Dave Brown does not understand why it is important for a health insurance professional to learn about reimbursement systems and patient accounting systems. In his opinion, the important content in this course is the information regarding completing and submitting insurance claims forms. When that is mastered, he is prepared to start a successful medical billing career—or is he?

Janetta Karlowski has a different opinion. She had been working as a billing and insurance clerk in a medical office for the past 4 years and enrolled in the course because she did not know enough about these systems, and this lack of information was holding her back. “Reimbursement systems are constantly changing, and new ones are being added,” she told Dave. “Granted, they may be complicated and confusing, but you have to stay on top of things to really do the job right or you’ll find yourself being replaced by someone who is better educated.”

Dave is still skeptical as he looks over the objectives. PPS, APCs, RUGs, DRGs—it’s like alphabet soup. How can anyone make sense of all these acronyms? “We’ll work together,” Janetta tells him, “and we’ll get through this chapter together. We’ve come this far; we can’t quit now.” She realized this information was more advanced than the previous chapters, and perhaps she should not have criticized Dave for being skeptical of its relevance to the average medical billing and insurance clerk. After 4 years of experience, however, Janetta is convinced that knowledge is power, and the more you know about your specialty, the better your chances are for advancement and higher pay.

Understanding reimbursement systems

To understand fully the entire health insurance picture and how fees are established, the health insurance professional should be aware of the various reimbursement systems, their structure, and how they affect health insurance in general. Understanding reimbursement systems is important in making the most of payment opportunities. Current reimbursement systems are based on five elements that impact the dollar amount paid:

• Third-party payer

• Healthcare setting/provider

• Coding system (ICD/CPT)

• Data set used

• Encoder, grouper, and data entry software used

Because reimbursement systems can be challenging, every healthcare facility ideally should assign someone the responsibility of being the “reimbursement expert.” The health insurance professional might fit this role best, and he or she should be prepared to take on this responsibility. The rules are constantly changing with the frequent introduction of new payment formulas, and it takes diligence and dedication to keep current with these changes. Small adjustments in the payment rates can make a big difference in practice income. The following sections describe the various types of reimbursement and their fee structures.

Types of Reimbursement

From an insurance standpoint, the term reimbursement means payment to the insured for a covered expense or loss experienced by or on behalf of the insured. More specifically in health insurance, reimbursement is a payment made to a provider or to a patient in exchange for the performance of healthcare services. There are several different types of reimbursement in the healthcare office. Table 17-1 lists common types of reimbursement.

Table 17-1

Comparison of Reimbursement Methods

Reimbursement Type	Explanation
Fee-for-service	Services or procedures are paid as charged from physician’s fee schedule
Discounted fee-for-service	Services or procedures are paid at insurers’ contracted rates
PPS	Flat-rate reimbursement based on predetermined factors such as diagnoses, procedures, or a combination of both
Capitation	Payment is based on a fixed, per capita amount for each person served without regard to the actual number or nature of services provided

Fee-for-Service

As we learned in Chapter 4, fee-for-service is a system of payment for healthcare services whereby the provider charges a specific fee (typically the usual, customary, and reasonable [UCR] fee) for each service rendered and is paid that fee by the patient or by the patient’s insurance carrier. UCR is a fee amount an insurance carrier will accept based on the prevailing charges made by physicians in a similar specialty for a particular service or procedure within a specific community or geographic area.

Discounted Fee-for-Service

When a healthcare provider offers services at rates that are lower than UCR fees, that arrangement is called discounted fee-for-service. A typical example of discounted fee-for-service is when a healthcare provider is a participating provider with a preferred provider organization (PPO) and charges patients enrolled in the PPO lower rates in return for certain amenities from the PPO. (See Chapter 7 for details about PPOs.)

Prospective Payment System

A third type of reimbursement is the prospective payment system (PPS). With a PPS, reimbursement is made to the healthcare provider on the basis of predetermined factors (e.g., patient category or type of facility) and not on individual services. PPS is Medicare’s system for reimbursing Part A inpatient hospital costs. The amount of payment is determined by the assigned diagnosis-related group (DRG). PPS rates are set at a level intended to cover operating costs for treating a typical inpatient in a given DRG. DRGs are discussed in more detail later in this chapter.

