20% of the approved fee

Non-participating physicians who do not accept assignment:

• Bill the patient for 115% of the Medicare-approved fee for non-participating physicians (which is already at 95% of fee for participating physicians)
• Receive entire payment from the patient. Then Medicare reimburses the patient for 80% of the approved fee for non-participating physicians

The following examples should help you better understand billing by and payment to physicians:

Assume the Medicare-approved fee for a procedure is $1,000. This means that the Medicare-approved fee for non-participating physicians is $950.

The participating physician will bill Medicare and the patient. Medicare will pay the doctor $800 (80%), and the patient pays $200 (20%).

The non-participating physician who accepts assignment bills Medicare and the patient. Medicare pays $760 (80% of the $950) and the patient pays $190 (20% of the $950).

The non-participating physician who does not accept assignment bills the patient a maximum of $1,092.50 (115% of the $950). This is called limiting charge. The patient pays the physician the entire amount. Then Medicare reimburses the patient $760 (80% of the $950 approved fee). In this scenario, the physician gets paid more than the participating physician but can only look to the patient. In this scenario, the patient is on the hook for $332.50, because Medicare will not pay more than $760.

Module 4 – Background

PAYING FOR HOSPITAL AND PHYSICIAN SERVICES

Required Reading

Centers for Medicare and Medicaid Services. (2019). Acute care hospital inpatient prospective payment system. Available at https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/downloads/AcutePaymtSysfctsht.pdf

Centers for Medicare and Medicaid Services. (2019). Hospital outpatient prospective payment system. Available at  https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/downloads/HospitalOutpaysysfctsht.pdf

Findlay, S. (2016). Medicare’s new physician payment system. Health Affairs/RWJ Foundation, 1-7. Available in the Trident Online Library.

Kaiser Family Foundation. (2019). Paying a visit to the doctor: Current financial protections for Medicare patients when receiving physician services. Available at https://www.kff.org/medicare/issue-brief/paying-a-visit-to-the-doctor-current-financial-protections-for-medicare-patients-when-receiving-physician-services/

Medicare Payment Advisory Commission. (2016). Physician and other health professionals payment system. Available at http://www.medpac.gov/docs/default-source/payment-basics/medpac_payment_basics_16_physician_final.pdf?sfvrsn=0

Chapter 3: Paying for Health Services, pp. 49-81 in:
Reiter, K. L., & Song, P. H. (2018). Gapenski’s fundamentals of healthcare finance (3rd Ed.). Chicago, Illinois: Health Administration Press. Available in the Trident Online Library.

Module 4 – Case

PAYING FOR HOSPITAL AND PHYSICIAN SERVICES

Assignment Overview

Third-party payers are the insurers that reimburse physicians and health care systems for services rendered – which identifies them as a central source of revenue for physicians and health care systems. This includes the two main categories of payers: the private insurances (such as Blue Cross/Blue Shield, etc.), and the public/government programs (such as Medicare/Medicaid/SCHIPs).

Third-party payers use a variety of reimbursement methods to pay providers and hospitals, depending on the specific payer involved and also the specific service(s) provided (outpatient or inpatient). The calculations vary and can be complicated, but they are critical to understand in terms of the basic math behind them. It’s also important to understand how the different payers compare in terms of reimbursement levels. Let’s move forward to examine how services are paid for by the third-party payers.

Case Assignment

Using the information in the Module 4 overview and required readings, as well as some additional research in peer-reviewed sources, complete your Case assignment by answering the questions in the following two-part assignment. Please show all formulas and calculations of your work in your paper.

Part I – Paying for Hospital Services – Overview

Mrs. Jones is a 74-year-old woman who is currently hospitalized for an ischemic stroke. She’s at a large urban Philadelphia hospital, and in the past few days, she’s incurred $189,000 in Medicare-approved charges for her care. Using the information provided in this Module, as well as the Hospital Payments Example (found in the Course’s table of contents link under “Presentations”), use the DRG table below to answer the following questions. Be sure to include all formulas and calculations used in your paper.

DRG	Description	Case Weight
163.3	Ischemic stroke	2.0150
338.0	Appendix removal	1.8911
870.1	Septicemia/severe sepsis	4.3296

Part I – Assignment

In approximately three pages, answer the following questions related to Mrs. Jones’ ischemic stroke. Show all formulas and calculations of your work.

1. What is the operating payment to be paid to the hospital?
2. What is the capital payment to be paid to the hospital?
3. Will the hospital be eligible for the Medicare outlier payment for this patient?
4. What is the total payment due to the hospital?

Part II – Paying for Physician Services – Overview

Mr. Thompson is an 83-year-old Medicare beneficiary. He is under the care of Dr. Heintz. Assume the following values for services provided by Dr. Heintz:

Categories	RVU	Geographic Cost Index	Product
Work	28.16	1.371	24.35
Practice Expense	37.47	1.925	68.08
Malpractice	11.49	0.668	4.24
Conversion Factor: 51.52

Part II – Assignment

In approximately three pages, answer the following questions. Show all formulas and calculations of your work.

