© 2010 Jones and Bartlett Publishers
Chapter 6
Financing and Reimbursement Methods
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Introduction (1 of 4)
Financing is any mechanism that gives people the ability to pay for health care services.
In most cases, financing is necessary to have access to health care.
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Introduction (2 of 4)
Sources of financing health care:
Private health insurance
Public insurance programs such as Medicare and Medicaid
Uncompensated or charity care
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Introduction (3 of 4)
Complexity of financing:
Many payers
Many plans
Many programs
Many payment mechanisms
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Introduction (4 of 4)
Economic perspective of financing:
Working Americans finance their own health care and subsidize it for those who cannot afford it.
Employer-paid insurance is an exchange for more salary.
The Medicare tax is a type of prepayment for certain services received at age 65.
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Effects of Financing and Insurance
See Exhibit 6.1.
See Figure 6.1.
End results:
1. Moral hazard and provider-induced demand waste health care resources and add to the rising cost of health care.
2. National health insurance enables supply-side rationing; this has not been possible in the United States.
3. The ACA still leaves many uninsured—indirect or demand-side rationing.
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Insurance: Its Nature and Purpose (1 of 8)
Insurance: a mechanism to protect against risk
Risk: the possibility of substantial financial loss from some event
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Insurance: Its Nature and Purpose (2 of 8)
Insured (enrollee or beneficiary): an individual protected by insurance
Insurer: an insurance agency that assumes the risk
Underwriting: evaluates, selects/rejects, classifies, and rates risk
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Insurance: Its Nature and Purpose (3 of 8)
Premium
Amount charged by the insurer to provide coverage
Cost sharing by employers and employees
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Insurance: Its Nature and Purpose (4 of 8)
Four principles of insurance:
1. Risk is unpredictable for individuals.
2. Risk can be predicted with some accuracy for a large group.
3. Insurance can shift risk from the individual to the group by pooling resources.
4. Losses are shared by all members.
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Insurance: Its Nature and Purpose (5 of 8)
Cost sharing
Insurance requires some type of cost sharing.
The insured assumes at least part of the risk.
The purpose of cost sharing is to reduce misuse of insurance benefits.
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Insurance: Its Nature and Purpose (6 of 8)
Cost sharing (cont’d)
There are three main types of cost sharing in private health insurance:
Premium cost sharing
Deductibles
Copayments
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Insurance: Its Nature and Purpose (7 of 8)
Cost sharing (cont’d)
Deductible
Amount the insured pays first before benefits are paid by the plan
Paid annually
Copayment
Money paid out of pocket each time health services are received
% share is referred to as coinsurance
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Insurance: Its Nature and Purpose (8 of 8)
Stop loss: limits total out-of-pocket costs
Findings of the Rand Health Insurance Experiment in the 1970s
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Insurance: ACA Mandates
Recommended preventive services and immunizations must be without cost sharing.
No lifetime limit on benefits
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Private Insurance (1 of 2)
Distribution of health plan enrollments:
See Figure 6.2.
Employment-based health insurance offer rates vary by employer characteristics:
See Exhibit 6.2.
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Private Insurance (2 of 2)
Five main types:
Group insurance
Self-insurance
Individual private insurance
Managed care plans
High-deductible health plans
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Types of Private Insurance (1 of 6)
Group insurance
Offered through an employer, a union, or a professional organization
Anticipates large numbers of people in a group will buy insurance through a sponsor
Cost and risk are shared among the insured.
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Types of Private Insurance (2 of 6)
Self-insurance
Large employers’ workforces are large and diversified enough.
They can predict their own medical experience.
They can assume risk and pay all claims.
High losses are covered through reinsurance.
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Types of Private Insurance (3 of 6)
Individual private health insurance
For those who do not have group coverage: farmers, early retirees, the self-employed. Risk is individually determined.
This market grew by 5.3 million in 2014, but the effects of the ACA are unclear.
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Types of Private Insurance (4 of 6)
Managed care plans
Managed care organizations (MCO) consist of:
Health maintenance organizations (HMO)
Preferred provider organizations (PPO)
They assume the risk in exchange for an insurance premium.
They assume the responsibility for obtaining health care services by contracting with providers.
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Types of Private Insurance (5 of 6)
High-deductible health plans (HDHPs)
HDHP/HRA
HDHP is combined with a health reimbursement arrangement.
Employer-financed account
Tax exempt payments made for qualified medical expenses
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Types of Private Insurance (6 of 6)
HDHP/HSA
HDHP is combined with a health savings account.
Mainly employee financed on a tax-deductible basis
The ACA and Private Insurance
The ACA has several mandates:
All U.S. residents must have health insurance that offers “minimum essential coverage.” Not having insurance incurs tax penalties.
