By contract, third-party payers reimburse hospital inpatient services based on a predetermined, fixed amount for a particular service. For example, Section 1886(d) of the Medicare Act established a classification system for inpatient charges (called diagnosis related groups or DRGs).
Part I – Paying for Hospital Services – Overview
By contract, third-party payers reimburse hospital inpatient services based on a predetermined, fixed amount for a particular service. For example, Section 1886(d) of the Medicare Act established a classification system for inpatient charges (called diagnosis related groups or DRGs). The DRGs are assigned by a grouping program, which takes into account the patient’s diagnosis, procedures, age, gender, discharge status, and comordibities. Medicare uses this prospective payment system to pay for hospital services on a rate-per-discharge basis that varies according to the DRG which is assigned to a particular patient’s hospital stay.
The reimbursement formula that is used calculates the payment for each specific case, multiplied by the hospital’s payment rate by the weight of the DRG of the case. Adjustment factors such as geographical location and outliers are considered as well. Every DRG weight serves to represent the average amount of resources required to care for that particular DRG case, relative to the average amount of resources used to treat the cases in all DRGs. There are currently over 740 Medicare DRGs, with these classifications and relative weights reviewed a minimum of annually. Other third-party payers have developed similar systems by which payment is calculated for inpatient services. Here are some examples of DRGs:
DRG
Description
Case Weight
Outlier
001
Craniotomy Age>17 Years, Except for Trauma
3.0932
32
037
Orbital Procedures
0.8821
26
072
Nasal Trauma
0.6419
26
115
Permanent Cardiac Pacemaker
3.5513
33
191
Pancreas, Liver, Shunt Procedure
3.6598
36
302
Kidney Transplant
4.1370
35
418
Post-Operative Infections
0.9777
29
441
Hand Procedure/Surgery
0.8785
25
488
HIV Extensive O.R. Procedure
4.2177
37
This system of prospective payment determines the pay rates for care, even before the care is provided to the patient. We now need to consider operating payments, capital payments, and outlier payments:
Operating payments are a central part of Medicare’s prospective payment system. However, if a patient’s serious condition requires additional services or a longer stay in the hospital, Medicare makes what are called “outlier” payments (discussed below). These payments may be more than the base operating and capital payments. The elements of the operating payment are calculated as follows: DRG relative weight x ((labor related large urban standardized amount x core based statistical area [CBSA] wage index) + (nonlabor related national large urban standardized amount x cost of living adjustment)) x (1+ indirect medical education + disproportionate share hospital).
In 1992, Medicare also began reimbursing hospitals for their capital costs associated with care and treatment of a patient, on a prospective basis. The elements of a capital payment are as follows: DRG relative rate x federal capital rate x large urban add-on x geographic cost adjustment factor x cost of living adjustment x (1+ indirect medical education + disproportionate share hospital).
Outlier payments are provided as occasional additional payments to encourage high-quality inpatient care for seriously ill patients who are identified as care outliers (these are the extremely costly cases producing losses that are often too large for hospitals to offset with other less costly cases in the same DRG). Because of the significant cost of such cases, a fixed loss amount is set each year to adjust for common pricing levels in the hospital’s local market area. The background reading links provide more information on the outlier payment formula as well as the process for calculation.
Part II – Paying for Physician Services – Overview
Until 1991, Medicare paid physicians based on the concept of reasonable charges. These charges were defined as the lowest of three factors: the actual cost of the service provided, the physician’s usual/customary charge, or the prevailing charge for the cost of the service in that particular community.
The physician payment system changed in 1992, moving to a resource-based relative value scale (RBRVS) system. This new system took into account three new components of care resources: the physician’s work (skill level, time, stress, other work-related factors), overhead/practice expenses (nonphysician costs, excluding cost of malpractice insurance), and the actual cost of malpractice insurance.
In this module, we will explore how to calculate physician reimbursements based on this newer RBRVS model. Each of the over 8,000 procedure codes are given relative value units (RVUs) for each of the three care resource components. After additional adjustments for geographic cost differentials, the units are added to calculate the total number of RVUs for the care provided. That number is then multiplied by a conversion factor that equals the dollar value of one unit, to arrive at the dollar amount of the reimbursement.
The following table should help you better understand how rates are calculated:
Categories
RVU
Geographic Cost Index
Product
Conversion Factor
Work
27.36
1.089
29.80
–
Practice Expense
33.59
1.473
49.48
–
Malpractice
6.82
0.646
4.41
–
Total
–
–
83.69
69.87
The product values are added up and multiplied by the conversion factor. Using the above figures, the payment rate would be $5,847.42. Now that we know the Medicare approved rate, we can move on to:
How are Physicians Reimbursed?
The following should help you better understand the distinction made between participating physicians and non-participating physicians:
Participating physicians:
· Accept assignment on each and every patient case
· Bill Medicare and the patient 100% of the Medicare-approved fee for a procedure
· Receive payment from Medicare equal to 80% of the Medicare-approved fee, and patient pays 20% of the approved fee
Non-participating physicians who accept assignment on a case-by-case basis:
· Bill Medicare and the patient 95% of the Medicare-approved fee for a procedure
· Receive payment from Medicare equal to 80% of the Medicare-approved fee for non-participating physicians (95%), and patient pays 20% of the approved fee
Non-participating physicians who do not accept assignment:
· Bill the patient for 115% of the Medicare-approved fee for non-participating physicians (which is already at 95% of fee for participating physicians)
· Receive entire payment from the patient. Then Medicare reimburses the patient for 80% of the approved fee for non-participating physicians
The following examples should help you better understand billing by and payment to physicians:
Assume the Medicare-approved fee for a procedure is $1,000. This means that the Medicare-approved fee for non-participating physicians is $950.
The participating physician will bill Medicare and the patient. Medicare will pay the doctor $800 (80%), and the patient pays $200 (20%).
The non-participating physician who accepts assignment bills Medicare and the patient. Medicare pays $760 (80% of the $950) and the patient pays $190 (20% of the $950).
The non-participating physician who does not accept assignment bills the patient a maximum of $1,092.50 (115% of the $950). This is called limiting charge. The patient pays the physician the entire amount. Then Medicare reimburses the patient $760 (80% of the $950 approved fee). In this scenario, the physician gets paid more than the participating physician but can only look to the patient. In this scenario, the patient is on the hook for $332.50, because Medicare will not pay more than $760.
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