The Centers for Medicare and Medicaid Services (CMS) uses a separate PPS for reimbursement to acute inpatient hospitals, home health agencies, hospice, hospital outpatient care, inpatient psychiatric facilities, inpatient rehabilitation facilities, long-term care hospitals (LTCH), and skilled nursing facilities (SNFs). Payments for each hospital are adjusted for differences in area wages, teaching activity, care to the poor, and other factors. PPS and DRGs are discussed in more detail later. To see related links for more detailed information about each specific PPS, visit the Evolve site.

Relative Value Units

Many insurance companies reimburse on a fee schedule that is based on relative value units (RVUs). More and more practices are also converting to a provider fee schedule that is based on RVUs. With the use of computers for medical billing, attaching RVUs to each procedure in the system provides the advantage of having a logical explanation for patients who inquire about the cost of their procedure (e.g., “the procedure is valued at 10 RVUs, and our conversion factor is $70 per RVU”). Patients tend to understand and accept this more readily than explaining what a UCR fee is (e.g., “$700 is what the average charge is for physicians in the same specialty in our area”). Additionally, when procedure codes are attached to an RVU, when the practice finds it necessary to increase its charges, the practice merely increases the conversion factor, rather than go into each procedure in the computer system and reset the charge amount. RVUs are discussed in more detail later in the chapter.

Managed Care Organizations

Managed care organizations (MCOs) vary greatly in their policies and procedures for reimbursement, and laws vary significantly from state to state. Individual MCO contracts have specific restrictions and requirements, and contracts may have rate reductions and discounts of certain types of care (e.g., telephone consultations). Referral processes typically require prior authorization, and billing procedures with MCOs are often complex.

Capitation

Capitation is a method of payment for healthcare services in which a provider or healthcare facility is paid a fixed, per capita amount for each individual to whom services are provided without regard to the actual number or nature of the services provided to each individual patient. Capitation is a common method of paying physicians in health maintenance organizations (HMOs).

What Did You Learn?

1. Define reimbursement.

2. List the basic types of reimbursement.

3. Explain the difference between fee-for-service and discounted fee-for-service.

4. ____________ is a common method of reimbursement in health maintenance organizations.

Medicare and reimbursement

The Tax Equity and Fiscal Responsibility Act (TEFRA) enacted by Congress in 1982 provided for limits on Medicare reimbursement that applied to stays in long-term acute care hospitals. After TEFRA was passed, the fee-for-service–based payment system was replaced with a PPS.

Initially, only Medicare patients were included in the PPS. Later, Medicaid patients were added on a state-by-state basis. As mentioned, with the PPS, a predetermined payment level is established primarily on the basis of a patient’s diagnoses and services performed, and the hospital receives a set payment. If money spent to care for a patient is less than the PPS payment, the healthcare facility is allowed to keep the extra money and makes a profit on the care provided. However, if the money spent to care for a patient is more than the PPS payment, the healthcare organization loses money in caring for the patient.

Medicare presently has three primary reimbursement systems:

• Prospective payment—a system of predetermined prices that Medicare uses to reimburse hospitals for inpatient and outpatient services and SNFs, rehabilitation hospitals, and home health services.

• Fee schedules—consisting of price lists that Medicare uses to reimburse healthcare providers for the services they provide and other healthcare providers for items and services that are not “bundled” into PPS, such as clinical laboratory tests, durable medical equipment, and some prosthetic devices.

• Medicare Advantage (Medicare Part C)—Medicare’s managed care program in which Medicare pays a set fee to managed care plans to provide care for Medicare beneficiaries.

Imagine This!

