reimbursement explained the life science lean in: analytics & big data in healthcare & life...

Reimbursement Explained

The Life Science Lean In: Analytics & Big Data in Healthcare & Life Science

Rich Henriksen, Presenter

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Hospital reimbursement overview Hospitals charge the same amount per service to all patients

regardless of payor source Each payor utilizes its own method for reimbursing the hospital Hospitals write off the difference between charges and

reimbursement as discount Some hospitals’ aggregate discounts are 70+% of charges, meaning

they collect only 30% of gross revenue; the remainder is discount Payment can be greater than billed charges, depending on the

contract terms Self-pay patients and patients with no coverage are expected to pay

full billed charges, less any charity discount

(c) RE Henriksen 2011

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Inpatient versus outpatient status Inpatient versus outpatient: patients are inpatient only

when the admitting physician orders it and when the patient meets criteria for admission

If patient does not meet inpatient criteria and if physician has not ordered inpatient services, then the patient’s status is outpatient

Services may be similar between inpatient and outpatient but reimbursement can be dramatically different


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Common inpatient reimbursement methods DRG (Diagnosis Related Groups) MS-DRGs (Medicare Severity DRGs) Per case Per diem Percent discount Carve outs Outlier provisions


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Inpatient: DRG DRG (Diagnosis Related Groups)

DRG = Diagnosis Related Groups Medicare transitioned to MS-DRGs (Medicare Severity DRGs) in 2008 Health information management (medical records) staff assign ICD-9 diagnosis and

procedure codes to the entire encounter after patient is discharged DRGs are a derivation of ICD-9 diagnosis and procedure codes, as well as other

demographic information Each admission has only one DRG Each DRG has a relative weight, which is updated annually by CMS Hospital and payor agree on a base rate (“weight of 1.00” amount or “conversion

factor”), which is multiplied by each admission’s DRG weight to determine reimbursement

Charges don’t matter, other than for outlier threshold determination Length of stay doesn’t matter, other than for outlier threshold determination


(c) RE Henriksen 2011 6

Inpatient: DRG Commercial payors negotiate the following with the hospital

DRG weight of 1.00 payment rate (eg, conversion factor) DRG grouper version Outlier provision

typically, payment is percent discount on the entire admission once a charge or length of stay threshold is met

DRG weight of one payment method no longer applies Carve outs; separate, additional payment for high-cost drugs and devices (typically

percent discount on the carve out items) Implants and devices High-cost drugs

Separate reimbursement methods (typically per diem or percent discount) for non-typical, high-cost, variable length-of-stay admission types: Inpatient rehab Neonatal intensive care, levels II, III, IV Mental health Chemical dependency

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Inpatient: Per Stay Per stay (also known as per admission)

Fixed rate for entire admission Can be organized into categories such as OB, medical,

surgical with different rates for each category Charges and length of stay don’t matter, other than for

outlier threshold determination Often there is no “lesser of” language, so the hospital is

paid the per stay rate regardless of charges



Inpatient: Per Stay What is negotiated

Categories and definitions; varies from hospital to hospital and plan to plan, but typical categories and definitions include Medical (defined as DRG type or bed type revenue code) Surgical (defined as DRG type or presence of surgical revenue code or bed type revenue

code) OB (DRG – can be split into vaginal and C-section) Normal newborn (DRG or revenue code; often paid at $0 if OB rate is intended to cover both

mom and baby) Cardiac (DRG or ICD-9 – can be split into bypass, PTCA, other categories)

Rates for each category Outlier provision

typically, payment is percent discount on the entire admission once a charge or length of stay threshold is met

Alternatively, can have additional per diem included with per stay amount, beginning on threshold day through day of discharge

Per stay payment method no longer applies


Inpatient: Per Stay What is negotiated (continued)

Carve outs; separate, additional payment for high-cost drugs and devices (typically percent discount on the carve out items) Implants and devices High-cost drugs

Separate reimbursement methods (typically per diem or percent discount) for non-typical, high-cost, variable length-of-stay admission types: Inpatient rehab Neonatal intensive care, levels II, III, IV Mental health Chemical dependency

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Inpatient: Per diem Fixed payment per day of hospital service

Can be organized into categories such as OB, medical, surgical with different rates for each category Charges and length of stay don’t matter, other than for outlier threshold determination Often there is no “lesser of” language, so the hospital is paid the per stay rate regardless of charges

