Chapter 2 Outline

1/9/2013 3:57:00 PM

The consumer of the product or service Has a choice among many suppliers Can distinguish the quality of competing goods or services Makes a rational decision regarding the purchase on the basis of quality and price Pays the full cost of the purchase There are only a few providers of a particular service in a given area Payment to the provider is made by a third-party payer For most individuals health insurance from third party payers is totally paid for by employers or government agencies. TPP is an insurance system comprising a wide variety of insurers of all types and sizes. Investor owned other are NFP Expected health care costs o Multiply the cost of outcome by its probability of occurrence and sum the products Individuals are risk averse o Pay a premium over expected costs to eliminate risk of financial ruin Law of large numbers the standard deviation of costs to an insurer with a large number of policyholders so the payout uncertainty is much less. Insurance has 4 characteristics Pooling of losses Payment only for random losses one that is unforeseen and unexpected and as a result of chance. Risk transfer Indemnification the reimbursement of the insured if a loss occurs. Adverse Selection occurs because individuals and businesses are more likely to have claims are more inclined to purchase insurance than those that are less likely to have claims. Exists because of asymmetric information, which occurs when individual buyers of health insurance know more about their health status than do insurers.

Underwriting refers to the selection and classification of candidates for insurance. o National averages for charges Cross subsidies exist because young healthy people pay the same premiums as older sickly people o Insurers could charge a premium to each subscriber on the basis of that subscribers expected health care costs Individuals with higher costs pay higher premiums o Experience ratings what a companys population is typically like used for negotiating rates

The trend over time Pre-existing conditions clauses in contracts. Physical or mental condition of the insured individual that existed before the policy was issued. HIPPA established national standards regarding what provisions could be included in health insurance policies. PPACCA help 32 million Americans gain access to health care o Expanding Medicaid eligibility Moral Hazard few people are willing to voluntarily sustain injury or illness for purpose of collecting health insurance. People use health care services that are not medically required. When someone else is paying the cost more is used. Individuals are more likely to forgo preventive actions and embrace unhealthy behaviors when the costs of not taking those actions will be none by insurers. Require a deductible o An amount that must be reached before payment begins from the insurance. o Colander year deductible resets every year. Co payment is the primary weapon against moral hazard o Percentage of the expense o Reduce over utilization of healthcare services o Stop loss limits out of pocket maximums After certain amount the insurance pays all Policy limits o 100 for eye glass yearly

o 1 mil lifetime limit Health savings accounts established with a trustee and can be used only to pay for healthcare expenses o Consumer driven healthcare if the consumer takes more responsibility for paying for services, they will ensure overall costs are reduced in the long run. FFS greater amount of services provided the higher the reimbursement Capitation fixed payment or each covered life. FFS Cost based reimbursement payer agrees to reimburse the provider for the costs incurred in providing services to the insured population. o Allowable costs directly related to the care. Charge based reimbursement o Payers pay billed charges according to the schedule of charge rates established by the provider in its charge description, contains the service code and list price for all services provided. Many pay by negotiated or discounted charges.

PSPS rates paid by the payers are determined before the services are provided. Per procedure. Per diagnosis Per diem Bundled global pricing Nonpayment People who have the capacity to pay o Bad debt loss People who do not have the capacity to pay o Charity or indigent care Handled differently on the income statement Provider incentives Incentives offered by alternative reimbursement methods influence provider behavior. Cost based reimbursement lavish facilities and incentive to incur costs.

Charge based reimbursement incentive to set high charge master rates, leading to high revenues. o Insurers with negotiating power will demand discounts. o Can increase volume and revenues by creating more visits Prospective reimbursement altered profitability of individual procedures varies depending on the relationship between the actual costs incurred and the payment for that procedure. Up coding o Incentive to reduce costs because the amount of reimbursement is fixed and independent of the costs actually incurred. Bundled payment forces cost effective care coordination. Capitation key to profitability is to work smarter and decrease utilization preventative care. Reimbursement risk the effect of financial risk on profit uncertainty. Providers bare the cost of service risk The greater the number of services that must be rendered for a single payment, or the greater the number of providers that have to share a single payment, the more providers are at risk of losing

money because of intensity of services. Capitation providers assume all utilization and actuarial risks. ALL PSPS involve a transfer of risk from insurers to provider, which increases as the payment unit moves from per procedure to capitation. ICD-9 code specify disease CPT codes specify medical procedures based on complexity of visit Private insurers BC In perpetuity for life Commercial insurance issued by life insurance companies, by casualty insurance companies, and by businesses formed exclusively to write health insurance. Stock businesses have shareholders A mutual business has no shareholders and the board of directors elected by the firms policyholders controls its management. Reimbursed healthcare providers on the basis of billed charges pressure on the insurance companies to trim costs.

Self-insurance bare the risks associated with healthcare costs and then set aside funds to pay costs that they occur. o Big corporations can negotiate directly with a hospital and physicians without the need of an insurance administrator Medicare Congress in 1965 Those 65+ and those with disabilities A hospital and SNF B physician service, out patient C managed care coverage Medicare advantage plans D RX coverage o USE MS-DRGs Groups of patients with similar clinical problems who are expected to consume similar amounts of hospital resources APC ambulatory payment classification outpatient hospital services RVU - relative value units physician fee schedule for Medicare Critical Access Hospital (CAH) limited to 25 beds 4 day LOS max Medicaid 1966 state and federal program to provide a medical safety net for low-income individuals. Cost shifting rates set by supply and demand conditions. Increasing billed charges applicable to DRGs so that private pay, commercially insured, HMO/PPO patients pay more. Case Mix Management lowest level used to lower the costs associated with a particular diagnosis by changing the mix of procedures applied to the diagnosis. Changing the providers overall patient mix by lowering the number of patients with diagnoses that typically cause the provider to lose money and increasing the number with diagnoses that are highly profitable. Fee for service method is often used to set the in network hospital inpatient capitation rate. Tier basis each tier defines the number of premium categorized offered One tier composite rates one single premium is applied regardless of whether the subscriber is single or has dependents Two tier one for single, one for with dependents Three tier one for single, one for them and spouse, one for family

For tiers same as 3rd but also with children and no spouse.

1/9/2013 3:57:00 PM

1/9/2013 3:57:00 PM