Four different patients visit Dr. Carson Inglewood, a family practice physician, for symptoms of influenza. Dr. Inglewood’s charge for an office visit is $50. Tony, a 22-year-old college student, has a commercial policy through the university that accepts fee-for-service charges. Emma, a 36-year-old bank teller, belongs to a PPO that Dr. Inglewood has contracted with at 10% discounted fee-for-service charges. Umberto, a 42-year-old factory worker, has healthcare coverage with a capitated health maintenance organization. Eunice, a 67-year-old retired teacher, is on Medicare. All four are established patients. Ellen McIntyre, Dr. Englewood’s health insurance professional, verifies the individual adjusted charges as follows:

Tony—$50 (UCR fee)

Emma—$45 (10% discount)

Umberto—$10 (capitation fee per patient per month)

Eunice—$34.50 (Medicare’s fee schedule allowed amount)

Medicare Prospective Payment System

Congress adopted the PPS to regulate the amount of resources the federal government spends on medical care for elderly and disabled individuals. The Social Security Amendments of 1983 mandated the PPS for acute hospital care for Medicare patients. The system was intended to encourage hospitals to modify the way they deliver services. Congress had the following four chief objectives in creating the PPS:

1. To ensure fair compensation for services rendered and not compromise access to hospital services, particularly for those who are seriously ill.

2. To ensure that the process for updating payment rates would account for new medical technology, inflation, and other factors that affect the cost of providing care.

3. To monitor the quality of hospital services for Medicare beneficiaries.

4. To provide a mechanism through which beneficiaries and hospitals could resolve problems with their treatment.

Congress gave primary authority for implementing the PPS to the Centers for Medicare and Medicaid Services (CMS). As a federal entity, CMS sets guidelines and rules that impact the entire insurance industry, and everyone must follow these guidelines and rules. Congress also assigned responsibilities to outside, independent organizations to ensure that the medical profession, hospital industry, and Medicare beneficiaries had the opportunity to provide input on the creation and implementation of the system.

Under the Medicare PPS, hospitals are paid a set fee for treating patients in a single DRG category, regardless of the actual cost of care for the individual. The DRG system is an inpatient classification structure based on several factors including principal diagnosis, additional diagnosis, surgical factors, age, sex, and discharge status. DRGs are discussed in more detail later.

In addition to payment adjustments for differences in area wages, teaching activity, care to the poor, and other factors, hospitals may receive additional payments to cover extra costs associated with atypical patients—patients whose stays are either considerably shorter or considerably longer than average (referred to as cost outliers) in each DRG.

Stop and Think

Referring to the scenario in Imagine This! concerning Dr. Inglewood’s practice, what is your reaction to the variation in adjusted charges for the four patients being seen in the same office for the same condition? Do you think it is reasonable that Tony’s insurer must pay the full $50, whereas Medicare allows only $34.50 for Eunice’s visit?

How the Medicare Prospective Payment System Works

In a PPS, payment levels are set ahead of time, or prospectively, and are intended to pay the healthcare provider for a particular group of services. The established payment rate for all services that a patient in an acute care hospital receives during an entire stay is based on a predetermined payment level that is selected on the basis of averages. This means that some providers’ actual costs would be above the average payment and some would be below. Whatever the case, the provider receives only the preset amount, regardless of whether actual costs are more or less.

CMS has developed several variations of payment systems from the initial PPS currently being used by Medicare and other third-party payers in the United States. Following are brief definitions of these various CMS PPS structures.

Acute Inpatient Prospective Payment System

The inpatient prospective payment system (IPPS) is the Medicare PPS used for acute care hospital inpatient stays. Under IPPS, each case is categorized into a DRG with a payment weight assigned to it based on the average resources used to treat patients in that particular DRG. Medicare publishes a final rule with revisions to IPPS every year for the upcoming fiscal year, which goes into effect on October 1—the beginning of the federal government’s fiscal year.

Outpatient Prospective Payment System

The outpatient prospective payment system (OPPS) is the Medicare PPS used for hospital-based outpatient services and procedures. Under OPPS, payment is based on the assignment of ambulatory payment classifications (APCs) and reimburses a predetermined amount by procedures performed. Medicare publishes revisions to OPPS annually for the upcoming fiscal year that go into effect on January 1 of the following year.

Skilled Nursing Facility Prospective Payment System

The skilled nursing facility prospective payment system (SNF PPS) is a per diem reimbursement system for all costs (routine, ancillary, and capital) associated with covered SNF services furnished to Medicare beneficiaries. Per diem rates are a hospital’s all-inclusive daily rates as calculated by department.