What is negotiated Categories and definitions; varies from hospital to hospital and plan to plan, but typical categories and

definitions include Medical (defined as DRG type or bed type revenue code) Surgical (defined as DRG type or presence of surgical revenue code or bed type revenue code) OB (DRG – can be split into vaginal and C-section) Normal newborn (DRG or revenue code; often paid at $0 if OB rate is intended to cover both mom and baby) ICU / CCU (defined as bed type revenue code) Pediatrics (defined as bed type revenue code) Rehab per diem (DRG or revenue code) NICU per diems – levels II, III, IV (revenue code) Mental health per diems (DRG or revenue code – can be split into psych, chemical dependency)

Rates for each category


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Inpatient: Per diem What is negotiated (continued)

Outlier provision typically, payment is percent discount on the entire admission once a charge or

length of stay threshold is met Per diem payment method no longer applies

Carve outs; separate, additional payment for high-cost drugs and devices (typically percent discount on the carve out items) Implants and devices High-cost drugs



Inpatient: Percent of charges Payment based on flat discount from billed charges What is negotiated

Discount rate Categories of service, if different rates apply to various service

lines Typically used for PPOs Often used by rural hospitals and by national health plans

that don’t have a lot of business with a hospital


Inpatient: Other methods Min/max contracts with per diems, per stay, or DRG weight of one

typically for PPOs rates are negotiated, then a corridor is set up to guarantee the PPO a discount (so a

payor never pays more than billed charges) but also so the hospital never gets hit with a deep discount on any given admission

typical min/ Surgical case add-on

Fixed amount per surgical admission paid in addition to med/surg per diem Can mix and match reimbursement methods within a contract

Example A: Per diems for medical, surgical, pediatrics, ICU/CCU Per stay for vaginal delivery, C-section

Example B: DRG weight of one for medical, surgical Per case rate for vaginal delivery, C-section, normal newborn Per diem for NICU, rehab, mental health


Hospital financial incentives based on reimbursement method

Reimbursement type Economic incentive Other issues

Charges, % of charges Do as much as you can, keep patient as long as you can

Raise charges as high as you can

Per diem Keep patient as long as you can but do as little for them as you can

Charges don’t matter

DRG weight of 1.00 Admit and then discharge patient as quickly as possible, do as little for them as possible

Charges don’t matter, but must have accurate coding to get to the highest DRG

Per stay Admit and then discharge patient as quickly as possible, do as little for them as possible

Charges don’t matter, coding doesn’t matter

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Common hospital payment methods – outpatient Historically, most outpatient services were paid at a

percent of charges Many rural hospitals are still paid at >90% of charges by

HMOs and PPOs for outpatient services Outpatient is much more difficult to set up on per visit rates

due to the large variability in types of services, although plans are beginning to use APCs to establish fixed outpatient rates


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Common hospital payment methods – outpatient (con’t.) Common categories of service reimbursed on a per visit

basis include Emergency department visit CT, MRI, other imaging Radiation therapy Outpatient surgery Therapies

Default % of charges for all other services


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Variation in pay type and amount by payor - exampleInpatient, 3 day stay, 3-vessel cardiac bypass, total charges = $40,000


Payor Pay Method Allowed Discount

Medicare MS-DRG $18,000 $22,000

Medicaid DRG $15,000 $25,000

HMO 1 Per diem $8,000 $32,000

HMO 2 Cardiac case rate

$25,000 $15,000

PPO 1 Percent discount

$32,000 $8,000

Self pay Charges $40,000 $0

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Physician reimbursement Like hospitals, physicians typically charge the same amount to all

patients for the same CPT code regardless of payor Physicians write off the difference between billed charges and

allowed amount as discount Most payors pay according to “lesser of” logic,, meaning they pay

the lesser of billed charges or the fee maximum in effect for that CPT code

Reimbursement is made per CPT and HCPCS code


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Physician reimbursement methods Fee schedule

Most payor fee schedules are based on CPT and HCPCS Level II codes Most payors use Resource-Based Relative Value System (RBRVS) to help them

develop their fee schedules Fee schedules are typically “fee maximums;” for each code subject to the fee

schedule, the payor reimburses the provider the lesser of provider’s billed charges or the fee maximum listed in the fee schedule

