Chapter 6

Financing and
Reimbursement
Methods

HRP 310-90
Current Trends in Health Care Delivery
Norfolk State University
Mrs. Melody Armstrong, MPA, BSN, RN,
CNOR(E)
 Introduction (1 of 4)
• Financing is any mechanism that
gives people the ability to pay for
health care services.
• In most cases, financing is
necessary to have access to health
care.
 Introduction (2 of 4)
• Sources of financing health care:
– Private health insurance
– Public insurance programs such as
Medicare and Medicaid
– Uncompensated or charity care
 Introduction (3 of 4)
• Complexity of financing:
– Many payers
– Many plans
– Many programs
– Many payment mechanisms
 Introduction (4 of 4)
• Economic perspective of financing:
– Working Americans finance their own
health care and subsidize it for those
who cannot afford it.
– Employer-paid insurance is an
exchange for salary.
– Medicare tax is a type of prepayment
for certain services received at age 65.
Effects of Financing and Insurance
• See Exhibit 6.1 and Figure 6.1.
• End results:
– Moral hazard and provider-induced demand
waste health care resources and add to the
rising cost of health care.
– National health insurance enables supply-
side rationing; this has not been possible in
the United States.
– The ACA still leaves many uninsured—
indirect or demand-side rationing.
 Insurance: Its Nature
and Purpose (1 of 8)
• Insurance: A mechanism to protect
against risk
• Risk: The possibility of substantial
financial loss from some event
 Insurance: Its Nature
and Purpose (2 of 8)
• Insured (enrollee or beneficiary): An
individual protected by insurance
• Insurer: An insurance agency that
assumes the risk
• Underwriting: Evaluates,
selects/rejects, classifies, and rates
risk
 Insurance: Its Nature
and Purpose (3 of 8)
• Premium
– Amount charged by the insurer to
provide coverage
– Cost sharing by employers and
employees
 Insurance: Its Nature
and Purpose (4 of 8)
• Four principles of insurance:
1. Risk is unpredictable for individuals.
2. Risk can be predicted with some
accuracy for a large group.
3. Insurance can shift risk from the
individual to the group by pooling
resources.
4. Losses are shared by all members.
 Insurance: Its Nature
and Purpose (5 of 8)
• Cost sharing
– Insurance requires some type of cost
sharing.
– The insured assumes at least part of
the risk.
– The purpose of cost sharing is to
reduce misuse of insurance benefits.
 Insurance: Its Nature
and Purpose (6 of 8)
• Three main types of cost sharing in
private health insurance:
1. Premium cost sharing
2. Deductibles
3. Copayments
 Insurance: Its Nature
and Purpose (7 of 8)
• Deductible
– Amount the insured pays first before benefits
are paid by the plan
– Paid annually
• Copayment
– Money paid out of pocket each time health
services are received
• Coinsurance
– Percentage paid by enrollee for health care
provided
 Insurance: Its Nature
and Purpose (8 of 8)
• Stop loss: Limits total out-of-pocket
costs
• Findings of the Rand Health
Insurance Experiment in the 1970s
 Insurance: ACA Mandates
• Recommended preventive services
and immunizations must be without
cost sharing.
• No lifetime limit on benefits
 Private Insurance (1 of 2)
• Distribution of health plan
enrollments:
– See Figure 6.2.
• Employment-based health insurance
rates vary by employer
characteristics:
– See Exhibit 6.2.
 Private Insurance (2 of 2)
• Five main types:
– Group insurance
– Self-insurance
– Individual private insurance
– Managed care plans
– High-deductible health plans
Types of Private Insurance (1 of 6)
• Group insurance
– Offered through an employer, a union,
or a professional organization.
– Anticipates large numbers of people in
a group will buy insurance through a
sponsor.
– Cost and risk are shared among the
insured.
Types of Private Insurance (2 of 6)
• Self-insurance
– Large employers’ workforces are large
and diversified enough.
– They can predict their own medical
experience.
– They can assume risk and pay all
claims.
– High losses are covered through
reinsurance.
Types of Private Insurance (3 of 6)
• Individual private health insurance
– For those who do not have group
coverage, such as farmers, early
retirees, the self-employed.
– Risk is individually determined.
– This market grew by 5.3 million in 2014,
but the effects of the ACA are unclear.
Types of Private Insurance (4 of 6)
• Managed care plans
– Managed care organizations (MCO) consist
of:
• Health maintenance organizations (HMO)
• Preferred provider organizations (PPO)
– They assume the risk in exchange for an
insurance premium.
– They assume the responsibility for
obtaining health care services by
contracting with providers.
Types of Private Insurance (5 of 6)
• High-deductible health plans
(HDHPs)
– HDHP/HRA
• HDHP is combined with a health
reimbursement arrangement.
• Includes an employer-financed account.
• Tax exempt payments made for qualified
medical expenses.
 Types of Private Insurance (6 of 6)
• HDHP/HSA
– HDHP is combined with a health savings account.
– Mainly employee financed on a tax-deductible
basis.
The ACA and Private Insurance (1 of 2)
• The ACA has several mandates:
– All U.S. residents must have health insurance that
offers “minimum essential coverage.” Not having
insurance incurs tax penalties.
o Effectively repealed by the Tax Cuts and Jobs Act of
2017.
– Health insurance can be purchased through
government-run exchanges, with subsidies for
low-income people.
The ACA and Private Insurance (2 of 2)
• ACA mandates:
– Exchanges offer four categories of plans.
– Employers must offer insurance to those working
30 hours or more per week.
– Coverage cannot be denied for preexisting
medical conditions.
– Children and adults can be covered under their
parents’ plans until age 26.

