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 reimbursement of physicians and hospitals by insurance companies and government programs. Therefore, new methods of reimbursement have been tried as one way of lowering 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; Primary Care 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 $10 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 $85 per hour.
During the course of a typical day, some physicians will be involved with four or five distinct types of reimbursement. This chapter will describe the different ways in which physicians and hospitals are paid. Although reimbursement 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.
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).
Table 4–1. Units of payment
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 reimbursement 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, 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 reimbursement 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.
HMOs are organizations whose patients are required (except in emergencies) to receive their care from providers within that HMO. There are several types of HMOs which are discussed in Chapter 6. Some HMOs pay physicians and hospitals by more highly bundled units of payment (eg, per diem, capitation, or salary).
Roy Sweet, a patient of Dr. Weisman, is seen for recent onset of diabetes. Dr. Weisman spends 20 minutes performing an examination, fingerstick blood glucose test, urinalysis, and ECG. Each service has a fee set by Dr. Weisman: $92 for a complex visit, $8 for a fingerstick glucose test, $15 for a urinalysis, and $70 for an ECG. Because Mr. Sweet is uninsured, Dr. Weisman reduces the total bill from $185 to $90.
In 1988, 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 $100 by Medicare. Dr. Lenz had spent 90 minutes on the surgery plus pre- and postoperative care and received $1600 from Medicare. In 1998, Dr. Weisman did a similar consultation for Dr. Lenz and received $130; Dr. Lenz was sent $900 for the operation.
Melissa High, a Medicaid recipient, makes three visits to Dr. Weisman for hypertension. He bills Medicaid $92 for one complex visit and $52 each for two shorter visits. He is paid $26 per visit, 40% 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 $84.40 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 reimbursed 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 reimbursed 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 $196 of which Medicaid paid only $78 ($26 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 1998, Dr. Weisman was paid nearly 15% of Dr. Lenz’s surgery fee, compared with 6% of that fee in 1988, before the advent of RBRVS.
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 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 $1300 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 $1300 cholecystectomy fee.
Joan Flemming complains of having had coughing, fever, and green sputum for 1 week. Dr. Violet Gramm analyzes a sputum smear and orders a chest x-ray and makes the diagnosis of pneumonia. She treats Ms. Flemming as an outpatient with azithromycin, checking her once a week for 3 weeks. With the experimental episode-based system, Dr. Gramm is paid one fee for all services and procedures involved in treating Ms. Flemming’s pneumonia.
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 reimbursement 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 health care experts recommend paying physicians through an episode-based system similar to that used by Medicare for hospital reimbursement (Pham et al, 2010). Under such a system one fee would be paid for one episode of illness, no matter how many times the patient visited the physician.
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 reimbursement 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 $1300 payments. As a general rule, the more services bundled into one payment, the larger the share of financial risk that is shifted from payer to provider. (Payer is a general term referring to whomever pays the bill; in Chapter 16, a distinction is made between purchasers of health insurance such as employers, and insurers, who can both be payers.)
Capitation payments (per capita payments or payments “by the head”) are monthly payments made to a physician for each patient signed up to receive care from that physician—generally a primary care physician. The essence of capitation is a shift in financial risk from insurers to providers. Under fee-for-service, patients who require expensive health services cost their health plan more than they pay the plan in insurance premiums; the insurer is at risk and loses money. Physicians and hospitals who provide the care earn more money for treating ill people. In a 180-degree role reversal, capitation frees insurers of risk by transferring risk to providers. An HMO that pays physicians via capitation has little to fear in the short run from patients who become ill. The HMO pays a fixed sum no matter how many services are provided. The providers, in contrast, earn no additional money yet spend a great deal of time and incur large office and hospital expenditures to care for people who are sick. (In the long term, HMOs do want to limit services in order to reduce provider pressure for higher capitation payments.)