Number of fee schedules in use varies by plan; some plans have a single fee schedule, others have hundreds of fee schedules

Percent of charges Typically used for CPTs and HCPCS codes that have no relative value Sometimes payors will agree to reimburse “must-have” clinics on a percent of

charge basis; not common(c) RE Henriksen 2011

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Physician reimbursement methods Capitation

Not widely used anymore Capitation = monthly payment to a group of providers for each member

assigned to that group of providers Covers a defined set of services; no additional reimbursement to clinic if they

provide services that are covered under capitation Typically used only for HMOs (not PPOS), since the insurer is bearing risk Not typically used by self-funded plan sponsors Need to have members designate a primary care clinic or care system for

capitation to work Referrals are typically tightly managed in a capitated model


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Variation in pay type and amount by payor - exampleOffice visit, established patient, level 3 (99213)Charges = $125


Payor Pay Method Allowed Discount

Medicare RBRVS $42.00 $83.00

Medicaid Fee schedule $30.00 $95.00

HMO 1 Fee schedule, fee max $80

$80.00 $45.00

HMO 2 Fee schedule, fee max $110

$110.00 $15.00

PPO 1 Fee schedule, fee max $140

$125.00 $0.00

Self pay Charges $125.00 $0

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New reimbursement models New reimbursement models are focused on rewarding physicians

and hospitals for “good” outcomes and the achievement of quality and outcome goals

Some payors pay quality bonuses if providers meet certain goals, such as A1C testing, immunization rates, limited use of high-tech imaging services, etc.


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New CMS reimbursement models CMS has begun to transform itself from a passive payer of services

into an active purchaser of higher quality, affordable care. The overarching goal is to foster joint clinical and financial

accountability in the healthcare system CMS has launched, or is exploring, new reimbursement models

including these: Voluntary “pay for performance program,” named the Physician Quality

Reporting System (PQRS) which provides for bonus payments to physicians for achieving quality goals


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New CMS reimbursement models (con’t.) “Meaningful Use”, which means providers can receive bonus payments if they can

demonstrate that they’re using certified electronic health record (EHR) technology in ways that can be measured significantly in quality and in quantity

New reimbursement models for patients with dual (Medicare and Medicaid) membership such as capitation and managed fee-for-service

Value-Based Purchasing – appropriate incentives encouraging all healthcare providers to deliver higher quality care at lower total costs; goals include: Financial Viability—where the financial viability of the traditional Medicare fee-for-

service program is protected for beneficiaries and taxpayers. Payment Incentives—where Medicare payments are linked to the value (quality and

efficiency) of care provided. Joint Accountability—where physicians and providers have joint clinical and financial

accountability for healthcare in their communities.


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CMS Value-Based Purchasing goals (con’t.) Effectiveness—where care is evidence-based and outcomes-driven to better manage

diseases and prevent complications from them. Ensuring Access—where a restructured Medicare fee-for-service payment system provides

equal access to high quality, affordable care. Safety and Transparency—where a value based payment system gives beneficiaries

information on the quality, cost, and safety of their healthcare. Smooth Transitions—where payment systems support well coordinated care across

different providers and settings. Electronic Health Records—where value driven healthcare supports the use of information

technology to give providers the ability to deliver high quality, efficient, well coordinated care.


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Resource-Based Relative Value System Medicare RBRVS was developed through the 1980s and

implementation began in 1992 as a 5-year phase-in from UCR (lower of usual, customary, or reasonable charges)

Result of the phase-in is that reimbursement for cognitive and E/M services was increased, but procedural reimbursement was decreased

This meant an increase in reimbursement to primary care physicians and a decrease in reimbursement to specialists

Now there is one fee schedule for all physician services based on CPT code – the same reimbursement applies regardless of the physician’s specialty – only difference is geographic adjustments


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Components of RBRVS Physician work

Time, mental effort, skill of physician 55% of the total physician cost

Practice expense Staff costs, rent, utilities, supplies, etc. 42% of the total physician cost

Professional liability insurance (PLI) expense Malpractice insurance 3% of the total physician cost


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Example RVU weights 99201, new patient E/M, level 1 1.29 99202, new patient E/M, level 2 2.19 99203, new patient E/M, level 3 3.18 99204, new patient E/M, level 4 4.84 99205, new patient E/M, level 5 5.99

