Slides for Class 2 H ADM 545 January 17, 2002

1. Slides for Class 2H ADM 545January 17, 2002

2. 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.

3. 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.

4. Hospital Payment Systems • Payment to hospitals based on: • ‘reasonable’ Historical costs • Charges for specific services • Negotiated bids and capitated rates • Medicare Diagnosis-related groups

5. 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

6. A hospital rate setting model • Hospital’s 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 hospital’s 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.

7. Medicare’s 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 hospital’s 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.

8. 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.

9. 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

10. 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.

11. 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

12. Types of HMOs • Staff model • Group model • IPA model • Independent contractor model • Network model

13. 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

14. Provider reaction to market pressure brought on by plans that manage care:Integrated 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

15. 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 IDS’s 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 IDS’s 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.

16. 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.

17. 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…...