RCM 1

HCA 716
HEALTH CARE ACCOUNTING & FINANCE

Josué Patien Epané, PhD, MBA 1
Gapenski’s Healthcare Finance Chapter 2: Health Insurance and Reimbursement Methodologies
Copyright 2021 Foundation of the American College of Healthcare Executives. Not for sale.
Chapter 2: Healthcare Insurance and
Reimbursement Methodologies
Although some provider Because revenues are
revenues come directly essential to financial
from patients, the vast success, health services
majority come from managers must understand
insurers and other entities the healthcare insurance
known collectively as system and the
third-party payers. methodologies that payers
use to reimburse providers.
2
Learning Objectives
After studying this chapter, readers
will be able to:
Explain the overall concept of insurance,
including adverse selection and moral
hazard.
 Briefly describe the third-party payer
system.
 Explain the different types of general
payment methods.
 Describe the incentives created by the
different payment methods and their impact
on provider risk.
3
Learning Objectives…
After studying this chapter, readers
will be able to:…
Describe the purpose and organization of
managed care plans.
Explain the impact of healthcare reform
on insurance and reimbursement
methodologies.
 Explain the importance and types of
medical coding
4
Insurance Concepts
Basic Characteristics Issues Insurance Programs Face
For insurance to “work,” it However, two problems
must have these basic often arise in insurance
characteristics: programs:
Pooling of losses Adverse selection
Payment only for random Moral hazard
losses
Risk transfer
Indemnification
5
Adverse Selection
Adverse selection means those with greater risk are more
likely to purchase insurance.
The problem exists because of asymmetric information;
insurance applicants have better knowledge of their health status
than insurers have.
In the past, insurance companies used underwriting provisions to
minimize adverse selection.
Cross-subsidies often exist among different groups.
6
Moral Hazard
Insurers use the following
Moral hazard is the techniques to protect
overuse of health services themselves:
or forgoing of prevention Deductibles
because the insured does Copayments
not bear the full cost of Coinsurance
the consequences. Stop-loss limits
Policy restrictions
7
Third-Party Payers
For the most part, Private insurers
provider revenues Blue Cross/Blue Shield
come from third- Commercial insurers
party payers Self-insurers
rather than from Public insurers
patients. Medicare
Medicaid
8
Managed Care Plans
Managed care plans There are many types of plans
strive to combine both Health maintenance
the provision of organizations (HMOs)
healthcare services and Preferred provider organizations
the insurance function (PPOs)
in a single Point-of-service (POS) plans
organization, with the
purpose of increasing In general, the purpose of
quality of care and managed care plans is to
decreasing costs. control costs. How?
9
Health Reform and Insurance
New insurance standards
Individual mandate to have insurance (repealed)
Establishment of federal/state health insurance exchanges (HIEs)
Medicaid expansion
Price transparency
High-deductible health plans
New (individual) insurance markets
Increased focus on chronic care
10
General Reimbursement Methodologies
Regardless of payer, there are a limited number of payment
methodologies.
Fee for Service Capitation
Payment is tied to the Payment is tied to the size
amount of services of the covered population
provided. (number of enrollees).
Charge based
Cost based
Prospective payment
11
FFS: Charge-Based Reimbursement
Payer pays billed (gross) charges for services rendered.
Historically, all third-party payers reimbursed providers

based on billed charges.
Some payers still use billed charges as the payment method,

but often negotiate a discount from gross charges ranging
from 20 to 50 percent (or more).
What should the uninsured pay for healthcare services?

12
FFS: Cost-Based Reimbursement
Payer pays all allowable costs incurred in providing services.
Typically, periodic interim payments are made, with a final

reconciliation at the end of each year.
Medicare used this method for all hospitals in its early years
(1966–1983).
Used rarely today. One example is Medicare payment to critical

access hospitals (CAHs).
13
FFS: Prospective Payment
Prospective payment Prospective payment may be

methods have a fixed on a:
payment Per procedure basis
determined Per diagnosis (DRG) basis
beforehand that is Per diem (per day) basis
not dependent on Bundled (episodic) pricing
either costs or basis
charges.
14
Capitation
Capitation is entirely different from FFS reimbursement.
Payment is not tied to utilization, but rather to the number of
covered lives.
Payment to providers usually is made on a per member per
month (PMPM) basis.
Used primarily by managed care plans.
The impact of capitation will be examined throughout the

