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Payment Systems In The American Medical System

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Payment systems in the American Medical systemThe historic payment system for reimbursing hospitals both by insurers and by Medicarehas been Retrospective Cost Based Reimbursement(RCBR). This system of reimbursementencourages hospitals to over charge in order to cover the costs of the uninsured who utilize thehospital. Charges have continued to rise year after year eventually putting the employers at a pointwhere they could no longer afford the payments.For physician reimbursements, both insurers and Medicare employed the Usual andCustomary(U+C) approach to reimbursement. This practice, which averaged the charges for aprocedure in a region, also encourages doctors to over-charge in order to raise the average amountpaid to them for a procedure. These two systems, RCBR and U+C eventually started to suck toomuch money out of the insurers, employers, and the Medicare/Social Security trust fund so thatinterventions were deemed necessary. Perhaps the biggest intervention adopted by the private sector to reduce medical servicecosts was the trend toward businesses self-insuring. By doing so, they avoided state-mandatedbenefits that were required if they hired a third-party insurer. In addition, the money was now paidto claims as they arose rather than prospectively so income could be earned on this capital as it satin the bank.Other intervention to reduce medical service costs mainly involved private insurers as itwas difficult for small businesses to self-insure because of low-capitol. Underwriting was a typicalpractice of insurance companies; that is, excluding some employees from coverage if they havepreexisting conditions or if they are employed in |high-riskX areas. Payment caps are were alsoemployed by insurers as a way to save medical costs. This practice meant setting limits for thetotal amount paid for selected diagnoses.These interventions ultimately led to segmentation in the insurance market. A shiftoccurred in the way that insurers calculated premium charges. Community rating used to be thenorm. It involves placing all beneficiaries into a large group and projecting their claims. Premiumswere then spread across the entire group as were risks. However, as a result of the historicalhospital and physician payments schemes, insurers shifted to experience rating. That is, a ratingthat bases a group+s premiums on its experienced cost. Therefore, by only including low-risk, low-cost individuals under coverage, premiums for those individuals may be minimized. This effectleaves small groups behind, paying much more in premiums. These interventions mentioned as well as increased experience-rating adopted by insurersand the subsequent phenomena of market segmentation have had effects on many levels of thehealth care system: Premiums for small employers have skyrocketed for two reasons. First, administrative costsfor small employers are proportionally higher than those for larger firms(CongressionalResearch Service) and secondly, larger firms have more market clout and are so able to seal thecontracts that provide lower premiums to their employees. Larger firms are also able to spreadthe risks of their insured employees across a larger beneficiary base with lots of capitol toabsorb any abnormality in claims from one year to the next. Small firms don+t have this luxuryand as a result their premiums have increased. As health care costs grew, many larger businesses opted to self-insure and take the risks oftheir employees rather than paying an insurance company to perform this role. Theseemployers also avoided the state mandated benefits and could use capital not prospectively paidto earn interest. It was in the 1980’s, when employers were becoming increasingly concerned about soaringhealth care costs, commercial insurers were concerned about the future of traditional healthinsurance, and physicians were increasingly joining health plans to guarantee a steady flow ofcustomers, that managed care really expand dramatically. As diagram 1 shows(seeattachments), the number of people enrolled in HMO’s in 1976 was 6 million and by 1991 hadreached 38.6 million. The higher costs of medical care forced different groups into HMO’s fordifferent reasons. Doctors enrolled in HMO’s gave up some autonomy but were guaranteed asteady flow of patients. The patients enrolled were guaranteed care for a fixed monthlypremium at the expense of visiting only providers covered in their plan. The draining of the Social Security trust fund by traditional hospital RCBR method andphysicians by U+C for Medicare was tackled by alternative payment mechanisms. Thetraditional U+C payment to doctors was replaced with the Resource Based Relative ValueScale(RBRVS) 1n 1992. This system of payment assigned a numerical value to everyprocedure performed in order to attempt to objectify what goes into a physician’s service. Inthis way, the payments to physicians could be regulated and controlled. Hospitals, which weretraditionally reimbursed under RCBR were paid by the Prospective Payment System(PPS)starting in 1983. Under this system, each episode of illness was associated with a fixedpayment regardless of resources consumed, time spent, or expenses incurred. All illnesseswere grouped into Diagnostic Related Groups(DRG) effectively cataloguing hospitalizedpatients according to fee payment. The ever-increasing costs associated with health care brought along many cost-savinginterventions which have been mentioned. These interventions had effects at all levels of thehealth care industry but especially so in hospitals as they represent 38% of our nation’s healthexpenditure. Hospital admissions declined sharply as the new payment schemes for hospitalswere introduced in 1983. Since hospitals were being paid by a PPS system, the incentive wasto get the patients out as soon as possible. Admitting patients is associated with high costs andhospitals opted for more outpatient care rather than admissions. This PPS payment structurealso influenced the average length of stay. Hospitals were now encouraged financially torelease patients as soon as possible since they were reimbursed the same amount regardless ofthe duration of the stay. Efficiency was now of paramount concern as a person sitting in a bed

