Fee-for-service reimbursement is payment for specific healthcare services under a fee schedule. A health service might be an office visit, surgery, ear irrigation, suturing of a wound, a Pap smear, or any one of thousands of other services. Fees are based on a complex variety of factors, including the number and type of services provided, the Current Procedural Terminology (CPT) and International Classification of Diseases (ICD) codes, the geographic area of service, and certain office and training expenses of the provider. All reimbursable services have a CPT code. CPT is a uniform coding system developed by the American Medical Association and adopted by third-party payers for use in claim submission. All CPT codes have a corresponding Medicare fee. All medical diagnoses have an ICD code.

Fees for CPT codes may vary in different locations and for different providers depending upon a complex variety of factors, including the geographic area of service and certain office, malpractice, and training expenses of the provider. Under Medicare, NPs may be reimbursed at a rate of 85% of the physician fee schedule. Under a fee-for-service system of reimbursement, the more services an NP performs, the more money he or she will generate.

The physician fee schedule is determined using a system called a resource-based relative value scale (RBRVS). The RBRVS, developed by CMS, the federal agency charged with administering Medicare, determines reimbursement for Medicare Part B services. The RBRVS assigns a relative value to each procedural code (CPT code). Under the RBRVS system, services are reimbursed on the basis of resources related to the procedure rather than simply on the basis of historical trends.

There are three components to a relative value: (1) a practice expense component, (2) a work component, and (3) a malpractice component. Each component is adjusted geographically, using three separate Geographic Practice Cost Indexes (GPCIs). The final formula to arrive at an area-specific relative value is:

(Practice Expense RV × Practice Expense GPCI) + (Work RV × Work GPCI) + (Malpractice RV × Malpractice GPCI) = Relative Value

The relative value is then multiplied by a single “conversion factor” to arrive at the geographic-specific fee schedule allowable for a given area. The conversion factor is based on whether the service is surgical or medical. RBRVS affects payments made
to physicians, NPs, and other providers entitled to Medicare and other forms of thirdparty reimbursement.

An NP wishing to provide service to a Medicare patient on a fee-for-service basis applies to be a Medicare provider. Once an NP has a provider number, the NP submits bills to the local Medicare carrier agency for each visit or procedure. A standard form, the CMS 1500, is used. NPs who are self-employed receive 85% of the physician charge for the billed procedure. When an NP is employed by physicians and can meet “incident to” requirements, the practice may receive 100% of the physician charge for the billed procedure, subject to the “incident to” rules.

The full term for incident to is incident to a physician’s professional service. Incident to is a term peculiar to Medicare. The legal definition of “incident to” services is services furnished as an “integral, although incidental, part of the physician’s personal professional services in the course of diagnosis or treatment of an injury or illness.”¹ To qualify under this definition, the services of nonphysicians must be rendered in a physician’s office under a physician’s “direct personal supervision.” Nonphysicians must be employees of a physician or physician group or have an independent contractor relationship with the group. Services must be furnished during a course of treatment in which a physician performs an initial service and subsequent services of a frequency that reflects the physician’s active participation in and management of the course of treatment. Direct personal supervision in the office setting does not mean that a physician must be in the same room. However, a physician must be present in the office suite and immediately available to provide assistance and direction throughout the time that an NP is performing services. Incident to may refer to the services of office nurses and technicians as well as NPs.

Capitation is a fee paid by a managed care organization (MCO) to a healthcare provider, per patient, per month, for care of an MCO member. Capitated fees for primary care vary, based on a patient’s age and sex. Under a capitated system of reimbursement, NPs and physicians are paid a set fee per patient per month for all services agreed to by contract. If an NP has agreed to provide all primary care services for a patient, then the NP must provide an unlimited number of primary care visits. On the other hand, if a patient never visits, the NP operating under a capitated system of reimbursement still is paid.

An NP wishing to provide care for a Medicare patient enrolled in an MCO applies to the MCO for admission to the organization’s provider panel. For information about applying for admission to managed care provider panels, see Exhibit 9-1.

Individuals covered by Medicare may choose between traditional fee-for-service coverage and managed care.

An MCO is an insurer that provides both healthcare services and payment for the services. MCO is an umbrella term that may include HMOs and other forms of health plans. An HMO is a prepaid, comprehensive system of health benefits that combines the financing and delivery of health services to subscribers.

NPs are gaining admission to MCO provider panels. With panel membership comes the designation primary care provider (PCP), a contract for providing care, credentialing, directory listing, and reimbursement.

A PCP has full responsibility for a patient’s primary care, including: (1) complying with the MCO’s quality, utilization, and patient satisfaction standards; (2) coordinating care with specialists, hospitals, or long-term care facilities; (3) approving or disapproving referrals for specialty care; (4) keeping costs as low as possible while maintaining quality; and (5) providing a system for 24-hour access to care.

MCOs reimburse PCPs on a fee-for-service basis, a capitated basis, or a combination of fee-for-service and capitation. Each MCO negotiates a payment arrangement with each group, practice, or provider on its panel. See the section “Negotiating an MCO Contract” in this chapter.

MCOs sell a priced package of health services to their clients, who may be employers, individuals, or government agencies, such as the state Medicaid agency or Medicare. A client signs up for a particular plan and offers that plan to patients, or “members,” who often share in the cost of the plan. Each MCO has a panel of healthcare providers who may or may not be employed by the MCO.

There are two types of affiliation between MCO and provider. The first type is an employer-employee arrangement, called the group-model MCO. The best known group-model MCO is Kaiser Permanente. A group-model MCO pays a provider a set salary in return for taking care of a panel of patients. In the second type of affiliation, called the practice-model MCO, the MCO contracts with independent providers, group practices, or practice associations for a “product line” of services. Contracts between MCO and a practice govern the relationship. See the section “Negotiating an MCO Contract” in this chapter.

Both group-model and practice-model MCOs are allowing patients the option of choosing NPs as PCPs. Not all MCOs currently recognize NPs as PCPs, however.

NPs should determine which MCOs are prevalent in the geographic area of practice and prevalent among the practice’s patients. Once the NP has compiled a short list of MCOs, it is wise to do some research on the MCOs.

Ask other providers who have done business with the MCO, or the state agency that oversees MCOs, the following questions:

Then apply to the MCOs for which all the above answers are “yes.”

NPs who have been admitted to MCO provider panels are: (1) those whose practice is in a geographic area of interest to an MCO; (2) those who have large numbers of patients who are attractive to the MCO; (3) those who offer a service unavailable elsewhere; or (4) those who have been endorsed and supported by the physicians in a large group practice. In general, these are the same characteristics distinguishing physicians who have been admitted to MCO provider panels.

In brief, the application process is: (1) call Provider Relations at an MCO and request an application; (2) apply for admission; and (3) follow up by telephone or letter.

MCOs “credential” providers means that they collect educational, license, malpractice, employment, and certification data on each provider and make a judgment that a provider is adequately prepared to care for the MCO’s patients. For the information commonly required of applicants to provider panels, see Appendix 9-A.