INTRODUCTION
Chapter 2 described the different modes of financing health care: out-of-pocket payments, individual health insurance, employment-based health insurance, and government financing. Each of these mechanisms attempted to solve the problem of unaffordable care for certain groups, but each “solution” in turn created new problems by stimulating rapid rises in health care costs. One of the factors contributing to this inflation was the payment of physicians and hospitals by insurance companies and government programs. Currently, new methods of payment are being tried to lower the growth rate in health care costs.
Dr. Mary Young has recently finished her family medicine residency and joined a small group practice, PrimaryCare. On her first day, she has the following experiences with health care financing: her first patient is insured by Blue Shield; PrimaryCare is paid a fee for the physical examination and for the electrocardiogram (ECG) performed. Dr. Young’s second patient requires the same services, for which PrimaryCare receives no payment but is forwarded $15 for each month that the patient is enrolled in the practice. In the afternoon, a hospital utilization review physician calls Dr. Young, explains the diagnosis-related group (DRG) payment system, and suggests that she send home a patient hospitalized with pneumonia. In the evening, she goes to the emergency department, where she has agreed to work two shifts per week for $100 per hour. She was also delighted to open her mail and find a small check rewarding her for providing high-quality care for her PrimaryCare patients.
During the course of a typical day, some physicians will be involved with four or five distinct types of payment. This chapter will describe the different ways in which physicians and hospitals are paid. Although payment has many facets, from the setting of prices to the processing of claims, this discussion will focus on one of its most basic elements: establishing the unit of payment. This basic principle must be grasped before one can understand the key concept of physician-borne risk.
UNITS OF PAYMENT
Methods of payment can be placed along a continuum that extends from the least to the most aggregated unit. The methods range from the simplest (one fee for one service rendered) to the most complex (one payment for many types of services rendered), with many variations in between (Table 4-1).
The unit of payment is the visit or procedure. The physician or hospital is paid a fee for each office visit, ECG, intravenous fluid, or other service or supply provided. This is the only form of payment that is based on individual components of health care. All other payment modes aggregate or group together several services into one unit of payment.
The physician or hospital is paid one sum for all services delivered during one illness, as is the case with global surgical fees for physicians and DRGs for hospitals.
The hospital is paid for all services delivered to a patient during 1 day.
One payment is made for each patient’s care during a month or year.
This includes global budget payment of hospitals and salaried payment of physicians.
Traditionally physicians and hospitals have been paid on a fee-for-service basis. The development of managed care plans introduced changes in the methods by which hospitals and physicians are paid, largely for the purpose of controlling costs. Managed care is discussed in more detail in Chapter 6; in this chapter, only those aspects needed to understand physician and hospital payment will be considered.
There are three major forms of managed care: fee-for-service practice with utilization review, preferred provider organizations (PPOs), and health maintenance organizations (HMOs).
This is the traditional type of payment, with the addition that the third-party payer (whether private insurance company or government agency) assumes the power to authorize or deny payment for expensive medical interventions such as hospital admissions, extra hospital days, and surgeries.
PPOs are loose-knit organizations in which insurers contract with a limited number of physicians and hospitals who agree to care for patients, usually on a discounted fee-for-service basis with utilization review (the insurer authorizing or denying payment for services deemed unnecessary). Patients with a PPO plan pay a much higher share of the cost when using physicians or hospitals outside the “preferred” network.
HMOs are organizations whose patients are required (except in emergencies) to receive their care from physicians and hospitals within that HMO. The types of HMOs are discussed in Chapter 6. Some HMOs pay physicians and hospitals by more highly bundled units of payment (e.g., per diem, capitation, or salary).
METHODS OF PHYSICIAN PAYMENT
Roy Singleton, a patient of Dr. Weisman, is seen for recent onset of diabetes. Dr. Weisman spends 20 minutes performing an examination, finger-stick blood glucose test, urinalysis, and ECG. Each service has a fee set by Dr. Weisman: $100 for a complex visit, $10 for a finger-stick glucose test, $10 for a urinalysis, and $80 for an ECG. Because Mr. Singleton is uninsured, Dr. Weisman reduces the total bill from $200 to $100.
In 2001, Dr. Lenz, an ophthalmologist, requested that Dr. Weisman do a medical consultation for Gertrude Rales, who developed congestive heart failure and arrhythmias following cataract surgery. Dr. Weisman took 90 minutes to perform the consultation and was paid $120 by Medicare. Dr. Lenz had spent 90 minutes on the surgery plus pre- and postoperative care and received $900 from Medicare. In 2014, Dr. Weisman did a similar consultation for Dr. Lenz and received $130; Dr. Lenz was sent $804 for the operation.
