Introduction

Healthcare costs in the United States continue to rise at a rate greater than general inflation. In 2009, for example, Americans spent $2.2 trillion for health care—approximately 16.2% of the gross domestic product (GDP). This equals $7026 per person. The health share of the GDP is projected to increase to 19.5% in 2017 (Centers for Medicare & Medicaid Services [CMS], 2008). Yet millions of uninsured and underinsured Americans do not have access to basic healthcare services. With the exception of South Africa, the United States was the only industrialized nation where health care is viewed as a privilege rather than a right.

Despite our huge expenditures, major indicators reveal significant health problems in the United States, as well as large disparities in health status related to gender, race, and socioeconomic status (Healthy People 2010, 2001). Our infant mortality rate is among the highest of all industrialized nations, and black infants die at more than twice the rate of white infants. Average life expectancy is lower than that in most developed countries, and men have a life expectancy that is 6 years less than that of women. One in eight women will develop breast cancer during her lifetime, with black and Native American women experiencing a much higher death rate than white women. Violence-related injuries are on the rise, and unintentional injuries, such as motor vehicle accidents, are a leading cause of death. Clearly, we are not receiving a high value return for our healthcare dollar.

The large portion of the GDP that is spent on health care poses problems to the economy in other ways, too. Funds are diverted from needed social programs such as childcare, housing, education, transportation, and the environment. The price of goods and services is increased, and therefore the country’s ability to compete in the international marketplace is compromised. The cost of providing health care to automobile manufacturing employees added from $1100 to $1500 to the cost of each of the 4.65 million vehicles General Motors sold in 2004 (Appleby & Carty, 2005). As the amount of the GDP devoted to healthcare expenses rises, the more vulnerable the healthcare industry is to external influences. This creates a major concern for an industry that already expresses concerns about being overregulated.

What Escalates Healthcare Costs?

Total healthcare costs are a function of the prices and the utilization rates of healthcare services (Costs = Price × Utilization) (Table 12-1). Price is the rate that healthcare providers set for the services they deliver, such as the hospital rate or physician fee. Utilization refers to the quantity or volume of services provided, such as diagnostic tests provided or number of patient visits.

Price inflation and administrative inefficiency are leading contributors to increasing prices for health services. In recent decades, rises in healthcare prices have dramatically outpaced general inflation. Examples of factors that stimulate price inflation are physician incomes that rise faster than average worker earnings and the high prices of prescription drugs, which are often 50% higher than prices in other nations (Bodenheimer & Grumbach, 2009). Administrative inefficiency or waste is primarily a result of the large numbers of clerical personnel whom organizations use to process reimbursement forms from multiple payers. U.S. hospitals spend an average of 20% of their budgets on billing administration alone! This single fact indicates why some hospital administrators advocate for the elimination of multiple payers.

Several interrelated factors contribute to increased utilization of medical services. These include unnecessary care, consumer attitudes, healthcare financing, pharmaceutical usage, and changing population demographics and disease patterns. A substantial amount of unnecessary care does not add health benefits for patients. Inappropriate or ineffective medical procedures are also prevalent and have led to national initiatives to demonstrate efficacy of interventions and to decrease variations in physician practice.

Our attitudes and behaviors as consumers of health care also contribute to rising costs. In general, we prefer to “be fixed” when something goes wrong rather than to practice prevention. When we need “fixing,” expensive high-tech services typically are perceived as the best care. Many of us still believe that the physician knows best, so we do not seek much information related to costs and effectiveness of different healthcare options. When we do seek information, it is not readily available or understandable. Also, we are not accustomed to using other, less costly healthcare providers, such as nurse practitioners.

The way health care is financed contributes to rising costs. When health care is reimbursed by third-party payers, consumers are somewhat insulated from personally experiencing the direct effects of high healthcare costs. For example, the huge rise in consumer demand for prescription drugs since 1995 was fueled by low copayments for drugs required by most insurance companies (Heffler et al., 2004). As consumer out-of-pocket expenses for drugs increase, consumer demand should decrease. In most instances, however, consumers do not have many incentives to consider costs when choosing among providers or using services. In addition, the various methods of reimbursement have implications for how providers price and use services.

Evidence of pharmaceutical usage can be seen in advertisements in magazines and on television. No longer do pharmaceutical companies attempt to influence only the prescribers. They go directly to the consumer, who then goes to the prescriber. Because of some typical drug benefit programs, the consumer often is unaware of the total cost of a medication, which may be a “quick fix” (described previously) or a lifestyle enhancement, such as sexual enhancers or skin conditioning.

