Module 1: Changing Dynamics of the U.S. Health Care System

Question 1

Basic Characteristics of Insurance (4)

Answer 1

(1) Pooling of Losses
(2) Payment only for random losses
(3) Risk Transfer
(4) Indemnification

Question 2

Basic Characteristics of Insurance (4) - (1) Pooling of Losses

Answer 2

• Basis of insurance
• Pooling means that losses are spread over a large group of individuals, so that each individual realizes the average loss of the pool (plus admin expenses) rather than the actual loss incurred
• Pooling involves the groups of a large number of homogeneous exposure units (people / things having the same risk characteristics) so that the law of large numbers applies
• Law of large numbers applies; as the size of the sample increases, the sample mean gets closer and closer to the population mean
• Pooling implies (1) the sharing of losses by the entire group and (2) the prediction of future losses with some accuracy

Question 3

Basic Characteristics of Insurance (4) - (2) Payment Only for Random Losses

Answer 3

• A random loss is one that is unforeseen and unexpected and occurs as a result of chance
• Insurance is based on the premise that payments are made only for losses that are random

Question 4

Basic Characteristics of Insurance (4) - (3) Risk Transfer

Answer 4

• the transfer of a risk from an insured to an insurer, which typically is in a better financial position to bear the risk than the insured because of the law of large numbers
• the sole exception to the element of risk is self-insurance

Question 5

Basic Characteristics of Insurance (4) - (4) Indemnification

Answer 5

• reimbursement to the insured if a loss occurs
• takes place when the insurer pays the insured, or the provider, in whole or in part for expenses related to the insured illness or injury

Question 6

Adverse Selection

Answer 6

• the problem faced by insurance companies because individuals / businesses that are more likely to have claims are more inclined to purchase insurance than those that are less likely to have claims
• best way to combat is to create a large, well diversified pool of subscribers

Question 7

Moral Hazard

Answer 7

• the problem faced by insurance companies because individuals are more likely to use unneeded health services when they are not paying the full cost of those services
• insurance is based on the premise that payments are made only for random losses, and from this premise stems the problem of moral hazard.
• the primary tool that insurers have to combat the moral hazard problem is coinsurance or copayments (after deductible)

Question 8

Third Party Payers (3)

Answer 8

• a generic term for any outside party, typically an insurance company or a govt. program, that pays for part or all of a patient’s healthcare services.
• (1) Private Insurers
• (2) Public Insurers
• (3) Managed Care Plans

Question 9

Third Party Payers (3) - (1) Private Insurers
(A) BlueCross BlueShield
(B) Commercial Insurers
(C) Self Insurers

Answer 9

• (A) BlueCross BlueShield; BlueCross originated as a number of separate insurance programs offered by individual hospitals. BlueShield plans developed in a manner similar to BlueCross, except that the providers were physicians instead of hospitals.
• Blues have 36 organizations (“The Blues”) which provide healthcare for more than 106 million in all 50 states, DC, and Puerto Rico
• Hospital service plans - fee paid for services whether you used them or not
• (B) Commercial Insurers; issued by life insurance companies, casualty insurance companies, and companies that were formed exclusively to offer healthcare insurance.
• Examples include Aetna, Humana, and UHC
• taxable, for profit companies
• entered the market after WWII
• IRS ruled that employer provided health insurance was not taxable, giving employers an incentive to offer this tax-fee benefit
• (C) Self Insurers; large groups (employers) are good candidates.

Question 10

Third Party Payers (3) - (2) Public Insurers
(A) Medicare
(B) Medicaid

Answer 10

• (A) Medicare; a federal govt. health insurance program (1965) that primarily provides benefits to individuals age 65+.
• 44 million enrolled which pays for 21% of all US healthcare services
• Part A; FREE if age 65+, hospital and skilled nursing facility coverage
• Part B; optional and comes with monthly premium cost, physician services, ambulatory surgical services, outpatient services
• Part C; AKA Medicare Advantage, managed care coverage offed by private insurance companies and be selected in lieu of Part A and Part B, 1/3 choose to participate in these plans
• Part D; RX
• Many private insurers offer Medicare Supplement or Medigap plans; designed to help pay costs traditional Medicare does not coverage (deductible, copay, coinsurance) or does not cover such as medical services outside of the US. Medicare pays first.
• (B) Medicaid; a federal and state govt. health insurance program (1966) that provides benefits to low-incoming individuals
• goal is to provide a medical safety net for low income mothers and children and for elderly, blind, and disabled individuals who receive benefits form the Supplemental Securely Income (SSI) program.
• congress mandated that Medicare cover hospital and physician care, but states were encouraged to expand the basic package of benefits, either by increasing the range of benefits or by extending the program to cover more people
• a mandatory nursing home benefit was added in 1972