99211, established patient E/M, level 1 0.60 99212, established patient E/M, level 2 1.29 99213, established patient E/M, level 3 2.14 99214, established patient E/M, level 4 3.14 99215, established patient E/M, level 5 4.20

12002, repair superficial wound(s) 3.29 21340, treatment of nose fracture 24.54 33513, CABG, vein-4 74.80 71010, chest x-ray 0.70 71010-26, chest x-ray prof component 0.26 71010-TC, chest x-ray technical component 0.44


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Geographic Practice Cost Indices (GPCIs) GPCIs are used to account for regional differences in physician costs – are used to adjust

Medicare payment upward for high-cost regions and downward for low-cost regions GPCIs updated every 3 years (at a minimum) Includes these factors:

Cost of living Proxy data sources are used to measure physician income Measures geographic differences in the earnings of all college-educated workers

based on census data Practice expense

Reflects differences in physicians’ office rents and employee wages Designed to measure geographic variation in the unit costs per square foot (e.g., rent)

and cost per hour (e.g., staff salary) that the physician faces Reflects only the differences in practice expense costs across geographic areas

relative to the national average Malpractice insurance (MP)

Based on rolling 3-year averages of each state’s malpractice costs(c) RE Henriksen 2011

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Geographic Practice Cost Indices (GPCIs) Composite GPCI (also called a geographic adjustment factor, or GAF), is arrived at by weighting each GPCI by the

share of Medicare payments accounted for by the work, practice expense, and MP components Example: CPT 12001, repair superficial wound

Work RVU = 0.84 Practice expense RVU (non-facility) = 1.83 MP RVU = 0.14 MN Work GPCI = 0.995 MN PE GPCI = 0.994 MN MP GPCI = 0.262 Total RVU for MN is (0.84*0.995)+(1.83*0.994)+(0.14*0.262)=2.6915 MN Medicare allowed = 2.6915*$34.0230 = $91.57

Variation in GPCIs – much less variation in physicians’ costs of practice than under historic Medicare prevailing charge

Most Medicare payments under fully transitioned RBRVS are within 10% of the national average, rather than the twofold and threefold differences in payment common under UCR

For many areas where physicians’ payments were only 60% to 70% of the national average under UCR, payments increased to 80% to 90% of the national average under the payment schedule

In areas where Medicare’s payments under UCR were twice the national average, payments declined to only 15% to 20% above the national average


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Conversion factors Medicare conversion factor (CF) is the same for all physicians across

the US 2011 CF for Medicare is $34.0230

Historical CFs: 2012 $34.0376 2011 $33.9764 2010 $36.0846 2009 $36.0666 2008 $38.0870 2007 $37.8975 2006 $37.8975 2005 $37.8975 2004 $37.3374 2003 $36.7856



Historical allowed amount – 99213 (mid-level E&M visit, established pt)

Year Rate

2000 $50.122001 $50.822002 $48.832003 $49.622004 $51.122005 $51.752006 $51.752007 $62.032013 $78.91


Historical allowed amount – 27332 (Removal of knee cartilage)

Year Rate

2000 $586.082001 $644.502002 $628.872003 $644.912004 $588.252005 $602.232006 $602.232007 $570.352013 $685.64

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RBRVS Conversion factor is updated each year by CMS Most payors have adopted RBRVS as their method of reimbursing

physicians Some use GPCIs, others do not Typical HMO conversion factor is $45-$65+ – varies by product and

by region Typical PPO conversion factor is $45-$70+ - varies by product and

region Some payors will override RBRVS for certain codes, such as allergy

injections, E/M visits, etc. – typically to increase payment for primary care services


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RBRVS to set fees Many physician practices use RBRVS for setting

fees Typical primary care CF is $60-$80 Typical specialty CF is $80-$95++


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RBRVS to compensate physicians Many clinics use RBRVS to compensate physicians within

their practice Is not dependent on payor mix and thereby does not

economically penalize a physician who sees a higher share of government-paying patients

Usually only the physician work portion of the RVU is used A conversion factor may be established for compensation Bonuses can also be prorated based on each physician’s

work RVUs compared with the clinic’s total work RVUs


reimbursement explained the life science lean in: analytics & big data in healthcare & life...

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outpatient status inpatient

admissions drg weight

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