Healthcare Payment Methods Notes

OBJECTIVES

• Define the different methods of payment.

• Identify and define the 4 different methods of provider payment.

• Identify and define the 5 different methods of hospital payment.

• Understand who is at risk under each payment arrangement.

• Determine which payment methods are used in pharmacy.

METHODS OF PAYMENT FOR HEALTHCARE PROFESSIONALS AND HOSPITALS

Healthcare Professionals

• Payment per Procedure: Fee-for-Service (FFS)

• Payment per Episode of Illness

• Payment per Patient: Capitation

• Payment per Time: Salary

Hospitals

• Fee-for-Service (FFS)

• Per diem payments

• Diagnosis-Related Group (DRG)

• Capitation

• Global Budget

RISK UNDER PAYMENT ARRANGEMENTS

• Financial risk refers to the potential loss of money, earning less, or additional time without reimbursement.

• Providers' financial incentives depend on payment methods, impacting their willingness to provide services or reduce utilization.

METHODS OF PAYMENT DEFINED

Fee-for-Service Payments

• Paid per visit or procedure; providers receive fees for services like office visits, X-rays, lab tests.

• Only payment type based on individual healthcare components.

Types of Fee-for-Service

• Usual and Customary Rates (UCR): Maximum reimbursement for tests based on provider charges analysis.

• Discounted Fee-for-Service: In-network providers accept negotiated payments as full payments.

• Resource-Based Relative-Value Scale (RBRVS):

  • Each procedure assigned a total relative value unit (RVU) based on physician work, practice expenses, and liability insurance.

  • Current Procedural Terminology (CPT) provides a uniform language for services.

  • Implemented by CMS in 1992, with 77% of payers adopting its components.

PAYMENT BY EPISODE OF ILLNESS

• Fixed sum for all services delivered during one illness; DRG assigned at discharge for fixed hospital payment.

PER DIEM PAYMENTS

• Predetermined payment for each day of inpatient treatment; varies by service types.

  • Example:

  • Medical-surgical stay: $1800/day

  • Obstetrics: $2000/day

  • Mental Health: $2200/day

CAPITATION

• Fixed per-person payment covering all healthcare services over a defined period.

• Example: Provider receives $60 per member/per month, regardless of service utilization.

CAPITATION STRUCTURES

Two-Tiered Structure

• Payment goes from health plan to Primary Care Provider (PCP); referral services paid separately.

Three-Tiered Structure

• Capitation from the health plan to PCP; additional referral services reimbursed separately.

• Financial risk varies depending on model:

  • Model A: Risk spread among members of Independent Practice Association (IPA).

  • Model B: IPA bears risk; more services result in budget liabilities.

SALARY

• Providers carry minimal risk; risk on the prepaid group practice or plan if expenses rise.

HOSPITAL PAYMENT METHODS

• Fee-for-Service: Itemized billing for services during hospital stays; often discounted.

• Per Diem: Bundling of services for a patient’s daily care (e.g., $1600/day).

• Diagnosis-Related Groups (DRGs): Fixed payments based on diagnoses (e.g., $7000 for certain conditions).

• Capitation: Rare due to risk burden on hospitals.

• Global Budget: One payment for all annual services; hospital manages within budget constraints.

PHARMACY REIMBURSEMENT

• Typically reimbursed via fee-for-service, including immunizations and Medication Therapy Management (MTM).

• Pharmacists often compensated through salary.

VALUE-BASED PURCHASING (VBP) PROGRAM

• Incentive payments for hospitals based on care quality, adjusting DRG payment amounts based on performance metrics.

• Approximately 3000 hospitals participate, with 2% of Medicare payments withheld per hospital.

QUESTIONS?

Feel free to ask for clarifications or further explanations on the material.