Question 11

Third Party Payers (3) - (3) Managed Care Plans
(A) HMO
(B) PPO
(C) Managed Fee for Service

Answer 11

• a combined effort by an insurer and a group of providers that aims both to increase qualify of care and to decrease costs
• combine the provision of healthcare services and the insurance function into a single entity
• traditional plans are created by insurers that either directly own a provider network or create one through contractual arrangements with independent providers
• (A) Health Maintenance Organization (HMO); based on the premise that the transition insurer / provider relationship creates incentives that reward providers for treating patients’ illnesses while offering little incentive for providing prevention and rehab services; referred to as volume over value
• HMOs have several drawbacks from a patient perspective; limited network of providers and the assignment of a PCP (gatekeeper) who acts as the initial contact and authorizes all services received from the HMO
• (B) Preferred Provider Organization (PPO); hybrid of HMO’s and traditional health plans that use many of the cost saving strategies developed by HMO’s.
• do not mandate that beneficiaries use specific providers and do not mandate a PCP, although, financial incentives (patients pay less for going to more efficient providers) encourage members to use providers that are part of the provider panel - those providers that have contracts (discounts prices) with the PPO.
• (C) Managed Fee for Services Plans; use readmission certification (review of patient need before admission), utilization review (examination of services provided to a patient), and second surgical opinions to control inappropriate utilization.
• insurer has a mechanism by which it controls, or at least influences, patients utilization of services.

Question 12

Health Care Reform & Insurance - (1) Insurance Standards

Answer 12

• the ACA introduced a number of provisions to expand insurance coverage and improve insurance affordability and access.
• A number of new insurance standards were specified in the ACA.

In terms of coverage;
- children and dependents coverage to age 26
- insurers cannot drop insureds if they become sick or have pre-existing conditions
- insured has a right to appeal and request that insurer review denial of payment

In terms of cost;
- insurers must charge the same premium rate to all applicants of the same age and location, regardless of pre-ex or sex; COMMUNITY RATING
- insurers are required to spend at least 80% of premium dollars on health costs and claims instead of on admin costs and profits; if insurer violates, must issue rebates to policyholders; MLR
- lifetime limits on most benefits are prohibited for all new health plans

In terms of care;
- all plans must now include EHB such as ambulatory patient services, ER services, hospitalization, maternity & newborn care, mental health and substance abuse, RX, lab services, preventive and wellness, chronic disease mgmt, pediatric dental / vision
- preventive services such as childhood immunizations, adult vaccinations, basic medical screenings, free of charge
- individuals are permitted to choose PCP outside of plan network, PAY MORE
- individuals can seek ER care at hospital outside of plan network, PAY MORE

Question 13

Health Care Reform & Insurance - (2) Individual Mandate

Answer 13

• the ACA introduced a number of provisions to expand insurance coverage and improve insurance affordability and access.
• Effective 1/2014.
• Required all eligible individuals (US Citizen & Legal Residents) to have insurance or face a penalty
• Repealed 1/2019.
• Increase number of uninsured by 4 million in 2019 and 13 million in 2027.

Question 14

Health Care Reform & Insurance - (3) Medicaid Expansion

Answer 14

• the ACA introduced a number of provisions to expand insurance coverage and improve insurance affordability and access.
• Expansion of Medicare to all citizens and legal residents between the ages of 19 and 64 who have household incomes below 138% of the FPL.
• Primarily benefits childless adults who previously did not qualify for Medicaid regardless of their income level as well as low income parents who previously did not qualify even if their children did qualify.
• Additional 16 million people would receive coverage if all states expanded
• in 2012, US Supreme Court ruled that states could opt out of Medicaid expansion
• 37 states and DC expanded as of 2019

Question 15

Health Care Reform & Insurance - (4) Health Insurance Exchanges (HIEs)

Answer 15

• the ACA introduced a number of provisions to expand insurance coverage and improve insurance affordability and access.
• online marketplace created primarily by the states or the federal govt. that insurers use to post plan details and consumers use to purchase health insurance.
• as of 2018, 12 million used HIE to purchase coverage
• Public exchanges; created by state or federal govt. and are open to both individuals and small groups employers.
• Private exchanges; created by private sector firms such as health insurance companies
• subsidies offered to those 400% below the FPL; two types (1) premium tax credits that offset the amount of monthly premium paid for coverage (2) costing sharing subsidies that minimize the amount of out of pocket costs
• challenges; difficult launch due to technology challenges, while coverage is largely affordable for individuals that receive subsidies, it is unaffordable for many with income levels above 400% of FPL