© 2010 Jones and Bartlett Publishers

 Public Insurance
• Government financing
– 2013 stats: A little over one-third of the
insured are covered under public
programs.
• 17% covered by Medicaid
• 16% covered by Medicare
– Categorical programs: Benefits are
designed for defined categories of
people.
 Public Financing (1 of 16)
• Medicare
– Title 18 of Social Security Act
– An entitlement program
• People contribute through taxes and are
entitled regardless of income and assets.
– A federal program
• Administered by CMS, an agency under the
U.S. Department of Health and Human
Services (DHHS)
 Public Financing (2 of 16)
• Medicare (cont’d)
– Finances medical care for:
• Those 65 years or older
• Disabled people who are entitled to Social
Security benefits
• Those with end-stage renal disease
 Public Financing (3 of 16)
• Medicare (cont’d)
– Not comprehensive coverage
– Main noncovered services:
• Vision
• Eyeglasses
• Dental care
• Hearing aids
• Many long-term care services
 Public Financing (4 of 16)
• Medicare (cont’d)
– Medigap: Private insurance used to
cover gaps in Medicare
– Four parts: Parts A, B, C, and D
 Public Financing (5 of 16)
• Medicare Part A: Hospital insurance
– Financed by payroll taxes:
• Paid by all working individuals.
• Paid on all income earned.
• Paid equally by both employer and
employee.
 Public Financing (6 of 16)
• Medicare Part A (cont’d)
– Hospital insurance covers:
• Inpatient services
• Short-term convalescence and
rehabilitation in a skilled nursing facility
(SNF)
• Home health
• Hospice
 • Medicare Part A (cont’d)

Data from National Center for Health Statistics. Health,

United States, 2016. Hyattsville, MD: U.S. Department of
Health and Human Services; 2017:348
Public Financing (7 of 16)