course.
15
Discussion Item
Assume that you are the CEO of a hospital. What are the
incentives to the organization under:
Charge-based reimbursement?
Cost-based reimbursement?
Per diagnosis (DRG) reimbursement?
Per diem reimbursement?
Bundled reimbursement?
Capitation?
16
Medical Coding
Medical coding Coding is performed There are three
is the first step by administrative different types of
in the personnel (coders) codes commonly
reimbursement based on clinicians’ used by
process. notes. providers.
ICD codes
CPT codes
HCPCS codes
17
The codes currently consist of 3, 4, or 5
digits. The greater the number, the more
detailed the information. For example:
ICD Codes 410 is heart attack
International 410.0 specifies the anterior wall
Classification of
Diseases (ICD)
codes are used to ICD codes are used by hospitals to
specify diseases, specify inpatient diagnoses. ICD-9 was
symptoms, or used up until October 2015, but ICD-
injuries. 10, with many more 3- to 7-character-
length codes, is now required.
18
CPT Codes
Current The codes are 5 digits. For example:
Procedural 99211 is a simple (short) office visit
Terminology 99215 is a complex (long) office visit
(CPT) codes are
used to specify
medical CPT codes are used by physicians
procedures (and other clinicians) to specify
(treatments). procedures performed on patients.
19
HCPCS Codes
Because government This system expands the
payers wanted more set of CPT codes to
information than found in include nonphysician
CPT codes, they use an services, ambulance
expanded system: the services, and durable
Healthcare Common medical equipment such as
Procedure Coding prosthetic devices.
System (HCPCS).
20
Medicare Reimbursement Methods
Different methods are We will illustrate with three
used for different examples.
providers. More information can be found
Most use a method of at the Medicare Payment
classifying patients into Advisory Commission
groups based on clinical (MedPAC) website
data. (www.medpac.gov).
Patient groups are
weighted to reflect different
use of resources with the
weights frequently updated.
21
Hospital Acute Inpatient Services
The Inpatient Prospective Payment System (IPPS) is
used.
Each discharge is assigned to a Medicare severity diagnosis

related group (MS–DRG).
Payment rates are calculated using a base dollar amount, first

adjusted for local input prices, then multiplied by the MS–
DRG relative weight.
22
Outpatient Hospital Services
The Outpatient Prospective Payment System (OPPS) is
used.
Each discharge is assigned to an ambulatory payment

classification (APC).
Payment rates are calculated using a base dollar amount, first

adjusted for local input prices, then multiplied by the relative
weight for each APC.
23
Physician Services
The Physician Fee Schedule is used.
Each service has a relative value unit (RVU) assigned that

reflects amount of physician work, practice expenses, and
liability insurance costs.
Payment rates are calculated using an RVU value, first

adjusted for local input prices, then multiplied by a standard
dollar amount (the conversion factor).
24
Health Reform & Reimbursement
Methods
Emphasis on value-based purchasing

New models of bundled payment
Shared savings programs
Quality-based clinician compensation
Readmission reduction program
Program to reduce hospital-acquired conditions (HACs)
25
Conclusion
This concludes our discussion of Chapter 2 (Healthcare
Insurance and Reimbursement Methodologies ).
After studying this chapter, readers will be able to:
Explain the overall concept of insurance, including adverse selection and
moral hazard.
 Briefly describe the third-party payer system.
 Explain the different types of general payment methods.
Although not all concepts were discussed in class, you are responsible for
all the material in the text.
Do you have any questions? 26

Conclusion
After studying this chapter, readers will be able to:…
 Describe the incentives created by the different payment methods and
their impact on provider risk.
 Describe the purpose and organization of managed care plans.
 Explain the impact of healthcare reform on insurance and reimbursement
methodologies.
 Explain the importance and types of medical coding
Although not all concepts were discussed in class, you are responsible
for all the material in the text.
Do you have any questions? 27


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RCM 1

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HCA 716

HEALTH CARE ACCOUNTING & FINANCE

Cross-subsidies often exist among different groups.

Historically, all third-party payers reimbursed providers

Some payers still use billed charges as the payment method,

What should the uninsured pay for healthcare services?

Typically, periodic interim payments are made, with a final

Used rarely today. One example is Medicare payment to critical

Prospective payment Prospective payment may be

The impact of capitation will be examined throughout the

Each discharge is assigned to a Medicare severity diagnosis

Payment rates are calculated using a base dollar amount, first

Each discharge is assigned to an ambulatory payment

Payment rates are calculated using a base dollar amount, first

Each service has a relative value unit (RVU) assigned that

Payment rates are calculated using an RVU value, first

Emphasis on value-based purchasing

Do you have any questions? 26

Do you have any questions? 27

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