Home Health Prospective Payment System

The home health PPS is the reimbursement system developed by CMS to cover home health services provided to Medicare beneficiaries. Medicare pays home health agencies a predetermined base payment. The payment is adjusted for the health condition and care needs of the beneficiary and for the geographic differences in wages for home health agencies across the United States. The adjustment for the health condition, or clinical characteristics, and service needs of the beneficiary is referred to as the case-mix adjustment.

Inpatient Rehabilitation Facility Prospective Payment System

The inpatient rehabilitation facility (IRF) PPS is the reimbursement system developed by CMS to cover inpatient rehabilitation services provided to Medicare beneficiaries. The IRF PPS uses the patient assessment instrument to assign patients to case-mix groups according to their clinical status and resource requirements.

Inpatient Psychiatric Facility Prospective Payment System

The inpatient psychiatric facility PPS is a per diem PPS based on 15 DRGs.

Long-Term Care Hospital Prospective Payment System

The PPS for LTCHs classifies patients into diagnostic groups based on clinical characteristics and expected resource needs of inpatient stays in LTCHs (defined as hospitals with an average length of stay greater than 25 days). The patient classification groupings are called LTC-DRGs—they are the same DRGs used under the hospital inpatient PPS.

Medicare Advantage Program (Centers for Medicare and Medicaid Services Hierarchical Condition Category)

The Medicare Advantage program employs a CMS hierarchical condition category (HCC) risk assessment payment model. This capitation payment model is used to provide payment to managed care organizations (e.g., HMOs and PPOs) on behalf of Medicare beneficiaries. The CMS HCC risk assessment adjusts per-beneficiary capitation payments with a risk adjustment methodology using diagnoses to measure relative risk owing to health status. Select diagnostic codes are used to define disease groups, referred to as hierarchical condition categories, or HCCs.

CMS also develops fee schedules for specific providers and services such as physicians, ambulance services, clinical laboratory services, durable medical equipment, and supplies. You can read more about them on the CMS website at http://www.cms.gov/.

HIPAA Tip

HIPAA regulations do not mandate that all healthcare facilities become computerized.

What Did You Learn?

1. What congressional act provided for limits on Medicare reimbursements for stays in long-term acute care hospitals?

2. List the three primary reimbursement systems for Medicare.

3. Name the federal entity that sets guidelines and rules that impact the entire insurance industry.

4. T/F—Under the Medicare PPS, hospitals are paid a set fee for treating patients in a single DRG category based on the actual cost of care for the individual.

5. Define a “cost outlier.”

6. Identify six types of prospective payment systems.

Other systems for determining reimbursement

Until the latter part of the 20th century, fee-for-service was the usual method of determining reimbursement in the United States. As the nation faced an increase in the elderly population and access to healthcare improved, the government enacted legislation to control the increasing cost of healthcare associated with these factors. Out of these federal laws, several new systems of reimbursement appeared (Table 17-2).

Table 17-2

Prospective Payment Systems Comparison

Type of System	Applicable Setting	Reimbursement Based on
DRG	Acute care	Diagnosis and procedures
APC	Ambulatory care	Procedures, using diagnoses to verify medical necessity
RUG	Skilled nursing facilities	Minimum data set including activities of daily living index
HH PPS	Home health care	Outcome and assessment information set
IRF PPS	Inpatient rehabilitation facilities	Length of hospital stay and function-related group classification

APC, Ambulatory payment classifications; DRG, diagnosis-related groups; HH PPS, home health prospective payment system; IRF PPS, inpatient rehabilitation facility prospective payment system; RUG, resource utilization group.

Relative Value Scale

The relative value scale (RVS), first developed by the California Medical Association in the 1950s, is a method of determining reimbursement for healthcare services based on establishing a standard unit value for medical and surgical procedures. RVS compares and rates each individual service according to the relative value of each unit and converts this unit value to a dollar value. RVS units are based on average charges for a same or similar procedure of all healthcare providers during the time in which the RVS was established and published. The total relative value unit (RVU) consists of the following three components:

1. A relative value for physician work

2. A relative value for practice expense

3. A relative value for malpractice risk

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Mar 15, 2017 | Posted by admin in NURSING | Comments Off

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