Certain methods have been developed to mitigate the financial risk associated with capitation payment. One method involves reintroducing fee-for-service payments for specified services. Such types of services provided but not covered within the capitation payment are called carve-outs; their reimbursement is “carved out” of the capitation payment and paid separately. Pap smears, immunizations, office ECGs, and minor surgical procedures may be carved out and paid on a fee-for-service basis.
A common method of managing risk is called “risk-adjusted capitation.” For physicians paid by capitation, patients with serious illnesses require a great deal more time without any additional payment, creating an incentive to sign up healthy patients and avoid those who are sick. Risk-adjusted capitation provides higher monthly payments for elderly patients and for those with chronic illnesses. However, risk adjustment poses a major challenge. Researchers have investigated measures for risk-adjusting capitation payments by appraising an individual’s state of health or risk of needing health care services (Brown et al, 2010).
Capitation has potential merits as a way to control costs by providing an alternative to the inflationary tendencies of fee-for-service payment. In addition, capitation has been advocated for its potential beneficial influence on the organization of care. Capitation payments require patients to register with a physician or group of physicians. The clear enumeration of the population of patients in a primary care practice offers advantages for monitoring appropriate use of services and planning for these patients’ needs. Capitation also potentially allows for more flexibility at the practice level in how to most effectively and efficiently organize and deliver services. For example, fee-for-service typically only pays for an in-person visit with a physician; under capitation payment, a physician could substitute “virtual visits” such as e-mail and telephone contacts for in-person visits for following up on blood pressure or diabetes control, or delegate routine preventive care tasks to nurses or medical assistants in the practice, without experiencing a financial disincentive for these alternative ways of delivering care. Capitation also explicitly defines—in advance—the amount of money available to care for an enrolled population of patients, providing a better framework for rational allocation of resources and innovation in developing better modes of delivering services. For a large group of primary care physicians, the sheer size of the aggregated capitation payments provides clout and flexibility over how to best arrange ancillary and specialty services.
Jennifer is a young woman in England who develops an ear infection; her general practitioner, Dr. Walter Liston, sees her and prescribes antibiotics. Jennifer pays no money at the time of the visit and receives no bill. Dr. Liston is paid the British equivalent of $12 per month to care for Jennifer, no matter how many times she requires care. When Jennifer develops appendicitis and requires an x-ray and surgical consultation, Dr. Liston sends her to the local hospital for these services; payment for these referral services is incorporated into the hospital’s operating budget paid for separately by the National Health Service.
British System—Capitation payments to physicians in the United States are complicated, as will shortly be seen. But in the United Kingdom, they have traditionally been simple (see Chapter 14). Under the traditional British National Health Service, each person enrolls with a general practitioner, who becomes the primary care physician (PCP). For each person on the general practitioner’s list, the physician receives a monthly capitation payment. The more patients on the list, the more money the physician earns. Patients are required to route all nonemergency medical needs through the general practitioner “gatekeeper,” who when necessary makes referrals for specialist services or hospital care. Patients can freely change from one general practitioner to another. This simple arrangement, illustrated in Figure 4–1, is referred to as a two-tiered capitation structure. One tier is the health plan (the government in the case of the UK) and the other tier the individual PCP or a small number of physicians in group practice.
United States System—In the United States, capitation payment is associated with HMO plans and not with traditional or PPO insurance. Some HMO plans have two-tiered structures, with HMOs paying capitation fees directly to PCPs (Figure 4–1). However, capitation payment in US managed care organizations more often involves a three-tiered structure.
Figure 4–1. Two-tiered capitated payment structures. The health plan pays the primary care physician by capitation and pays for referral services (eg, x-rays and specialist consultations) through a different reimbursement stream.
In three-tiered structures, HMOs do not pay capitation fees directly to individual physicians or small group practices, but instead rely on an intermediary administrative structure for processing these payments (Robinson and Casalino, 1995). In one variety of such three-tiered structures (Figure 4–2A), physicians remain in their own private offices but join together into physician groups called independent practice associations (IPAs).
