Chapter 6 Revenue Determination 5–3 Learning Objectives Define basic methods of payment for health care firms Understand the general factors that influence.

Chapter 6

Revenue Determination

•5–3

Learning Objectives• Define basic methods of payment for health care

firms

• Understand the general factors that influence pricing

• Define the basic health care pricing formula

• Determine if prices are defensible

• List some of the important considerations when negotiating a managed-care contract

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Alternative Payment Systems

• Payment systems can be categorized by 2 dimensions– Payment Basis– Unit of Payment

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Payment Basis

• The basis of payment defines how the actual payment will be made. There are 3 primary methods-

1. Cost

2. Fee Schedules

– e.g. DRG’s

3. Price Related

– e.g. 75% of billed charges

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Unit of Payment

• Unit of payment defines how the services provided are consolidated into an actual claim. There are 2 primary methods-

1. Specific Services

– Individual items that are listed in a claim are paid

2. Bundled Services

– Specific services listed in a claim are paid on some aggregated basis – such as a DRG or per diem

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Health Care Payment Methods

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Factors Influencing Pricing

• Pricing includes the establishment of CDM prices and the negotiation of managed care contracts

• Three factors drive pricing policies– Required net income– Competitive position– Market structure

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Figure 6–1 Factors Influencing Pricing

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Setting Actual CDM Prices

• There are 4 factors that must be “mathematically” reflected in prices

• Failure to incorporate these 4 factors will impact financial survival.

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Four Elements of Pricing

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•Average costsLosses on third-party fee-schedule payments

MedicaidMedicareOther

Write-offs on billed-charge patientsSelf payCommercial

Reasonable return on investmentSustainable growth

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Pricing Example

Given the specified volumes, costs, desired profit, and other assumptions, what is the required charge per visit (i.e., price)?

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Pricing Example, Income Statement Approach

Given the specified volumes, costs, desired profit, and other assumptions, what is the required charge per visit (i.e., price)?

Solve for this

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Pricing Formula

General Pricing Formula

Pricing Formula Applied to Example

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1. Increase in costs

2. Governmental programs that pay less than cost

3. Managed-care plan fee schedules that do not pay at levels above cost

4. Increases in required profit, such as debt-service obligations or capital replacement

5. Reductions in charge-paying patients

6. Increases in uninsured patients

Factors That Tend to Increase Prices

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Assessing Reasonableness of Prices

• Many healthcare providers, especially hospitals, have been criticized for unreasonable prices.

• One web site http://www.hospitalvictims.com compares prices based on markups for all hospitals in US. A Maryland hospital (Johns Hopkins) is selected because Medicare + Medicaid pay close to 100% of charges which keeps Maryland hospital prices very low.

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1. Return-on-Investment (ROI) adequacy

2. Comparison with other health care firms

Reasonableness of Charges

Two Generic Ways of Assessing:

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Is ROI at Case Hospital reasonable?

Are costs at Case Hospital reasonable?

Is investment at Case Hospital reasonable?

ROI Method, Case Hospital Example

Three Issues:

Investment

CostRevenueInvestmentonReturn

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Figure 6–3 Return on Assets (Net Income/Assets) 5-Year Average – 2004 to 2008

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Figure 6–4 Return on Equity (Net Income/Equity) 5-Year Average – 2004 to 2008

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Reasonableness of Costs, Case Hospital Example

1. Medicare cost per discharge – Case-mix- and wage-index adjusted (MCPD)

2. Medicare cost per outpatient claim – relative-weight and wage-index adjusted (MCPC)

The hospital cost index (HCI) is then constructed as follows:

avgUS

MCPCxrevenueOutpatient%

avgUS

MCPDxrevenueInpatient%HCI

Cost Assessment Methodology:

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Figure 6–5 Hospital Cost Index – 2008

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Figure 6–6 Medicare Cost per Discharge CMI & WI Adj) – 2008

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Figure 6–7 Cost per Medicare Visit (RW & WI Adj) –2008

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Figure 6–8 Fixed Asset Turnover (Net Revenue/Net Fixed Assets) – 2008

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Case Hospital is not realizing excessive profits

Costs at Case Hospital are consistent with expected values and are reasonable

Investment at Case Hospital is reasonable and not excessive

Therefore prices must be reasonable

ROI Method—Summary, Case Hospital Example

Conclusions:

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Compare with similar hospitals and/or

Compare with hospitals in the same region

Comparison-of-Charges Method, Case Hospital Example

General Methodology:

Compare with all academic centers in California

Compare with regional average for academic medical centers (cost-of-living adjusted)

Case Hospital:

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Figure 6–9 Hospital Charge Index – 2008

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Figure 6–10 Medicare Charge per Discharge (CMI & WI Adj) – 2008

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Figure 6–11 Average Charge per APC (RW & WI Adj) – 2008

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Figure 6–12 Medicare Inpatient DSH % Average Value – 2004 - 2008

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Negotiating Managed Care Contracts

• Contract negotiation is critical to continued financial solvency

• Contract negotiation involved 2 key areas– Contract language– Payment rates

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Managed-Care Contract Negotiation

1. Remove contract ambiguity

2. Eliminate retroactive denials

3. Establish a reasonable appeal process

4. Define clean claims

5. Remove most favored nation (MFN) clauses

6. Prohibit silent PPO arrangements

7. Include terms for outliers or technology-driven increases

8. Establish ability to recover payment after termination

9. Preserve the ability to be paid for services

10. Minimize health plan rate differentials

10 Important Areas of Managed-Care Contract Language:

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Average Commercial Contract Rates to Hospitals 2009

Services Average

INPATIENT SERVICES

All IP services Paid at % 80.1%

MS-DRG $7,781

Medical-per diem $2,076

Surgical-per diem $2,228

Psych $868

SNF $761

Normal vag Del case rate (or 2 day stay)

$3,669

C-Section case rate (or 3 day stay) $4,780

Nursery Level 1- Boarder-per diem $740

Stop Loss: Threshold $100,212

Stop Loss Charges paid at %: 63.5%

Rate Increase Limit % 5.8%

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Average Commercial

Contract Rates to Hospitals 2009

Outpatient Services

All OP services Paid at % 79.8%

Emergency Department Paid at % 74.5%

Emergency Department-Case Rate $667

Observation Paid at % 73.5%

Observation case rate-per hour $65

Physical Therapy Paid at % 74.6%

PT case rate-per visit $147

MRI OP Paid at % 76.4%

MRI OP-case rate $1,009

Outpatient Surgery Paid at % 74.7%

OP Surgery Group-case rate $2,569

OP Surg Group 1-case rate $1,280

OP Surg Group 2-case rate $1,632

OP Surg Group 3-case rate $2,011

OP Surg Group 4-case rate $2,448

OP Surg Group 5-case rate $2,894

OP Surg Group 6-case rate $3,116

OP Surg Group 7-case rate $3,964

OP Surg Group 8-case rate $4,718

OP Surg Group 9-case rate $5,875

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Summary

• Revenue generation is critical to financial solvency

• Revenue generation is impacted by 3 areas:– Pricing– Contract negotiation– Coding and billing

• Inadequate payments by many government payers force healthcare providers to “cost shift”

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