Question 16

Health Care Reform & Insurance - (5) High Deductible Health Plans (HDHPs)

Answer 16

• the ACA introduced a number of provisions to expand insurance coverage and improve insurance affordability and access.
• least expensive options on the exchanges
• rate of enrollment has more than doubled since 2009
• aim to provide control over health care expenditures

Question 17

General Reimbursement Methodologies - Fee for Service & Capitation

Answer 17

• Fee for Service; a reimbursement method that provides payment each time a service is provided; the greater the amount of services provided, the higher the amount of reimbursement
• Capitation; a reimbursement method that is based on the number of covered lives (or enrollees) as oppose to the amount of services provided

Question 18

Fee for Service Methods (3) - (1) Cost Based Reimbursement

Answer 18

• a fee for service reimbursement method based on the costs incurred in providing services
• reimbursement is limited to allowable costs
• guarantees that a providers cost will be covered by payments from the payer
• payer makes periodic interim payments to the provider with a final reconciliation after the contract period expires to ensure all payments were made accordingly
• critical access hospitals, which are small rural hospitals that provider services to remote populations that do not have access to other hospitals, are still reimbursed on a cost basis by Medicare. All others have transitioned to per diagnosis prospective payment system.

Question 19

Fee for Service Methods (3) - (2) Charge Based Reimbursement

Answer 19

• Chargemaster; established by the provider, a list of all items and services provided by a health services organization contingent heir gross (list) prices.
• when payers pay “billed charges” or charges, they pay according to a rate schedule
• places payers at the mercy of the providers
• no longer common, transitioned to discounts (negotiated) charges method

Question 20

Fee for Service Methods (3) - (3) Prospective Payment
(A) Per Procedure
(B) Per Diagnosis
(C) Per Day (Per Diem)
(D) Bundled

Answer 20

• Prospective Payment System; the rates paid by payers are established by the payer before services are provided, payments are not directly related to either costs or chargemaster rates.
• a fee for service method in which the payment amount is established beforehand by the third payer and in theory is not directly related to costs or charges

(A) Per Procedure - a separate payment is made for each procedure performed, high admin costs when there is a complex diagnosis, more commonly used in outpatient settings than inpatient settings

(B) Per Diagnosis - provider is paid a rate that depends on the patients diagnosis, diagnosis’ that require higher resource utilization and are most costly to treat have higher reimbursement rates, Medicare pioneered this basis of payment in its Diagnosis Related Group (DRG) system which it first used for hospital inpatient reimbursement in 1983. Providers seek patients with diagnosis that have the greatest profit potential and discourage / discontinue services that have the least potential. Have incentive to reduce the length of stay and hence costs.

(C) Per Day (Per Diem) - pays a set amount for each day that service is provided (INPATIENT only), regardless of the nature of the service, can be stratified. Amount paid can differ based on level of care and/or length of care. Hospitals have incentive to increase the length of stay.

(D) Bundled (Global) Payment - single payment amount for the complete set of services (one or multiple providers) required to treat a single episode. Example - pregnancy. Incentives hospitals and providers to prove the most efficient and effective care at the lowest cost.
- may cover an entire population, then becomes GLOBAL payment vs. bundled payment which in effect is a capitation payment.
-“Unbundling”; providers do not have the ability to be reimbursed for a series of separate services

Question 21

Capitation

Answer 21

• provider is paid a fixed amount per covered life, per period (usually a month), regardless of the number of services provided.
• Example; PCP may be paid $15 PMPM for handing 100 members of an HMO plan
• used primarily by managed care plans, dramatically changes the financial environment of healthcare providers and has implications for financial accounting, managerial accounting, and financial management
• key is to work smarter and decrease utilization
• providers have incentive to promote health, rather than just treat illness or injury, because a healthier population consumes fewer healthcare services