Health insurance can be purchased through government-run exchanges, with subsidies for low-income people.
Exchanges offer four categories of plans.
Employers must offer insurance to those working 30 hours or more per week.
Coverage cannot be denied for preexisting medical conditions.
Children and adults can be covered under their parents’ plans until age 26.
Public Insurance
Government financing
2013 stats: A little over one-third of the insured are covered under public programs.
17% covered by Medicaid
16% covered by Medicare
Categorical programs: Benefits are designed for defined categories of people.
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Public Financing (1 of 16)
Medicare
Title 18 of Social Security Act
An entitlement program
People contribute through taxes and are entitled regardless of income and assets.
A federal program
Administered by CMS, an agency under the U.S. Department of Health and Human Services (DHHS)
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Public Financing (2 of 16)
Medicare (cont’d)
Finances medical care for:
Those 65 years or older
Disabled people who are entitled to Social Security benefits
Those with end-stage renal disease
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Public Financing (3 of 16)
Medicare (cont’d)
The program does not offer comprehensive coverage.
Main noncovered services:
Vision
Eyeglasses
Dental care
Hearing aids
Many long-term care services
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Public Financing (4 of 16)
Medicare (cont’d)
Medigap: Private insurance used to cover gaps in Medicare
Medicare has four parts: Parts A, B, C, and D.
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Public Financing (5 of 16)
Medicare Part A: Hospital Insurance
Financed by payroll taxes:
Paid by all working individuals
Paid on all income earned
Paid equally by both employer and employee
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Public Financing (6 of 16)
Medicare Part A (cont’d)
Hospital insurance covers:
Inpatient services
Short-term convalescence and rehabilitation in a skilled nursing facility (SNF)
Home health
Hospice
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Public Financing (7 of 16)
Medicare Part A (cont’d)
Hospital insurance expenditures:
Figure 6.3
Medicare Part A Expenditures, 2012
Data from National Center for Health Statistics. Health, United States, 2014. Hyattsville, MD: U.S. Department of Health and Human Services; 2015:336.
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Public Financing (8 of 16)
Medicare Part A (cont’d)
The timing of benefits is determined by a benefit period.
It begins on the day a beneficiary is hospitalized.
It ends when the beneficiary has not been in a hospital or a skilled nursing facility for 60 consecutive days.
Thereafter, a new benefit period begins.
A beneficiary can have unlimited benefit periods.
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Public Financing (9 of 16)
Medicare Part A (cont’d)
Hospital benefits:
Deductible is paid for the first 60 days.
Copayment required from 61 to 90 days.
Higher copayment required after 90 days and reserve days must be used.
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Public Financing (10 of 16)
Medicare Part A (cont’d)
SNF benefits:
Eligibility begins after 3 consecutive days of hospital stay.
100 days maximum in SNF
First 20 days at no charge to the beneficiary; copayment applies from day 21
Public Financing (11 of 16)
Medicare Part A (cont’d)
Home health benefit
Patient must be homebound.
Patient must require intermittent or part-time skilled nursing care or rehabilitation care.
Hospice benefit
Patient must be terminally ill.
Only a token copayment is required.
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Public Financing (12 of 16)
Medicare Part B: Supplementary Medical Insurance (SMI)
Part B covers such things as:
Physician services
Hospital outpatient services (surgery)
Diagnostic tests
Radiology
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Public Financing (13 of 16)
Medicare Part B (cont’d)
Also covers certain screening and preventive services
Annual wellness exam
For most services:
An annual deductible must be paid.
80:20 coinsurance
Public Financing (14 of 16)
Medicare Part C: Medicare Advantage
Beneficiaries are given the choice to remain in the original fee-for-service program or sign up for Part C.
Additional benefits (basic vision and dental) may be offered by the private managed care plans.
Beneficiary receives all Part A, B, and D services through the MCO.
It eliminates the need for Medigap coverage.
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Public Financing (15 of 16)
Medicare Part D: Prescription Drug Coverage
Created under the Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003.
Available to those who have Part A or B.
Monthly premium must be paid.
Annual deductible applies
Three layers based on spending (see Table 6.1)
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Public Financing (16 of 16)
Medicaid
Title 19 of Social Security Act
Finances health care for the indigent, but it is a means-tested program
Jointly financed by state and federal governments
Each state establishes its own eligibility criteria according to income and assets.
Each state administers its own Medicaid program.
Medicaid recipient categories: Figure 6.4
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Children’s Health Insurance Program (CHIP)
Title 21 of Social Security Act
For children up to age 19
Most states cover children in families with incomes at or above 250% of federal poverty level.
States can use existing Medicaid or create a separate CHIP program.