Changing population demographics also are increasing the volume of health services needed. For example, chronic health problems increase with age and the number of older adults in America is rising. The fastest growing population is the group ages 85 years and older, and Baby Boomers are beginning to move into their senior years. Infectious diseases such as acquired immunodeficiency syndrome (AIDS) and tuberculosis, as well as the growing societal problems of homelessness, drug addiction, and violence, increase demands for health services.

How Is Health Care Financed?

On March 23, 2010, historic healthcare reform was signed into law. This phased-in legislation includes some features that take effect quickly and others that are delayed for several years. Pre-existing conditions that often limited an individual’s ability to secure health insurance starts with coverage for children. Although the enacted legislation does not cover the entire population, a great majority will be covered. This coverage changes how individuals are insured and thus how they are viewed within the system. Multiple demands for nurses, especially those in advanced practice roles, will continue to emerge over the next several years. As all of these changes unfold, opportunities and challenges exist for the way in which health care will be delivered and paid for, and those changes will alter what nursing does.

Health care is paid for by four sources: government (45%); private insurance companies (35.9%); individuals (15%); and other, primarily philanthropy (4.1%) (Figure 12-1). Three fourths of the government funding is at the federal level. Federal programs include Medicare and health services for members of the military, veterans, American Indians, and federal prisoners. Medicare, the largest federal program, was established in 1965 and pays for care provided to people 65 years of age and older and some disabled individuals. Medicare Part A is an insurance plan for hospital, hospice, home health, and skilled nursing care that is paid for through Social Security taxes. Nursing home care that is mainly custodial is not covered. Medicare Part B is an optional insurance that covers physician services, medical equipment, and diagnostic tests. Part B is funded through federal taxes and monthly premiums paid by the recipients. Medicare does not cover outpatient medications, eye or hearing examinations, or dental services. The drug benefit plan, effective in 2006, has been viewed as beneficial but very difficult to understand.

Medicaid, a state-level program financed by federal and state funds, pays for services provided to persons who are medically indigent, blind, or disabled and to children with disabilities. The federal government pays between 50% and 83% of total Medicaid costs based on the per capita income of the state. Services funded by Medicaid vary from state to state but must include services provided by hospitals, physicians, laboratories, and radiology departments; prenatal and preventive care; and nursing home and home healthcare services.

Private insurance is the second major source of financing for the healthcare system. Most Americans have private health insurance, which usually is provided by employers through group policies. Individuals can purchase health insurance, but typically the rates are very high and provide minimal coverage. Health insurance that is so intertwined with employment is problematic and contributes to the number of uninsured and underinsured Americans. Many of the uninsured workers are those employed in small businesses that cannot afford to provide group insurance and those who have part-time, seasonal, or service positions.

Individuals also pay directly for health services when they do not have health insurance or when insurance does not cover the service. Costs paid by individuals are called out-of-pocket expenses and include deductibles, copayments, and coinsurance. Health insurance benefits often do not cover preventive care, cosmetic surgeries, alternative healthcare therapies, or items such as eyeglasses and nonprescription medications.

Reimbursement Methods

Four major payment methods are used for reimbursing healthcare providers: charges, cost-based reimbursement, flat-rate reimbursement, and capitated payments (Zelman, McCue, Millikan, & Glick, 2003). These methods are summarized in Box 12-1. Health-service researchers do not agree on the exact effects of these reimbursement methods on cost and quality. However, considering these effects is important because changes in payment systems have implications for how care is provided in healthcare organizations.

Charges consist of the cost of providing a service plus a markup for profit. Third-party payers often put limitations on what they will pay by establishing usual and customary charges by surveying all providers in a certain area. Usual and customary charges rise over time as providers continually increase their prices. In cost-based reimbursement, all allowable costs are calculated and used as the basis for payment. Each payer (government or insurance company) determines what the allowable costs are for each procedure, visit, or service. Charges and cost-based reimbursement are retrospective payment methods because the amount of payment is determined after services are delivered. When the reimbursed costs are less than the full charge for the service, a contractual allowance or discount exists. Charges and cost-based reimbursement were the predominant payment method in the 1960s and 1970s but have been largely supplanted by payer fee schedules determined before service delivery.

Flat-rate reimbursement is a method in which the third-party payer decides in advance what will be paid for a service or episode of care. This is a prospective reimbursement method. If the costs of care are greater than the payment, the provider absorbs the loss. If the costs are less than the payment, the provider makes a profit. In 1983, Medicare implemented a prospective payment system (PPS) for hospital care that uses diagnosis-related groups (DRGs) as the basis for payment.

