Slides for Class 2 H ADM 545 January 17, 2002

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Slides for Class 2H ADM 545January 17, 2002
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Broad model depicting what a Health Care
Organizations (HCO) must do to remain financially
viable.

• Hire resources it requires to deliver medical
  services.
• Structure these resources in an order that allows
  it to deliver health services that people need or
  want.
• Sell these services at prices that cover the cost
  of resources consumed in delivering the medical
  services.
• Summary
• The costs of a HCO are equal to the units of
  resources it hires times the prices it pays for
  these resources
• Its operating revenues are equal to units of
  health services delivered times the prices it is
  paid for these services.
• Its aim is to earn revenues that are greater than
  its costs.

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HCOs hire, purchase or own the resources needed
to deliver health services

• Hired resources
• Employees paid wages and provided employee
  benefits .
• Purchased resources
• Services offered by suppliers laundry,
  consultant, home-health-agency services.
• Materials offered by suppliers prescription
  drugs.
• Owned resources
• Buildings and improvements to buildings and
  property owned or leased by HCOs.
• Equipment expected to last more than one year and
  owned or leased by HCOs.

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Hospital Payment Systems

• Payment to hospitals based on
• reasonable Historical costs
• Charges for specific services
• Negotiated bids and capitated rates
• Medicare Diagnosis-related groups

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Stages in the hospital rate-setting process

• Determining net income hospital requires to
  remain financially viable or fund a strategic
  plan
• Budgeted financial requirements for current
  expenses, debt principal payments, increases in
  working capital and capital expenditures
• Required Net income budgeted financial
  requirements - budgeted expenses
• Determining the patient payment composition or
  the patients payment mix
• Determining the level of bad debts and charity
  care delivered by the hospital

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A hospital rate setting model

• Hospitals challenge To set its rates at a level
  that insures that its actual revenues are
  sufficient to pay its budget expenses its
  required net income
• To reach this goal, the hospitals rate setting
  model solves for the rate charge-paying patients
  need to pay if the hospital is to meet this
  challenge.
• To solve for this rate, the model sets gross
  patient revenue budgeted expenses required
  net income - payments made by non-charge paying
  patients / proportion of charge paying
  patients.

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Medicares Prospective Payment System for
inpatient hospital care

• Payments to hospitals that are based on a
  national average of the costs of resources used
  to treat inpatients in each of 490
  Diagnosis-related groups (DRGs)
• Medicare pays each hospital this average after
  adjusting for wage rates in a hospitals area and
  the type of the hospital whether large urban or
  other
• Medicare further adjusts what it pays to a
  hospital based on factors such as the graduate
  medical education supported by the hospital.
• Medicare completed PPS for capital costs in 1999.

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Medicare payments for physician care Resource
Based Relative Value Scale (RBRVS)

• Medicare pays for physician services by ----
• 1st, assigning a service to one of 7000 current
  procedural terminology (CPT) codes
• Given its CPT code and the location of the
  service, Medicare assigns the service a distinct
  value based on an index of three, Relative Value
  Unit categories.
• Medicare then adjusts the payment by a
  geographical cost index .
• Medicare pays a participating physician 80 of
  the payment rate or .95 times the payment rate
  for a non-participating physician.

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Factors that have made it increasingly
challenging to budget revenues for HCOs and
physician practices

• Variety of payment systems that are used to
  reimburse HCOs and physicians
• Rate setting required for hospitals to maintain
  financial viability.
• The Prospective Payments Systems used by
  Medicare to pay providers
• DRG system for hospitals
• RBRVUs for physician services

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All Health Plans

• Enroll members and pay for a defined portion of
  the cost of medical care delivered to these
  subscribers. ( Indemnify the subscribers)
• Underwrite the financial risk linked to the
  obligation to pay for covered benefits delivered
  to the members
• Administer the claims presented on behalf of
  subscribers
• Market plans to purchasers, purchaser coalitions
  or individuals
• Review medical care delivered to members.
  Monitoring utilization of services and care
  outcomes.

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A sub-set of health plans which take steps to
manage the medical care delivered to subscribers

• Most familiar example is the Health Maintenance
  Organization (HMO)
• HMOs manage the delivery of care by
• Limiting their coverage to services delivered by
  a restricted network of providers
• Requiring members to access care through a
  primary care gatekeeper.
• Pay primary care gatekeepers on a PMPM or
  capitated payment
• Offer financial incentives designed to encourage
  providers and institutions to deliver more cost
  effective care

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Types of HMOs

• Staff model
• Group model
• IPA model
• Independent contractor model
• Network model

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Why managed care plans have dramatically
increased market share in the health plan business

• Employers and government agencies pay lower PMPM
  premiums for Managed Care health plans
• Managed care plans generally provide more
  comprehensive benefits than traditional indemnity
  plans
• Employers and government agencies are pressuring
  health plans to reduce PMPM premiums and hold
  providers more responsible for medical care they
  deliver

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Provider reaction to market pressure brought on
by plans that manage careIntegrated Delivery
Systems (IDS)

• As the agent for physicians and hospitals, IDSs
  negotiate and administer contracts with health
  plans or purchasers
• Example Physician Hospital Organization
• Contracts with a Network HMO to provide medical
  care for an enrolled population
• IDS sets up and governs a mechanism for
  distributing the revenues from the HMO to the
  physicians and hospitals that deliver the medical
  care

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A formula an IDS might use to pay
providers.(Refer to Table 3-3. P. 61)

• Primary care physicians (PHC) - gatekeepers
• Straight capitation 100 of IDSs primary care
  budget is allocated to PCPs based on the number
  of subscribers signed up with each PCP or PCP
  group
• Combination capitation and fee-for-service 50
  of IDSs primary care budget allocated by sign
  ups, and 50 is paid on a discounted
  fee-for-service bases.
• Specialty Care Physicians (SCP)
• Fee-for-service with risk pool and withholds
• Hospitals
• Per diem with risk pool and withhold.

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Estimating PMPM rates for negotiating capitated
contractsFocus on Table 3-5, p. 64

• Annual Frequency per 1,000 subscribers
• Unit cost of service provided
• Adjusting for co-payments to estimate Net PMPM
• Adjusting for revenue from coordination of
  benefits
• Adding a margin of 15 to cover the costs
  covering risk, administering claims, setting up
  reserves and profits
• Estimate of the PMPM required to cover costs and
  achieve a level of profits or net income.

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Summary of slides associated with Chapter 3 on
Managed Care

• All health plans
• But health plans that attempt to manage care go
  further by..
• The sub-set of health plans that attempt to
  manage care have had better than average success
  because..
• IDSs surfaced because..
• The market challenge for HMOs and IDSs
• Estimating the value of PMPM
• Deciding how to distribute revenues between...