Question 22

Provider Incentives Under Alternative Reimbursement Methodologies

Answer 22

• Under Cost Based Reimbursement, providers are given a “blank check” to acquire facilities and equipment and incur operating costs. If payers reimburse providers for all costs, the incentive is to incur costs. Facilities will be lavish, conveniently located, staff available to ensure patients are given “deluxe” treatment. Services that may not be medically required will be provided because more services lead to higher costs and hence lead to higher revenues.
• Under Charge Based Reimbursement, providers have incentive to set high charge rates, which lead to high revenue. In a competitive market, there will be a constraint on how high providers can go.
• “Churning”; creating more visits, ordering more tests, extending inpatient stays, etc. which increases utilization and in turn increases revenues.
• Creates incentive for providers to contain costs because (1) the spread between charges and costs represents profits, the most the better (2) lower costs can lead to lower charges, which increases volume.
• Incentive to contain costs is weak because charges can be increased more easily than costs can be reduced
• Discounted charge reimbursement places additional pressure on profitability and hence increases the incentive for providers to lower costs
• Under Prospective Payment Reimbursement, provider incentives are altered. Profitability varies depending on the relationship between the actual costs incurred and the payment for the procedure.

Question 23

Medical Coding; The Foundation of Fee-for-Service Reimbursement
(1) Background
(2) Diagnosis Codes
(3) Procedure Codes

Answer 23

(1) Background
Medical Coding (Medical Classification); the process of transforming descriptions of medical diagnoses and procedures into code numbers that can be universally recognized and interpreted.

(2) Diagnosis Codes
- International Classification of Disease (ICD); numerical codes for designating diseases plus a variety of signs, symptoms, and external causes of injury. Used internationally to record many types of health events, including hospital inpatient stays and causes of death. Published by the WHO.
- 3 - 7 characters long. First 3 refer to the category. Next 3 refer to etiology, anatomic site, severity. 7th refers to extension.
-Federal law requires physicians and providers use ICD for the coding and transfer of healthcare information.

(3) Procedure Codes
- Current Procedural Terminology (CPT) Codes; used to specify medical, surgical, and diagnostic procedures (TX).
- developed and are copyrighted by the AMA.
-Federal law requires physicians and providers use CPT for the coding and transfer of healthcare information.
- 10 code for PCP visits. 5 apply to new patients, 5 apply to established patients, codes differ by complexity of visit. 3 components (1) extent of patient history review (2) extent of examination (3) difficulty of medical decision making
- For established patients; least complex code 99211; most complex code 99215.

• Healthcare Common Procedure Coding System (HCPCS); commonly pronounced hick picks. Created by CMS. Expands the set of CPT codes to include non-physician services (ie ambulance transport) and DME.

Question 24

Specific Reimbursement Methods (Medicare Focus) -
(1) Hospital Inpatient Services
(2) Physician Services

Answer 24

(1) Hospital Inpatient Services
- Inpatient Prospective Payment Systems (IPPS); prospective payment method based on an inpatients diagnosis at discharge used to reimburse providers for inpatient services
- It starts with 2 national base payment rates (operating and capital expenses) which are then adjusted to account for two factors that affect the costs of providing care (1) patients condition and TX (2) market conditions in the facility’s geographic location
- Discharges are assigned to 1 of 754 Medicare Severity Diagnosis-Related Groups (MS-DRG) which designate the diagnoses of patients with similar clinical problems who therefore are expected to consume similar amounts of hospital resources.
- Each MS-DRG has a relative weight that reflects the expected cost of inpatients in that group.
- The MS-DRG payment rates in each local market are determined by adjusting the base payment rates to reflect the local input price level and then ** them by the relative weight for each MS-DRG.
- The operating and capital payment rates are increased for facilities that operate an approved resident training program or that treat a disproportionate share of low income patients.
- rates are reduced for transfer cases that are extraordinarily costly to protect the providers from large financial losses due to unusually expensive cases.
- both operating and capital payment rates are updated annually.
- IPPS rates are intended to cover the costs that reasonably efficient providers would incur in providing high-quality care. If the hospital is able to provide the services for less than the fixed reimbursement amount, it can keep the difference. If a Medicare patient’s TX costs are more than the reimbursement amount but do not meet the definition of an outlier, the hospital bears the loss.

(2) Physician Services
- Medicare pays for physician services using a resource-based relative value scale (RBRVS); payments for services are determined by the resource costs needed to provide them as measured by weights called RVU.
- Relative Value Unit (RVU); a measure of the amount of resources consumed to provide a particular service. When applied to physicians, a measures of the amount of work, practice expenses, and liability costs associated with a particular service.
- 3 Components of RVU
(1) Work RVU - includes the skill level and training required along with the intensity and time required for the service .67
(2) Practice Expense RVU - includes equipment and supplies costs as well as office support costs including labor .62
(3) Malpractice Expense RVU - accounts for relative risk and cost of potential malpractice claims .03
- .52 minimal office visit, 1.32 avg. office visit, 3.06 comprehensive office visit
- RVU values are then adjusted to reflect variations in local input prices, and the total is ** by a standard dollar value - called the conversion factor - to arrive at the payment amount. May be adjusted to reflect provider characteristics, geographic designations, and other factors. The provider is paid the final amount, less any beneficiary coinsurance.