Figure 4–2. Three-tiered capitated payment structures. (A) The CapCap Associates type of arrangement, in which primary physicians receive a capitation payment plus a bonus from the IPA if there is an end-of-the-year surplus in the pool for paying for referral services. (B) The CapFee Associates type of arrangement, in which the IPA receives capitation payments from the health plans, but pays its primary care physicians on a fee-for-service basis.
George is enrolled through his employer in Smart-Care, an HMO run by Smart Insurance Company. SmartCare has contracted with two IPAs to provide physician services for its enrollees in the area where George lives. George has chosen to receive his care from Dr. Bunch, a PCP affiliated with one of these IPA groups, CapCap Associates IPA. Smart-Care pays CapCap Associates a $60 monthly capitation fee on George’s behalf for all physician and related outpatient services. CapCap Associates in turn pays Dr. Bunch a $15 monthly capitation fee to serve as George’s primary care physician.
George develops symptoms of urinary obstruction consistent with benign prostatic hyperplasia. Dr. Bunch orders some laboratory tests and refers George to a urologist for cystoscopy. The laboratory and the urologist bill CapCap Associates on a fee-for-service basis and are paid by the IPA from a pool of money (called a risk pool) that the IPA has set aside for this purpose from the capitation payments CapCap Associates receives from Smart-Care. At the end of the year, CapCap Associates has money left over in this diagnostic and specialist services risk pool. CapCap Associates distributes this surplus revenue to its PCPs as a bonus.
Sorting out the flow of payments and nature of risk sharing becomes difficult in this type of three-tiered capitation structure. In most three-tiered HMOs, the financial risk for diagnostic and specialist services is borne by the overall IPA organization and spread among all the participating PCPs in the IPA. In the 1980s and 1990s, the CapCap Associates type of IPA often provided financial incentives to PCPs to limit the use of diagnostic and specialist services by returning to these physicians any surplus funds that remain at the end of the year. This method of reimbursement is known as capitation-plus-bonus payment. The less frequent the use of diagnostic and specialist services, the higher the year-end bonus for IPA physician gatekeepers. This arrangement came under criticism as representing a conflict of interest for PCPs because their personal income was increased by denying diagnostic and specialty services to their patients (Rodwin, 1993). More recently some managed care organizations have begun to tie bonus payments to quality measures—“pay for performance”—rather than to cost control (see Chapter 10). A considerable price must be paid for setting up a three-tiered structure because administrative costs are substantial for both the health plan and the IPA.
George’s brother Steve works for the same company as George and also has SmartCare insurance. Steve, however, obtains his primary care from a physician in the other SmartCare IPA plan, CapFee Associates. Like CapCap Associates, CapFee Associates is an IPA that receives $60 per month in capitation fees for every patient enrolled. Unlike CapCap Associates, CapFee Associates pays its PCPs on a fee-for-service basis.
Three-tiered IPA structures become even more confusing when the unit of reimbursement differs across tiers. In the CapCap Associates model, capitation is the basic payment method for both the IPA as a whole and its constituent primary care physicians. However, in the CapFee Associates model the IPA receives capitation payments from the health insurance plan but then reimburses its participating PCPs on a fee-for-service basis (Figure 4–2B). Under this arrangement, the fees billed by the IPA physicians may well exceed the amount of money the IPA has received from the insurance plan on a capitated basis to pay for physician and related outpatient services. To reduce this risk, many IPAs of the CapFee Associates type pay their physicians only a portion, perhaps 60%, of a predetermined fee schedule and withhold the other 40%. If money is left over at the end of the year, the physicians receive a portion of the withheld money.