represented a cost that could be contained if the patient was released sooner than later. It is nosurprise then that occupancy rates for hospitals have also declined since 1980. This combination of reduced admissions and shorter length of stay per visit resulted in fewpeople in hospitals at any given time. These trends present special problems for smaller, ruralhospitals which have more difficulty gathering resources, staying technologically current, andmaintaining financial strength. As a result, more and more smaller hospitals are closing,especially in these rural areas. The high level of unemployment in the early 1980’s along with stricter eligibility requirementsfor Medicaid led to a rise in the number of uninsured individuals in the U.S.(see diagram 2).Market segmentation beginning in the early 80’s also contributed to the number of uninsured asthose with pre-existing conditions or high-risk jobs were denied coverage. Because of thehighly competitive hospital market created by payment changes, the incentive to treat theuninsured is lost and these people are increasingly marginalized. No longer may hospitalssubsidize the treatment of the uninsured by over-charging employers or insurance companies. Many cuts have proposed by the Republicans in Congress that aim to trim down the costof health care. Medicare is at the root of many of these proposed policy changes. Among them areincreases in co-payments made by beneficiaries, caps on payments to beneficiaries, a reduction inthe amount paid to beneficiaries per episode of illness, a holding of the rates of increase forhospitals and doctors so that if services increase, payments decrease, and letting the marketnaturally move people into HMOs. These proposed policy changes are likely to effect hospitals inmany ways, some of which are already being seen. It is likely that hospital admissions willcontinue to decline as hospitals have no incentive to admit. Payments are the same to hospitalswhether the treat outpatient or they admit the patient, so to save money the natural tendency is totreat with ambulatory or outpatient care. Even more incentive is present for hospitals not to admita patient as the amount paid to them will decrease as they increase services. Incentive to not treat+is what it may be called.For those that are admitted to hospitals, we will continue to see a reduction in the numberof days each patient stays in the hospital. The motivation for the hospital to release the patientpersists because of the payment schemes in place. For the patient who is paying a higher co-payment, the incentive is also to leave the hospital as soon as they feel well enough…andsometimes before! What we are likely to see are increasing numbers of rural hospital closures asthey are unable to survive the drop in hospital visits and stays. Empty beds mean administrativecosts for the hospital that need to be defrayed by treating people. If there is nobody to treat, thehospital must inevitably shut down. As people continue to move into HMO’s to receive some sortof coverage, hospitals will perhaps see an increase in the number of visitors at hospitals but theywill be required to receive prior approval for most procedures and the amount paid to the hospitalswill remain the same regardless of the number of procedures so the incentive to treat more is lost. As Medicare cuts continue to prevail, it is likely that more and more beneficiaries ofMedicare will be drawn into HMO’s. Just as this has led to increased market segmentation in theprivate-insurance community so would it lead to the same dynamic in the Medicare community.Those hospitals or physicians that sign contracts with HMO’s will be securing their patient-basewhile the HMO will be cornering more of the hospital/physician market. For those who are notenrolled in HMO’s, their costs will not be controlled. Higher fees will be the likely result. Sincethe Medicare reform proposals pay less per episode of illness, the patient will be responsible formore of this increased amount.The amount of Medigap payments for Medicare beneficiaries is also likely to go up as aresult of the current Medicare reform proposals. Medicare will pay less per episode of illness. Ifwe assume that the charge per episode of illness will not come down, then the amount that mustcome out of the pocket of the beneficiary must increase. This increase will be a direct result of thecuts to the Medicare program. Long-term care in the United States has received much attention in recent years as thebaby-boomers soon will be the population requiring this type of care. For those seeking long-termcare there are several options available with different payments sources for each. They are brieflyoutlined here: Nursing Homes: nursing home care may be provided in different settings with differingpayment options for each. They are consumer payment-this type of care may include anythingqualifying as daily care for an elderly or mentally-ill patient requiring long-term care. There isgenerally a daily charge rate for the custodial care. Mediacaid covers custodial and general careonce personal funds are depleted. Medicare covers skilled nursing and skilled therapiesfollowing hospitalization This coverage is limited to 100 days maximum per episode. Home/Community-Based Care: this type of care consists of skilled nursing care andtherapies, homemaker/home health aid care, high technology home therapy, and durablemedical equipment. Consumer bought care may include personal care, including theaforementioned home health aids and homemakers and chore services. Also, any RN timespent beyond that authorized would be covered by the patient. Medicaid covers personal careand assistance for eligible frail elderly or disabled individuals. Medicare covers skillednursing, physical or speech therapy. Housing/Retirement Community: this is an enhanced service package and often includesmore supportive or custodial care. A combination of both Medicare and Medicaid may beused to pay for this type of service. One organized method to do just this is the Program ofAll-Inclusive Care for the Elderly(PACE). The idea is that for qualified individuals, PACEmerges Medicaid and Medicare funding into an integrated system that enables a care-managerto allocate resources by need. PACE must be seen for what it is, care for acute and chronicconditions within a long-term care package. Source: U.S. Bureau of the Census, Unpublished Current Population Survey Data, HealthInsurance Coverage Status by State, Table Hi-4.

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