The DRG system is a classification system that groups patients into categories based on the average number of days of hospitalization for specific medical diagnoses, considering factors such as the patient’s age, complications, and other illnesses. Payment includes the expected costs for diagnostic tests, various therapies, surgery, and length of stay (LOS). The cost of nursing services is not explicitly calculated. With a few exceptions, DRGs do not adequately reflect the variability of patient intensity or acuity within the DRG. This is problematic for nursing because the amount of resources (nurses and supplies) used to care for patients is directly related to the patient acuity. Therefore many nurses believe that DRGs are not good predictors of nursing care requirements. Recently, Medicare also began reimbursing home health agencies, nursing homes, and ambulatory care providers through a PPS.

In addition to Medicare, some state Medicaid programs and private insurance companies use a DRG payment system. Although DRGs are not currently used for specialty hospitals (pediatric, psychiatric, and oncology), they are a dominant force in hospital payment. Implementation of a PPS with DRGs resulted in increased patient acuity and decreased LOS in hospitals, along with a greater demand for home care. The need for hospital and community-based nurses also increased.

The resource-based relative value scale (RBRVS) is a flat-rate reimbursement method the federal government uses to pay physicians. Fees in this system are set by estimating the time, cognitive and technical skills, and physical effort required to provide the specific service. Another common flat-rate method is the discounted payments payers negotiate with providers in preferred provider organizations (PPOs).

Capitated payments are based on the provision of specified services to an individual over a set period such as 1 year. Providers are paid a per-person-per-year (or per-month) fee. If the services cost more than the payment, the provider absorbs the loss. Likewise, if the services cost less than the payment, the provider makes a profit. Capitation is the mode of payment characteristic of health maintenance organizations (HMOs) and other managed care systems.

The Changing Healthcare Economic Environment

Health care is a major public concern, and rapid changes are occurring in an attempt to reduce costs and improve the health and wellness of the nation. As shown in Box 12-2, strategies shaping the evolving healthcare delivery system include managed care; organized delivery systems (ODSs); and competition based on price, patient outcomes, and service quality. These strategies affect both the pricing and use of health services.

Managed care is a health plan that brings together the delivery and financing function into one entity, in contrast with a traditional fee-for-service plan, in which insurers pay providers based on costs (Finkler & McHugh, 2007). A major goal of managed care is to decrease unnecessary services, thereby decreasing costs. Managed care also works to ensure timely and appropriate care. HMOs are a type of managed care system in which the primary physician serves as a gatekeeper who determines what services the patient uses. Because HMOs are paid on a capitated basis, it is to the HMO’s advantage to practice prevention and use ambulatory care rather than more expensive hospital care. In other forms of managed care, a non-physician case manager arranges and authorizes the services provided. Many insurance companies have used case managers for years. Nurses who work in home health and ambulatory settings often communicate with insurance company case managers to plan the care for specific patients. PPOs and point-of-service (POS) plans are other types of managed care plans that give the patient more options than traditional HMOs do for selecting providers and services.

ODSs comprise networks of healthcare organizations, providers, and payers. Typically, this means hospitals, physicians, and insurance companies. The aim of such joint ventures is to develop and market collectively a comprehensive package of healthcare services that will meet most needs of large numbers of consumers. Hospitals, physicians, and payers will share the financial risks of the enterprise. Although hospitals share some risk now with prospective payment, physicians have not generally shared the risk. This risk-sharing is expected to provide incentives to eliminate unnecessary services, use resources more effectively, and improve quality of services.

Competition among healthcare providers increasingly is based on cost and quality outcomes. Decision making regarding price and utilization of services is shifting from physicians and hospitals to payers, who are demanding significant discounts or lower prices. Scientific data that demonstrate positive health outcomes and high-quality services are required. Providers who cannot compete based on price, patient outcomes, and service quality will find it difficult to survive as the system evolves.

What Does this Mean for Nursing Practice?

What does the healthcare economic environment mean for the practicing professional nurse? We must value ourselves as providers and think of our practice within a context of organizational viability and quality of care. To do this, we must add “financial thinking” to our repertoire of nursing skills and we must determine whether the services we provide add value for patients. Services that add value are of high quality, affect health outcomes positively, and minimize costs. The following sections help develop financial thinking skills and ways to consider how nursing practice adds value for patients by minimizing costs.

