Essentials of Health Care Finance

1
Essentials of Health Care Finance Cleverley and
Cameron Sixth Edition
Financial Environment of Health Care
Organizations
Chapter 3
2
Topics Covered

• Financial Viability
• Sources of Operating Revenue
• Rate/Price Setting
• Balanced Budget Act Impacts
• Medicare Prospective Payment System for Hospitals
• Medicare Payment for Physicians
• Medicare Payment for Alternative Providers

3
Objectives
1. Describe factors that influence the financial
viability of a health care organization 2. Describ
e the financial environment of the largest
segments of the health care industry 3. Discuss
the major reimbursement methods that are used in
health care 4. Discuss the major aspects of
Medicare benefits 5. Describe how Medicare
reimburses the major types of providers, and be
able to discuss the implications of these methods
for an organizations resource management
4
Financial Environment of Healthcare Organizations
5
Basic Requirements for Financial Survival

• Funds flow in any business is the primary key to
  survival
• Ultimately any business entity must achieve
  financial equilibrium with regard to funds flow

Revenues Capital Gifts
Expenses Capital Investment
FIRM
6
Source of Funds

• Revenues
• 1. Public (Medicare, Medicaid)
• 2. Private insurance (Blue Cross/Blue Shield,
  self-
• insured, commercial insurance)
• 3. Direct payment
• 4. Non-operating revenues
• Capital
• 1. Taxable debt
• 2. Tax-exempt debt
• 3. Equity (stock, partnership)
• Gifts

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Use of Funds

• Expenses
• 1. Salaries
• 2. Supplies
• 3. Insurance
• Capital
• 1. Interest
• 2. Debt principal
• 3. Dividends/partner distributions
• Investment
• 1. Working capital
• 2. Buildings and equipment
• 3. Replacement reserves

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Statement of Operations Example
Statement of Operations for Memorial Hospital,
Year Ended 2007 (000s Omitted)
9
Overview of the Industry

• Inputs
• Personnel
• Consultants
• Financing
• Supplies
• Fixed Assets

• Providers
• Hospitals
• Physicians
• Nursing Homes
• Drugs Non-durables
• Dentists
• Other Professional
• Home Health
• Other

• Buyers
• Federal
• Government
• State
• Government
• Insurance
• Out-of-Pocket

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National Health Care Expenditures
Observation The hospital industry is still by
far the largest sector, but growth in the drug
sector is projected to be large.
Source Centers for Medicare Medicaid Services,
Office of Financial and Actuarial Analysis,
Division of National Cost Estimates.
11
Sources of Health Services Funding
Source Centers for Medicare Medicaid Services,
Office of Financial and Actuarial Analysis,
Division of National Cost Estimates.
12
Health Care Payment Systems
Four Major Payment Units

• Historical cost reimbursement
• Specific services (charge payment)
• Bundled services
• Capitated rates

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Medicare Payment Units by Sector
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Overview of Medicare Program

• What Are the Benefits?
• Hospital Insurance (Part A)
• Inpatient hospital
• Skilled nursing facility
• Home health
• Hospice care
• Medical Insurance (Part B)
• Physician services
• Outpatient hospital services
• Medical equipment and supplies
• Other health services and supplies
• Prescription Insurance (Part D)
• Prescription drugs

• Who Qualifies?
• People over 65
• People who are disabled
• People with permanent kidney failure

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Medicare Benefits

• Part A, hospital insurance

• No monthly premium if 40 quarters of Medicare
  employment. Deductibles and coinsurance apply.

• Part B, medical insurance

• Beneficiary pays monthly fee, 78.20 in 2006

• Part D, prescription-drug insurance (started Jan.
  1, 2006

• Various benefit plans, requiring deductibles and
  co-pays

See www.medicare.gov for more details.
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Medicare Payment Hospital Inpatient

• Prospective Payment System (PPS) started October
  1, 1983.
• All Medicare-participating hospitals are
  reimbursed by PPS, except
• childrens hospitals
• distinct psychiatric and rehabilitation units
• hospitals outside the 50 states
• hospitals in states with an approved waiver
• critical access hospitals
• Reimbursement based on diagnosis-related groups
  (DRGS)

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Medicare Inpatient Payment Schematic
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How does the Medicare prospective payment system
work?

• Payment by diagnostic-related group (DRG)
• 559 DRGs1 related to 25 major diagnostic
  categories (MDCs)
• Fixed payment per DRG
• Payment formula
• Operating
• Capital (rate in 2006 was 421.00)
• DRG payment reasonable cost

1 As of fiscal year 2006 some historical codes
are now unused
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What factors determine the DRG payment?