– Hospital insurance expenditures

Figure 6.3 Medicare Part A Expenditures, 2015 

 Public Financing (8 of 16)
• Medicare Part A (cont’d)
– Timing of benefits is determined by a
benefit period.
• It begins on the day a beneficiary is
hospitalized.
• It ends when the beneficiary has not been
in a hospital or an SNF for 60 consecutive
days.
• Thereafter, a new benefit period begins.
– A beneficiary can have unlimited
benefit periods.
 Public Financing (9 of 16)
• Medicare Part A (cont’d)
– Hospital benefits:
• Deductible is paid for the first 60 days.
• Copayment required from 61 to 90 days.
• Higher copayment required after 90 days
and reserve days must be used.
 Public Financing (10 of 16)
• Medicare Part A (cont’d)
– SNF benefits:
• Eligibility begins after 3 consecutive days
of hospital stay.
• 100 days maximum in SNF
• First 20 days at no charge to the
beneficiary; copayment applies from day
21
 Public Financing (11 of 16)
• Medicare Part A (cont’d)
– Home health benefit
• Patient must be homebound.
• Patient must require intermittent or part-
time skilled nursing care or rehabilitation
care.
– Hospice benefit
• Patient must be terminally ill.
• Only a token copayment is required.
 Public Financing (12 of 16)
• Medicare Part B: Supplementary
Medical Insurance (SMI)
– Covers such things as:
• Physician services
• Hospital outpatient services (surgery)
• Diagnostic tests
• Radiology
 Public Financing (13 of 16)
• Medicare Part B (cont’d)
– Covers certain screening and
preventive services
– Annual wellness exam
– For most services:
• Annual deductible
• 80:20 coinsurance
 Public Financing (14 of 16)
• Medicare Part C: Medicare
Advantage
– Beneficiaries are given the choice to
remain in the original fee-for-service
program or sign up for Part C.
– Additional benefits (basic vision and
dental) may be offered by the private
managed care plans.
– Beneficiary receives all Part A, B, and
D services through the MCO.
– Eliminates the need for Medigap
coverage.
 Public Financing (15 of 16)
• Medicare Part D: Prescription drug
coverage
– Created under the Medicare
Prescription Drug, Improvement and
Modernization Act (MMA) of 2003.
• Available to those who have Part A or B.
• Monthly premium must be paid.
• Annual deductible applies.
• Three layers based on spending (see Table
6.1).
 Public Financing (16 of 16)
• Medicaid
– Title 19 of Social Security Act.
– Finances health care for the indigent, but it is a
means-tested program.
– Jointly financed by state and federal governments.
– Each state establishes its own eligibility criteria
according to income and assets.
– Each state administers its own Medicaid program.
– See Figure 6.4 of Medicaid recipient categories.
 Children’s Health Insurance
Program (CHIP)
• Enacted as part of Title 21 of Social Security
Act.
• Covers children in low-income families to age
19.
• Most states cover children in families with
incomes at or below 200% of federal poverty
level.
• States can use existing Medicaid or create a
separate CHIP program.
• Federal and state funds finance the program.
 Issues with Medicaid
• Inadequate reimbursement and issues
of physician participation.
• Each state decides whether to expand
Medicaid, which was originally
required by the ACA.
• Some evidence indicates that ACA-
linked Medicaid expansion has resulted
in better access to care and utilization.
Reimbursement Methods (1 of 12)
• Third-party payers
– Insurance companies, managed care
organizations, Blue Cross/Blue Shield,
government
• Reimbursement
– Payment made by third-party payers to
the service providers
Reimbursement Methods (2 of 12)
• Fee-for-service
– Charges (prices) are set by providers.
– Each service is billed separately.
– “Usual, customary, and reasonable”
became common.
– Providers could balance bill.
– Led to cost escalations.
Reimbursement Methods (3 of 12)
• Bundled payments
– Related services are bundled and billed
at one price.
– Can align incentives that lead to
collaboration among specialties.
– Medicare initiatives seek to bundle
payments for an entire episode of care.
Reimbursement Methods (4 of 12)
• Resource-Based Relative Value
Scale (RBRVS)
– Medicare developed the program to
reimburse physicians according to a
“relative value” assigned to each
service.
– Based on time, skill, intensity.
Reimbursement Methods (5 of 12)
• Reimbursement under managed
care
– Discounted fees
– Used by PPOs
– Capitation
• Used by HMOs
• Per member per month (PMPM) fee to
cover all needed services
• Prudent delivery of services
• Minimize provider-induced demand
Reimbursement Methods (6 of 12)
• From retrospective reimbursement
to prospective reimbursement
– Retrospective:
• Rates are set after evaluating the costs
retrospectively.
• Historical costs are used to determine the
amount to be paid.
• Perverse incentives.
Reimbursement Methods (7 of 12)
• Prospective reimbursement
– Certain preestablished criteria
determine in advance the amount of
reimbursement
– Four main methods:
• Diagnosis-related groups (DRGs)
• Ambulatory payment classifications (APCs)
• Resources utilization groups (RUGs)
• Home health resources groups (HHRGs)
Reimbursement Methods (8 of 12)
• Diagnosis-related groups (DRGs)
– For acute hospital inpatients.
– Prospectively set bundled price
according to the admitting diagnosis
(DRG).
– Hospital earns a profit by keeping costs
below the DRG reimbursement.
– See example in Table 6.3.
– MS-DRGs now reflect patient severity.
Reimbursement Methods (9 of 12)
Reimbursement Methods (10 of 12)
• Ambulatory payment classification
(APC)
– Medicare’s Outpatient Prospective
Payment System (OPPS)
– 300 procedure groups
– Reimbursement associated with each
APC group
– Bundled rate includes anesthesia,
drugs, supplies, and recovery
Reimbursement Methods (11 of 12)
• Resource utilization groups (RUGs)
– A case-mix method to reimburse
skilled nursing facilities (SNFs).
• Case mix: Overall acuity level in a facility.
– Each patient is classified into 1 of 66
RUGs.
– Case mix determines a fixed per-diem
rate.
• The higher the case mix score, the higher
the reimbursement.
Reimbursement Methods (12 of 12)
• Home health resource groups
(HHRG)
– A fixed, predetermined rate for each 60-
day episode of care, regardless of
services given.
– OASIS is used to rate a patient’s
functional status and clinical severity.
– Assessment measures translate into
points.
– Total points determine the HHRG
category.
 Payment Reform Initiatives
• Value-based payments to hold
providers accountable for cost and
quality
• Increased shifting of risk to
providers
– New payment arrangements for
Medicare to be worked out, to include:
• Bundled payments
• Shared savings arrangements
• Risk sharing arrangements
National Health Expenditures (1 of 2)
• Includes spending for all health
services and related activities.
• Evaluated as a percentage of GDP
and as amount spent per capita.
• 17.8% of GDP was spent on health
care in 2015.
– Health care cost inflation is evaluated
using the CPI.
National Health Expenditures (2 of 2)
• In 2015, 85% of total national health
expenses were spent on:
– Personal health, including hospital care,
physician services, dental care, other
professional services, nursing home care,
home health care, prescription drugs, medical
supplies, durable medical equipment, vision
care.
– Remaining 15% was spent on public health
services, research, structures and equipment,
administrative services.
 Conclusion (1 of 3)
• Financing plays a critical function in
health care delivery.
– It enables consumers to obtain health
care services through insurance
coverage.
– For providers, it reimburses them for
the services they provide.
 Conclusion (2 of 3)
• Methods of reimbursement changed
from retrospective to prospective.
• Prospective payment and capitation
used by HMOs contain incentives
for the delivery of cost-effective
health care.
 Conclusion (3 of 3)
• Financing is shared between private
and public sources.
– Government incurs approximately 43%
of all health care expenditures in the
United States.
• A quasi-national health care system.