Why Is Profit Necessary?

Private, nongovernmental healthcare organizations may be either for-profit (FP) or not-for-profit (NFP). This designation refers to the tax status of the organization and specifies how the profit can be used. Profit is the excess income left after all expenses have been paid (Revenues − Expenses = Profit). FP organizations pay taxes, and their profits can be distributed to investors and managers. NFP organizations, on the other hand, do not pay taxes and must reinvest all of their profits, commonly called net income or income above expense, in the organization to better serve the public.

All private healthcare organizations must make a profit to survive. If expenses are greater than revenues, the organization experiences a loss. If revenues equal expenses, the organization breaks even. In both cases, nothing is left over to replace facilities and equipment, expand services, or pay for inflation costs. Some healthcare organizations can survive in the short run without making a profit because they use interest from investments to supplement revenues. The long-term viability of any private healthcare organization, however, depends on consistently making a profit. Box 12-3 presents a simplified example of an income statement from a neighborhood not-for-profit nursing center.

BOX 12-3   Income Statement of Revenues and Expenses from A Neighborhood Nursing Center

FYE December 31, 2010

Revenues
Patient revenues Grant income Other operating revenues total		$367,200
Expenses
Salary costs Supplies Other operating expenses (e.g., rent, utilities, administrative services) total Excess of revenues over expenses [profit]*

FYE, Fiscal year ending.

^*Loss would be shown in parentheses ( ) or brackets [ ].

Nurses and nurse managers directly affect an organization’s ability to make a profit. Profits can be achieved or improved by decreasing costs or increasing revenues. In tight economic times, many managers think only in terms of cutting costs. Although cost-cutting measures are important, especially to keep prices down so that the organization will be competitive, ways to increase revenues also need to be explored.

Understanding what is required for a department or agency to remain financially sound requires that nurses move beyond thinking about costs for individual patients to thinking about income and expenses and numbers of patients needed to make a profit. In a fee-for-service environment, revenue is earned for every service provided. Therefore increasing the volume of services, such as diagnostic tests and patient visits, increases revenues. In a capitated environment in which one fee is paid for all services provided, increasing the overall number of patients served and decreasing the volume of services used is desirable. With capitation, nurses must strive to accomplish more with each visit to decrease return visits and complications. Many healthcare organizations function in a dual-reimbursement environment—part capitated and part fee-for-service. Nurses need to understand their organization’s reimbursement environment and strategy for realizing a profit in its specific circumstances.

Knowing Costs and Reimbursement Practices

As direct caregivers and case managers, nurses are constantly involved in determining the type and quantity of resources used for patients. This includes supplies, personnel, and time. Nurses need to know what costs are generated by their decisions and actions. Nurses also need to know what items cost and how they are paid for in an organization so that they can make cost-effective decisions. For example, nurses need to know per-item costs for supplies so that they can appropriately evaluate lower-cost substitutes.

In ambulatory and home health settings, nurses must be familiar with the various insurance plans that reimburse the organization. Each plan has different contract rules regarding preauthorization, types of services covered, required vendors, and so on. Although nurses must develop and implement their plans of care with full knowledge of these reimbursement practices, the payer does not totally drive the care. Nurses still advocate for patients in important ways while also working within the cost and contractual constraints. Moreover, when nurses understand the reimbursement practices, they can help patients maximize the resources available to them.

In hospitals, the cost of nursing care usually is not calculated or billed separately to patients; instead, it is part of the general per-diem charge. One major problem with this method is the assumption that all patients consume the same amount of nursing care. Another problem with bundling the charges for nursing care with the room rate is that nursing as a clinical service is not perceived by management as generating revenue for the hospital. Rather, nursing is perceived predominantly as an expense to the organization. Although this perception may not matter in a capitated setting in which all provider services are considered a cost, accurate nursing care cost data are needed to negotiate managed care contracts. In addition, patients do not see direct charges and so have no way to understand the monetary value of the services they receive.

Exercise 12-5

How was nursing care charged on the bill you obtained? What are the implications for nursing in being perceived as an expense rather than being associated with the revenue stream? Why will this perception be less important in a capitated environment?

Only gold members can continue reading. Log In or Register to continue

Share this:

• Click to share on Twitter (Opens in new window)
• Click to share on Facebook (Opens in new window)

Related

Related posts:

1. Context
2. Patient Safety
3. Developing the Role of Manager
4. Managing Personal/Personnel Problems

Stay updated, free articles. Join our Telegram channel

Join