1. How much will Medicare pay Dr. Heintz if he is a Medicare participating physician? How much out-of-pocket payment will Mr. Thompson be responsible for?
2. How much will Medicare pay Dr. Heintz if he is a Medicare non-participating physician who elects assignment? How much out-of-pocket payment will Mr. Thompson be responsible for?
3. How much will Medicare pay Dr. Heintz if he is a Medicare non-participating physician who does not elect assignment? How much out-of-pocket payment will Mr. Thompson be responsible for?

Assignment Expectations

1. Conduct additional research to gather sufficient information to support your analysis.
2. Provide a response of 3-5 pages, not including title page and references. It is required that you show the formulas and calculations performed to arrive at your answers.
3. There are multiple required items to be addressed herein; please use subheadings to show where you are responding to each required item and to ensure that none are omitted.
4. Support your paper with peer-reviewed articles, with at least 3 references. Use the following link for additional information on how to recognize peer-reviewed journals:
   Angelo State University Library. (n.d.). Library Guides: How to recognize peer-reviewed (refereed) journals. Retrieved from https://www.angelo.edu/services/library/handouts/peerrev.php
5. You may use the following source to assist in formatting your assignment:
   Purdue Online Writing Lab. (n.d.). General APA guidelines. Retrieved from https://owl.english.purdue.edu/owl/resource/560/01/.
6. For additional information on reliability of sources, review the following source:
   Georgetown University Library. (n.d.). Evaluating internet resources. Retrieved from https://www.library.georgetown.edu/tutorials/research-guides/evaluating-internet-content

Module 4 – SLP

PAYING FOR HOSPITAL AND PHYSICIAN SERVICES

Using the information in the required readings, as well as some additional research in peer-reviewed sources, complete your SLP assignment by answering the following:

1. What are the specific reimbursement methods used by each of the major third-party payers?
2. What are the specific incentives and the risks for the providers under the various payment types?
3. What are the differences between insurance-negotiated rates and the private pay fees charged to uninsured patients for health care services? Is there a difference, and if so, how much is it? Provide an example of what is charged for one specific service (appointment, test, etc.).

SLP Assignment Expectations

1. Conduct additional research to gather sufficient information to support your analysis.
2. Provide a response of 3-5 pages, not including title page and references
3. As we have multiple required items to be addressed herein, please use subheadings to show where you’re responding to each required item and to ensure that none are omitted.
4. Support your paper with peer-reviewed articles, with at least 3 references. Use the following link for additional information on how to recognize peer-reviewed journals:
   Angelo State University Library. (n.d.). Library Guides: How to recognize peer-reviewed (refereed) journals. Retrieved from https://www.angelo.edu/services/library/handouts/peerrev.php
5. You may use the following source to assist in formatting your assignment:
   Purdue Online Writing Lab. (n.d.). General APA guidelines. Retrieved from https://owl.english.purdue.edu/owl/resource/560/01/.
6. For additional information on reliability of sources, review the following source:
   Georgetown University Library. (n.d.). Evaluating internet resources. Retrieved from https://www.library.georgetown.edu/tutorials/research-guides/evaluating-internet-content

Module 4 – Outcomes

PAYING FOR HOSPITAL AND PHYSICIAN SERVICES

• Module
  • Break down the formulas for reimbursing hospital services.
  • Break down the formulas for reimbursing physician services.
  • Calculate operating, capital, and total payments for services.
  • Elaborate on the provider risks and incentives under the various reimbursement structures.
  • Explain the differences between insurance-negotiated rates and the private pay (cash) fees charged to uninsured patients for health care services.
  • Investigate the potential costs associated with a single-payer system, and how this would affect all stakeholders.
  • Reflect upon and integrate course concepts.
• Case
  • Break down the formulas for reimbursing hospital services.
  • Break down the formulas for reimbursing physician services.
  • Calculate operating, capital, and total payments for services.
• SLP
  • Elaborate on the provider risks and incentives under the various reimbursement structures.
  • Explain the differences between insurance-negotiated rates and the private pay (cash) fees charged to uninsured patients for health care services.
• Discussion
  • Investigate the potential costs associated with a single-payer system, and how this would affect all stakeholders.
  • Reflect upon and integrate course concepts.

Module 4 Discussion: Health Care For All Is A Nice Idea – But How Would We Pay For It?

 

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Extending health care services to all persons is a popular topic of discussion, but the overall cost of paying the bill for the services is what seems to stop it from becoming a reality. Take some time to research the facts regarding what it would cost to extend basic medical services to all persons in the United States, and some of the proposed ideas of how it would/could be paid for. What are the likely effects for all stakeholders involved? Do you believe it is fair to expect “the haves” to pay additional personal and/or corporate taxes to provide medical services for the “have nots”? Should workers have to give up their current employer-sponsored private-pay insurance to move to one single-payer system, or should there be a choice, and why? Use peer-reviewed sources (not opinions) to respond to these questions in approximately 200 words.

Your posts will be graded on how well they meet the Discussion Requirements posted in the “Before You Begin” section”. Please review this section, as well as the discussion scoring rubric.