Federal and state funds finance the program.
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The ACA and Public Insurance
Enrollment in Medicare Advantage has increased despite reimbursement cuts; they received bonus payments and increased cost sharing.
Each state has been left free to decide whether or not to expand Medicaid, which was originally required by the ACA.
States can establish a Basic Health Program to obtain health insurance through the states. It has not been very successful.
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Reimbursement Methods (1 of 13)
Third-party payers
Insurance companies, managed care organizations, Blue Cross Blue Shield, government
Reimbursement
Payment made by third-party payers to the providers of services
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Fee-for-Service
Charges (prices) are set by providers.
Each service is billed separately.
“Usual, customary, and reasonable” became common.
Providers could balance bill.
It led to cost escalations.
Reimbursement Methods (2 of 13)
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Package pricing (bundled pricing)
Number of related services are bundled in one price.
It can align incentives that lead to collaboration among specialties.
Medicare initiatives to bundle payments for an entire episode of care.
Reimbursement Methods (3 of 13)
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Resource-Based Relative Value Scale (RBRVS)
Medicare developed the program to reimburse physicians according to a “relative value” assigned to each service.
Based on time, skill, intensity
Reimbursement Methods (4 of 13)
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Managed care approaches
Discounted fees
Used by PPOs
Capitation
Used by HMOs
Per member per month (PMPM) fee to cover all needed services
Prudent delivery of services
Minimize provider-induced demand
Reimbursement Methods (5 of 13)
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Retrospective reimbursement
Rates are set after evaluating the costs retrospectively.
Historical costs are used to determine the amount to be paid.
Perverse incentives
Reimbursement Methods (6 of 13)
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Prospective reimbursement
Uses certain preestablished criteria to determine in advance the amount of reimbursement
Reimbursement Methods (7 of 13)
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Prospective Reimbursement
Four main prospective reimbursement methods:
Diagnosis-Related Groups (DRG)
Ambulatory Payment Classifications (APC)
Resources Utilization Groups (RUG)
Home Health Resources Group (HHRG)
Reimbursement Methods (8 of 13)
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Diagnosis-Related Groups (DRGs)
For acute hospital inpatients
Prospectively set bundled price according to the admitting diagnosis (DRG)
The hospital earns a profit by keeping costs below the DRG reimbursement.
See example in Table 6.3.
MS-DRGs now reflect patient severity
Reimbursement Methods (9 of 13)
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Reimbursement Methods (10 of 13)
Ambulatory Payment Classification (APC)
Medicare’s Outpatient Prospective Payment System (OPPS)
300 procedure groups
Reimbursement rates are associated with each APC group.
A bundled rate to include anesthesia, drugs, supplies, recovery
Reimbursement Methods (11 of 13)
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Resource Utilization Groups (RUGs)
A case-mix method to reimburse skilled nursing facilities (SNFs)
Case mix: overall acuity level in a facility
Each patient is classified into one of 66 RUGs.
The case mix determines a fixed per-diem rate.
The higher the case mix score, the higher the reimbursement.
Reimbursement Methods (12 of 13)
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Home Health Resource Groups (HHRG)
A fixed, predetermined rate for each 60-day episode of care, regardless of services given
OASIS is used to rate a patient’s functional status and clinical severity.
Assessment measures translate into points.
Total points determine the HHRG category.
Reimbursement Methods (13 of 13)
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The ACA and Payment Reform
Value-based payments to hold providers accountable for cost and quality
Increased shifting of risk to providers
New payment arrangements for Medicare to be worked out, to include:
Bundled payments
Shared savings arrangements
Risk sharing arrangements
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National Health Expenditures (1 of 2)
Spending for all health services and related activities
Evaluated as a percentage of GDP and as amount spent per capita
17.4% of GDP spent in 2013
Health care cost inflation is evaluated using the CPI.
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National Health Expenditures (2 of 2)
In 2013, 85% of total national health expenses were spent on:
Personal health (i.e., hospital care, physician services, dental care, other professional services, nursing home care, home health care, prescription drugs, medical supplies, durable medical equipment, vision care)
Remaining 15% was spent on public health services, research, structures and equipment, administrative services.
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Conclusion (1 of 3)
Financing plays a critical function in health care delivery.
It enables consumers to obtain health care services through insurance coverage.
For providers, it reimburses them for the services they provide.
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Conclusion (2 of 3)
Methods of reimbursement changed from retrospective to prospective.
Prospective payment and capitation used by HMOs contain incentives for the delivery of cost-effective health care.
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Conclusion (3 of 3)
Financing is shared between private and public sources.
Government incurs approximately 43% of all health care expenditures in the United States.
A quasi-national health care system
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