Question 25

Healthcare Reform and Reimbursement Methods (6)
(1) Value Based Purchasing (VBP)
(2) Quality Based Clinician Compensation
(3) Shared Savings Programs
(4) Bundled Payment Methods
(5) Readmission Reduction Program
(6) Hospital Acquired Conditions Reduction Program

Answer 25

• key reforms include an increased focus on quality and efficiency and a move from fee for service based model to a prospective payment model, which may include bundled payments or capitation.
• aim to shift from reimbursement based on volume to value and better outcomes.
• despite efforts to repeal and replace ACA, most experts predict that the shift toward value based payment will continue
• new payment methods are deigned to accomplish the following
  (1) encourage providers to deliver care in a high quality, cost effective manner
  (2) support coordination of care among multiple providers
  (3) adopt evidence based care standards and protocols that result in best outcomes for patients
  (4) provide accountability and transparency
  (5) discourage over treatment and medically unnecessary procedures
  (6) eliminate or reduce the occurrence of adverse events
  (7) discourage cost shifting

Question 26

Healthcare Reform and Reimbursement Methods (6)
- (1) Value Based Purchasing (VBP)

Answer 26

• approach to provider reimbursement that rewards quality and efficiency of care rather than quantity of care
• Medicare initiative that rewards acute care hospitals with incentive payments for efficiently providing high quality care to Medicare beneficiaries
• leads to lower cost and better clinical outcomes for all hospitalized patients
• payment amount based on outcome measures such as mortality, health case associated infections, patient safety and experience, process of care, efficiency and cost reduction
• hospitals may be rewarded for their performance compared with all other hospitals, or for how well they improved their own performance compared with performance during a baseline period
• Medicare also uses VBP for end stage renal disease, skilled nursing, and home health.

Question 27

Healthcare Reform and Reimbursement Methods (6) -
(2) Quality Based Clinician Compensation

Answer 27

• Medicares effort to shift medicine away from volume based focus, where clinicians are paid for each services regardless of quality.
• Clinicians can earn additional compensation based on the quality of care they provide
• bonuses and penalties are calculated on the basis of performance on quality measures, which vary by specialty.
• paired with shared savings programs

Question 28

Healthcare Reform and Reimbursement Methods (6) -
(3) Shared Savings Programs

Answer 28

• approach to reducing healthcare costs and a mechanism for encouraging the creation of accountable care organizations (ACO)
• if a provider reduces total healthcare spending for its patients below the level that he payer expected, the provider is rewarded with a portion of the savings
• 2 Benefits (1) the payer spends less than it would otherwise (2) the provider gets more revenue than expected
• savings can arise from more efficient, cost effective use of hospital or outpatient services that enhance quality, reduce costs over time, and improve outcomes.
• applied to hospital episodes of care, including physician services or to physician office care

Question 29

Healthcare Reform and Reimbursement Methods (6) -
(4) Bundled Payment Methods

Answer 29

• promotes a more efficient use of resources and reward providers for improving the coordination, quality, and efficiency of care
• if cost of services is less than the bundled payment, the provider(s) retain the difference
• if cost of services exceed the bundled payment, the provider(s) are not compensated for the difference
• Virtual bundling; the payer may pay participating physicians and providers independently, but it may adjust each payment according to negotiated predefined rules to ensure that the total payments to all the providers do not exceed the total bundled payment amount
• if not Virtual Bundling, the ACO may receive the bundled payment and subsequently divide the payment among the participating physicians and providers.

Question 30

Healthcare Reform and Reimbursement Methods (6) -
(5) Readmission Reduction Program

Answer 30

• Medicare initiative that financially penalizes hospitals if they experience excessive readmission rates compared with expected levels of readmission
• penalties are based on a 30 day readmission measure for conditions such as heart attack, heart failure, and pneumonia

Question 31

Healthcare Reform and Reimbursement Methods (6) -
(6) Hospital Acquired Conditions Reduction Program

Answer 31

• Medicare initiative to encourage hospitals to improve patient safety.
• hospitals in the worst performing quartile for hospital acquired conditions such as bedsores, infections, complications from extended use of catheters, and injuries caused by falls are penalized 1 percent of inpatient payments for all discharges