Part II
REIMBURSEMENT
METHODOLOGIES
In this section, we will review how several reimbursement methodologies
can put your hospital at risk.
Managed care organizations utilize a variety of reimbursement methodologies
to control hospital utilization and costs. The managed care organization's
choice of reimbursement determines to what extent the hospital will bear
the risk. More managed care organizations are pushing hospitals towards
capitation. This is where the hospital bears the most risk.
Fee-For-Service
In a Fee-For-Service arrangement, the payer pays full charges or a discount
off of charges. This form of reimbursement has little risk for the hospital,
since the hospital receives payment for everything it bills. Therefore,
the hospital's incentive is to provide the greatest amount of services possible.
Managed care organizations are obviously trying to move away from this type
of reimbursement.
Per Diem
Under per diem , the payer pays a lump sum to the hospital for each day
a patient is in the hospital, regardless of the actual costs incurred by
the hospital. It requires "bundling" all services provided for
that patient on any given hospital day into one payment. The hospital must
know its costs in order to determine the appropriate per diem rate.
Under this method of reimbursement, managed care organizations attempt to
reduce the length of stay so it pays for fewer days; however, the managed
care organization will try to encourage the hospital to load more services
into the first few days of the stay. This can pose a potential problem for
hospitals, if they are not careful. The hospital's incentive under this
form of reimbursement is to extend length of stay to "recoup"
the costs of the first days of hospitalization, which are the most expensive.
When negotiating a managed care contract for a per diem rate, the Hospital's
Finance Department defines some form of a"stop-loss" threshold
mechanism to protect the hospital. "Stop-loss" is a form of re-insurance
that provides protection for a hospital against medical expenses above a
certain limit. For example, the hospital may have "stop-loss"
re-insurance for cases that exceed $50,000. Once a case reaches the $50,000
limit, the hospital receives a certain percentage of its expenses back.
Per Case
Under "per case" reimbursement, a lump sum payment for all services
performed per episode of hospitalization is paid to the hospital. The amount
of payment is based on the patient's diagnosis, which is why it is commonly
referred to as DRG or Diagnostic Related Group.
Since the hospital is paid a defined amount per case, regardless of the
number of days the patient is in the hospital, the hospital is at risk for
length of stay and resource utilization.
Under this arrangement, the hospital's incentive is to decrease length of
stay.
When negotiating a managed care contract payment for a "case rate",
the hospital should include some form of stop-loss protection if the charges
for a particular patient exceed a set dollar threshold for that diagnosis.
Capitation
Capitation is a pre-determined amount paid to the hospital for a defined
patient population on a per member per month basis to cover all hospital
costs. The pre-determined payment is adjusted for the age and sex of the
population covered.
With this type of arrangement, the hospital is responsible for providing
and/or coordinating all services required during a hospitalization, even
if the hospital does not offer the specified service. In many cases, hospitals
collect both the institutional and professional payments and then subcontract
under a separate capitated arrangement with its medical group to pay its
physicians.
When negotiating a managed care contract for capitation, the hospital should
have protection to ensure a predictable volume of members during the contract
tenure. The hospital should also include some form of stop-loss protection
against unanticipated losses, either through per case limitations or per
member limitations.