• Case weight of the DRG
• National standard cost per discharge (updated)
• Rural/urban status of hospital
• Wage index of hospital
• Indirect medical education (IME) adjustment
• Disproportionate share (DS)
• Outlier adjustment

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Calculation of Operating Payment
DRG 001 Sample City, ST
Payment DRG wt x (Labor amt x wage index)
non-labor amt
3.4347 (3,500 x 1.2509) 1,600
20,533.15
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Calculation of Capital Payment
DRG 001 Sample City, ST
Capital DRG wt standard amt
Payment large urban adjustment
geographical adjustment factor
3.4347 421 1.03 1.194
1,778.33
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Cost Outlier Payment

• Applies when actual cost of case exceeds DRG
  payment by CMS-specified amount (23,600 in 2006)
• Actual charges 100,000
• Hospital cost / charge 0.75
• Threshold equals higher of
• 2 Standard payment
• 33,000
• Medicare marginal cost proportion 0.80
• Cost 0.70 100,000 70,000
• Additional outlier payment
• MC proportion (cost - threshold)
• 0.80 (75,000 23,600) 41,120

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Disproportionate Share

• Extra payments for hospitals that serve
  low-income patients
• Primary Tests
• Medicaid discharge
• No-pay Medicaid
• Cannot drop OB if service in existence prior to
  1987
• State Medicaid Program Importance
• Voluntary or tax schemes
• Federal share
• A state with a 25/75 share that raised 200
  million would get 600 million from feds

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Other Adjustments

• Indirect Medical Education
• Ratio of interns residents to beds
• Excluded Hospitals and Distinct Parts
• Actual cost
• Or TEFRA1 limit
• Rural Referral Hospitals
• Urban rates
• Case Mix Index gt 1.25
• Discharges gt 5,000
• Critical Access Hospital (CAH)
• Reasonable cost

1Tax Equity and Fiscal Responsibility Act
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2004 Median Medicare Payment (WI 1.0 CMI 1.0)
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Medicare Payment Physicians

• Beginning in January 1992, Medicare began paying
  for physician services using a new resource-based
  relative value scale (RBRVS).
• Physicians categorized based on their election
• Medicare participating
• agrees to accept Medicares payment for a service
  as payment in full and will bill the patient for
  the co-payment portion only
• Medicare non-participating
• May accept assignment on a case-by-case basis
• Lower fee schedule (95 of the fee schedule for a
  participating physician)
• Maximum fee is 115 of approved fee for
  non-participating physician

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Participating Physicians
1. Accept Medicare payment as payment in full and
bill Medicare for charge except
co-payment 2. Agree to accept CPR (customary,
prevailing, reasonable) charges 3. Included in
directory of participants 4. Electronic claim
transmission 5. Receive payment at 100 of
prevailing charge vs. 95 for nonparticipating
physicians
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Physician Payment Examples
Non-participating Assigned Unassigned
Participating
Doctor charge Medicare approved x
participating factor Medicare allowed x MAC
factor Max allowed charge Medicare payment
(80) Patient payment Total payment to physician
200.00 100.00 1.0 100.00 1.0 100.00 80.00
20.00 100.00
200.00 100.00 0.95 95.00 1.0 95.00 95.00
19.00 95.00
200.00 100.00 0.95 95.00 1.15 109.25 76.0
0 33.25 109.25
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Physician Participation Assignment Rates

• 83 percent of physicians were participating in
  1998
• 97 percent of all claims were assigned

1985 1998 GPs 27.3 71.1
General Surgery 33.9 89.3 Family
Practice 25.5 85.9Internal Medicine 32.5 84.8
OB/GYN 29.1 81.3
Radiology 41.3 88.3 Nephrology 50.8 91.3
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Resource-Based Relative Value Scale

• CPT and HCPCS codes (10,000 services)
• Fees are region-specific based upon
• Work (RVUw)
• Practice expense (RVUpe)
• Malpractice (RVUm)
• Fee formula conversion factor
• (RVUw IW) (RVUpe IP) (RVUm IM)

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Fee Calculation Example
Excision of Neck Cyst in Los Angeles
Geographical Cost Index
RVU for Los Angeles Product
Work Practice expense Malpractice Total
Conversion Factor Approved charge
3.39 4.06 0.28 7.73 40.00 309.10
3.25 3.55 0.29
1.043 1.144 0.954
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Medicare OPPS