With the CapFee system, the IPA is the main entity at risk because provision of more services can cause the IPA to lose money. But individual physicians are also partially at risk because if expenditures by the IPA are high, they will not receive the withheld funds. The economic incentive for individual primary care physicians is a mixed one. It is to the physician’s financial advantage to schedule as many patient visits as possible because the physician receives a fee for each visit. But a large number of visits overall by IPA patients, as well as high use of laboratory and x-ray studies and specialist services, will deplete the IPA budget, thereby increasing the possibility that the IPA could go bankrupt, leaving its physicians with thousands of unpaid charges.
Dr. Joyce Parto is employed as an obstetrician-gynecologist by a large staff model HMO. She considers the financial security and lack of business worries in her current work setting an improvement over the stresses she faced as a solo fee-for-service practitioner before joining the HMO. However, she has some concerns that the other obstetricians are allowing the hospital’s obstetric house staff to manage most of the deliveries during the night, and wonders if the lack of financial incentives to attend deliveries may be partly to blame. She is also annoyed by the bureaucratic hoops she has to jump through to cancel an afternoon clinic to attend her son’s school play.
In contrast with traditional private physicians, physicians in the public sector (municipal, Veterans Health Administration and military hospitals, state mental hospitals), and in community clinics are usually paid by salary. Salaried practice aggregates payment for all services delivered during a month or year into one lump sum. Managed care has brought salaried practice to the private sector, sometimes with a salary-plus-bonus arrangement, particularly in integrated medical groups and group and staff model HMOs (see Chapter 6). Group and staff model HMOs bring physicians and hospitals under one organizational roof.
The distinction between staff and group model HMOs is analogous to the difference between the two-and three-tiered IPA model HMOs discussed previously. The staff model HMO is a two-tiered payment structure, with an HMO insurance plan directly employing physicians on a salaried basis (Figure 4–3A). In the group model HMO, the HMO insurance plan contracts on a capitated basis with an intermediary physician group, which in turn pays its individual physicians a salary (Figure 4–3B).
Figure 4–3. Salaried payment. (A) In the staff model HMO, the plan directly employs physicians. (B) In the group model HMO, a “prepaid group practice” receives capitation payments from the plan and then reimburses its physicians by salary.
HMO physicians paid purely by salary bear little if any individual financial risk; the HMO or physician group is at risk if expenses are too great. To manage risk, administrators at group and staff model HMOs may place constraints on their physician employees, such as scheduling them for a high volume of patient visits or limiting the number of available specialists. Salaried physicians are at risk of not getting extra pay for extra work hours. For a physician paid an annual salary without allowances for overtime pay, a high volume of complex patient visits may turn an 8-hour day into a 12-hour day with no increase in income. HMOs and medical groups may offer bonuses to salaried physicians if overall expenses are less than the amounts budgeted for these expenses or if the physician performs high quality care (pay for performance).
Kwin Mock Wong is hospitalized for a bleeding ulcer. At the end of his 4-day stay, the hospital sends a $14,000 seven-page itemized hospital bill to Blue Cross, Mr. Wong’s insurer.
In the past, insurance companies made fee-for-service payments to private hospitals based on the principle of “reasonable cost,” a system under which hospitals had a great deal of influence in determining the level of payment. Because the American Hospital Association and Blue Cross played a large role in writing reimbursement regulations for Medicare, that program initially paid hospitals according to a similar reasonable cost formula (Law, 1974). More recently, private and public payers concerned with cost containment have begun to question hospital charges and negotiate lower payments, or to shift financial risk toward the hospitals by using per diem, DRG, or capitation payments.
John Johnson, an HMO patient, with a severe headache is admitted to the hospital. During his 3-day stay, he undergoes MRI scanning, lumbar puncture, and cerebral arteriography, procedures that are all costly to the hospital in terms of personnel and supplies. The hospital receives $4800, or $1600 per day from the HMO; Mr. Johnson’s stay costs the hospital $7200.
Tom Thompson, in the same HMO, is admitted for congestive heart failure. He receives intravenous furosemide for 3 days and his condition improves. Diagnostic testing is limited to a chest x-ray, ECG, and basic blood work. The hospital receives $4800; the cost to the hospital is $4200.
