Third-Party Payment: Quick-Review Notes

Key Concepts

Third-party payer = patient (first party) contracts with providers (second party) to pay all or part of the bill.
Third-party payments represented 72.5\% of total personal healthcare expenditures in 2019.
Managed care organizations (MCOs) control costs, monitor quality, and manage access to care.
Health maintenance organizations (HMOs) integrate financing and delivery of care.
Post-managed care innovations include defined-contribution plans, self-funded plans, consumer-driven plans, high-deductible health plans (HDHPs), and various state/national reforms.
Payment methods to providers include fee-for-service, per diem, per diagnosis, capitated payments, bad debt, and charity care.
Cost shifting and cost cutting are strategies used by providers to manage payer mix and reimbursement pressures.

Emerged in the 1920s; 1915 saw support from labor unions but opposition from the AMA and anti-socialists.
Physicians supported a system that shifted some financial responsibility away from the patient.
Shift from pure second-party payment toward third-party arrangements over time.

Second-party payment and ethical/bad-debt concerns arose.
Western Clinic (Tacoma) 1910: first prepaid plan.
Baylor University Hospital (Dallas) 1929: prepaid hospital care for teachers; later became Blue Cross.
Dr. Sidney Garfield (California) 1933: prepaid care for workers; evolved into Kaiser-Permanente.

The Great Depression (1930s) influenced adoption.
Mid-1930s: AMA softened stance on voluntary health insurance; Blue Cross (hospital benefits) and Blue Shield (medical benefits) emerged.
AMA opposed compulsory health insurance.

Baylor/Kaiser plans extended to employer-sponsored prepaid care models.
Commercial indemnity plans grew through the 1950s, often at the expense of Blue Cross plans.
Financing mechanisms evolved: community rating (low-risk subsidizing high-risk) vs experience rating (premium differences by risk).
By late 1950s, ~66% of Americans had health insurance, mostly employer-based.
1954 IRS tax ruling offered tax exemption to employers; Medicare/Medicaid introduced in 1966 (by 1968, ~87% had insurance).
Early 1980s, ERISA allowed large employers to self-insure and gain cost reductions.
Deficit Reduction Act of 1984 limited employer deductions for health benefits; 1987 healthcare spending tracked by sponsor.

MCO: an organization that manages cost, quality, and access to care.
Managed Care Continuum (from traditional indemnity to HMOs/HDHPs) emphasizes increasing control over costs and utilization while balancing access and quality.
Endpoints on the continuum include traditional indemnity, high-deductible plans, PPOs, POS plans, and HMOs.

Traditional/Conventional indemnity plans: least cost control.
High-deductible health plans (HDHPs): lower premiums, higher deductibles to curb utilization.
PPOs: networks with discounted charges; utilization rules in exchange for higher patient volumes.
POS plans: combine PPO features with some in-network/out-of-network choices and added costs.
HMOs: integrate financing and delivery; most aggressive cost control.
Open-panel vs closed-panel HMOs; network HMOs.

Defined-Contribution Plans: employers cap contributions; employees choose plans.
Direct Contracting Plans: large employers contract directly with IDS/IDNs (Integrated Delivery Systems).
Consumer-Driven Plans: spending accounts (HRAs/HSAs) and tiered models.
High-Deductible Health Plans (HDHPs) continue as a popular design.

Direct Contracting involves employers contracting directly with integrated delivery systems (IDS) for services.
IDS arrangements can affect employer costs and patient access to care.

Employers shift more cost responsibility to employees by limiting employer contributions.
Employees choose among plans; costs above the employer contribution are paid by employees.

Goal: help individuals choose wisely and reduce unnecessary utilization.
Two primary models:
- Spending account models: Health Reimbursement Accounts (HRAs) and Health Savings Accounts (HSAs); higher-deductible plans often applied after HRA/HSA depletion.
- Tiered models: different deductibles/coinsurance with premium adjustments.

Scenario: 100 patients, cost per patient = 1{,}000; payer mix includes Medicare, Medicaid, MC-discount, MC-cap, Private, Self-Pay, Bad Debt, Indigent with specified payment rules.
Objective: determine charges or cost reductions needed to break even.

With charges equal to cost, total cost = 100{,}000; collections depend on payer rules.
Result: projected profit = -24{,}000 (loss) under the baseline mix.

Compute required charge adjustments to recover the {24{,}000} loss across the patient mix.
Result: per-patient charge increase leads to break-even after adjustments (approximate; rounding may occur).

Recalculate with updated charges; total collections align with total costs; overall profit ≈ 0 (within rounding error).

If some payers cap charges (e.g., cap at 1{,}070) per patient, total revenue may fall short of cost.
Implication: to break even under cap constraints, the hospital would need to reduce costs by approximately 22{,}460$$ (per calculations in the example) or seek additional revenue.

Third-party payment sources include federal, state, local programs and private insurance.
Blue Cross was the first prepaid health insurance plan.
MCOs control costs, quality, and access; HMOs integrate financing and delivery.
Innovations to control costs include defined-contribution plans, self-funded plans, consumer-driven plans, HDHPs, and state/federal health insurance reforms.
Payment methods vary (fee-for-service, per diem, per diagnosis, capitated, bad debt, charity care).
Cost shifting offsets losses from some payers by charging others more; cost cutting offsets losses by reducing costs.

What are the differences between second-party payment and third-party payment, and why did third-party payment develop?
How do you distinguish MCOs, PPOs, and HMOs? What roles did employers play in adopting these arrangements?
Why have employers favored MCOs, and how have MCOs evolved over time?
What distinguishes open-panel HMOs from closed-panel HMOs?
What are the benefits of defined-contribution plans for employers? What are the consumer-driven plan models (spending accounts vs tiered models)?
What are the common forms of payment to providers and why might an organization choose cost shifting?
How can a hospital balance uncompensated care, Medicare/Medicaid shortfalls, and private payer revenue?