• Over 1,000 APC groups
• Medical
• Surgical reducible
• Significant procedures
• Ancillary
• Each CPT/HCPCS code is assigned to one APC group
• Each CPT/HCPCS code has an indicator that tells
  how that procedure will be reimbursed by Medicare

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Payment Features

• Total Payment
• APC/Fee schedule payments
• Transitional pass-through payments
• Outlier payments
• Transitional corridor /
• Hold harmless payments

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APC Payment

• Relative weight x conversion factor
• Factors updated annually by CMS

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APC Payment

• Wage index adjusted
• Discounting (status indicator T)
• Coinsurance
• Deductible

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Coinsurance Amounts

• Initially set at 20 of median 1996 charge
  updated to 1999
• Cannot exceed inpatient deductible
• Can be reduced to 20 of APC rate on an
  APC-by-APC basis
• Bad debt recovery is not applicable to reduced
  coinsurance

37
Pass-through Payments

• By order of the BBRA, HCFA has created
  pass-through payments for high-cost medical
  devices, drugs, and biologicals
• Status indicators G and H represent items
  eligible for pass-through payments

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Status Indicators
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Example Medicare Payment for Outpatient Left
Heart Cardiac Catheterization
40
Outlier Payments

• On a line-item basis
• Paid when cost of claim gt 175 of payment
• 50 of difference is paid
• Cost is based on department RCC
• Bundled items will raise cost and increase
  outlier payments

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Hold Harmless

• 100 of pre-BBA less PPS
• Small rural hospitals until 01/01/2004
• Permanent for 10 cancer hospitals
• Permanent for childrens hospitals (BIPA)
  retroactive to 08/01/00
• Critical Access Hospitals

SCHIP State Childrens Health Insurance
Program BIPA SCHIP Benefits Improvement and
Protection Act of 2000
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Medicare Nursing Home Payment

• Balanced Budget Act Changes
• 1. Effective 7/1/98
• 2. 3-Year phase-in to prospective per diem rates
• 3. Resource Utilization Groups III (RUG III) case
  mix adjustment (54 groups)
• 4. Wage index adjustments
• 5. Consolidates Part B services provided during
  Part A stay (Part B providers seek payment from
  nursing facility)
• RUG assessments performed periodically
• Seven RUG Groups, 54 payment categories
• Rehabilitation (23) Impaired condition (4)
• Extensive services (3) Behavioral problems (4)
• Special care (3) Reduced physical function (11)
• Clinically complex (6)

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RUG III Grouper

• Six determinants
• number of minutes per week needed for
  rehabilitation services
• number of different rehabilitation disciplines
  needed
• specific treatments received
• residents ability to perform activities of
  daily living (ADL)
• ICD 9 diagnoses
• residents cognitive performance

44
Medicare Nursing Home Payment Example
Assume that a rehabilitation patient has been
categorized as Ultra high with treatment minimum
of 720 minutes per week.
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Medicare Payment Home Health Agencies

• Prospective Payment System (PPS) for home health
  started October 1, 2000.
• HHAs paid a predetermined base payment, adjusted
  for health condition and care needs and special
  outlier provisions for expensive care
• Payments are for 60-day episodes of care,
  renewable

46
Medicare Payment Home Health Agencies

• 77.7 percent of the payment is assumed to be
  labor-related (as of 2006)
• Home Health Resource Groups (HHRGs)

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Home Health PPS Features

• 60-Day episode
• Case-mix adjustment
• Outlier payments
• Adjustments for beneficiaries who require only a
  few visits during the 60-day episode
• Adjustments for beneficiaries who experience a
  significant change in the their condition
• Adjustments for beneficiaries who change HHAs

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Home Health Example Payment
Assume that a patient has been classified as 0
severity for clinical, 1 severity for functional,
and 2 severity for services utilization (C0F1S2).
Assume the provider has a wage index of 1.2000.
Payment 3,659.81 .777 1.2000
3,659.81 .223 4,228.54
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In a PPS environment, how can profit be
increased?
Ways to Improve Profitability 1. Product line
emphasis 2. Volume increases 3. Price
increases 4. Lower length of stay 5. Reduce
service intensity 6. Improve production
efficiency 7. Reduce resource prices
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Controlling Health Care Costs

• Cost Drivers
• Utilization
• Service Intensity
• Efficiency (Productivity)
• Wages (Prices) of Inputs

Observation Declining utilization and service
intensity will not result in lower costs unless
staffing is reduced.