Melissa High, a Medicaid recipient, makes three visits to Dr. Weisman for hypertension. He bills Medicaid $120 for one complex visit and $60 each for two follow-up visits. He is paid $30 per visit, 38% of his total charges. Under Medicaid, Dr. Weisman may not bill Ms. High for the balance of his fees.
Dr. Weisman contracted with Blue Cross to care for its PPO patients at 70% of his normal fee. Rick Payne, a PPO patient, comes in with a severe headache and is found to have left arm weakness and hyperreflexia. Dr. Weisman is paid $91 for a complex visit. Before a magnetic resonance imaging (MRI) scan can be ordered, the PPO must be asked for authorization.
Traditionally, private physicians have been paid by patients and insurers through the fee-for-service mechanism. Before the passage of Medicare and Medicaid, physicians often discounted fees for elderly or poor patients, and even afterward many physicians have continued to assist uninsured people in this way.
Private insurers, as well as Medicare and Medicaid in the early years, usually paid physicians according to the usual, customary, and reasonable (UCR) system, which allowed physicians a great deal of latitude in setting fees. As cost containment became more of a priority, the UCR approach to fees was largely supplanted by payer-determined fee schedules. An example of this is Melissa High’s three visits, which incurred charges of $240 of which Medicaid paid only $90 ($30 per visit).
In the early 1990s, Medicare moved to a fee schedule determined by a resource-based relative-value scale (RBRVS). With this system, fees (which vary by geographic area) are set for each service by estimating the time, mental effort and judgment, technical skill, physical effort, and stress typically related to that service (Bodenheimer et al., 2007). The RBRVS system made a somewhat feeble attempt to correct the bias of physician payment that has historically paid for surgical and other procedures at a far higher rate than primary care and cognitive services. In 2001, Dr. Weisman was paid nearly 13% of Dr. Lenz’s surgery fee, compared with 16% of that fee in 2014.
PPO managed care plans often pay contracted physicians on a discounted fee-for-service basis and require prior authorization for expensive procedures.
With fee-for-service payments, physicians have an economic incentive to perform more services because more services bring in more payments (see Chapter 10). The fee-for-service incentive to provide more services has contributed to the rapid rise in health care costs in the United States (Relman, 2007).
Dr. Nick Belli removes Tom Stone’s gallbladder and is paid $1,300 by Blue Cross. Besides performing the cholecystectomy, Dr. Belli sees Mr. Stone three times in the hospital and twice in his office for postoperative visits. Because surgery is paid by means of a global fee, Dr. Belli may not bill separately for the visits, which are included in his $1,300 cholecystectomy fee.
Joan Cluster has had type 2 diabetes for 8 years with no complications or other illnesses. Dr. Violet Sweet used to bill diabetes patients a fee for each visit but is now practicing in a bundled payment pilot. She receives one payment for taking care of Ms. Cluster’s diabetes for 1 year.
Surgeons usually receive a single payment for several services (the surgery itself and postoperative care) that have been grouped together, and obstetricians are paid in a similar manner for a delivery plus pre- and postnatal care. This bundling together of payments is often referred to as payment at the unit of the case or episode.
With payment by episode, surgeons have an economic incentive to limit the number of postoperative visits because they do not receive extra payment for extra visits. On the other hand, they continue to have an incentive to perform more surgeries, as with the traditional fee-for-service system. Some pilot projects are testing the use of payment by episode of illness, for example, one lump-sum payment for the treatment of diabetes over the period of 1 year, no matter how many times the patient visits the physician (Catalyst for Payment Reform, 2014a).
At this point, it is helpful to introduce the important concept of risk. Risk refers to the potential to lose money, earn less money, or spend more time without additional payment on a transaction. With the traditional fee-for-service system, the party paying the bill (insurance company, government agency, or patient) absorbs all the risk; if Dr. Weisman sees Rick Payne ten times rather than five times for his headaches, Blue Cross pays more money and Mr. Payne spends more in copayments. Bundling of services transfers a portion of the risk from the payer to the physician; if Dr. Belli sees Tom Stone ten times rather than five times for follow-up after cholecystectomy, he does not receive any additional money. However, Blue Cross is also partially at risk; if more Blue Cross enrollees require gallbladder surgery, Blue Cross is responsible for more $1,300 payments. As a general rule, the more services aggregated into one payment, the larger the share of financial risk that is shifted from payer to provider.
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