Many insurance companies and Medicaid plans contract with hospitals for per diem payments rather than paying a fee for each itemized service (room charge, MRI, arteriogram, chest x-ray, and ECG). The hospital receives a lump sum for each day the HMO patient is in the hospital. The insurer may send a utilization review nurse to the hospital to review the charts of its patients, and if the nurse decides that a patient is not acutely ill, the HMO may stop paying for additional days.
Per diem payments represent a bundling of all services provided for one patient on a particular day into one payment. With traditional fee-for-service payment, if the hospital performs several expensive diagnostic studies, it makes more money because it charges for each study, whereas with per diem payment the hospital receives no additional money for expensive procedures. Per diem bundling of services into one fee removes the hospital’s financial incentive because it loses, rather than profits, by performing expensive studies.
With per diem payment, the insurer continues to be at risk for the number of days a patient stays in the hospital because it must pay for each additional day. However, the hospital is at risk for the number of services performed on any given day because it incurs more costs without additional payment when it provides more services. It is in the insurer’s interest to conduct utilization reviews to reduce the number of hospital days, but the insurer is less concerned about how many services are performed within each day; that fiscal concern has been transferred to the hospital.
Bill is a 67-year-old man who enters the hospital for acute pulmonary edema. He is treated with furosemide and oxygen in the emergency room, spends 36 hours in the hospital, and is discharged. The cost to the hospital is $5200. The hospital receives a $7000 DRG payment from Medicare.
Will is an 82-year-old man who enters the hospital for acute pulmonary edema. In spite of repeated treatments with furosemide, captopril, digoxin, and nitrates, he remains in heart failure. He requires telemetry, daily blood tests, several chest x-rays, electrocardiograms, and an echocardio-gram, and is finally discharged on the ninth hospital day. His hospital stay costs $23,000 and the hospital receives $7000 from Medicare.
The DRG method of payment for Medicare patients started in 1983. Rather than pay hospitals on a fee-for-service basis, Medicare pays a lump sum for each hospital admission, with the size of the payment dependent on the patient’s diagnoses. The DRG system has gone one step further than per diem payments in bundling services into one payment. While per diem payment lumps together all services performed during one day, DRG reimbursement lumps together all services performed during one hospital episode. (Although an episode of illness may extend beyond the boundaries of the acute hospitalization [eg, there may be an outpatient evaluation preceding the hospitalization and transfer to a nursing facility for rehabilitation afterward], the term episode under the DRG system refers only to the portion of the illness actually spent in the acute care hospital.)
With the DRG system, the Medicare program is at risk for the number of admissions, but the hospital is at risk for the length of hospital stay and the resources used during the hospital stay. Medicare has no financial interest in the length of stay, which (except in unusually long “outlier” stays) does not affect Medicare’s payment. In contrast, the hospital has an acute interest in the length of stay and in the number of expensive procedures performed; a long, costly hospitalization such as Will’s produces a financial loss for the hospital, whereas a short stay yields a profit. Hospitals therefore conduct internal utilization review to reduce the costs incurred by Medicare patients.
Jane is enrolled in Blue Cross HMO, which contracts with Upscale Hospital to care for Jane if she requires hospitalization. Upscale receives $60 per month as a capitation fee for each patient enrolled in the HMO. Jane is healthy, and during the 36 months that she is an HMO member, the hospital receives $2160, even though Jane never sets foot in the hospital.
Wayne is also enrolled in Blue Cross HMO. Twenty-four months following his enrollment, he contracts Pneumocystis carinii pneumonia, and in the following 12 months he spends 6 weeks in Upscale Hospital at a cost of $35,000. Upscale receives a total of $2160 (the $60 capitation fee per month for 36 months) for Wayne’s care.
With capitation payment, hospitals are at risk for admissions, length of stay, and resources used; in other words, hospitals bear all the risk and the insurer, usually an HMO, bears no risk. Capitation payment to hospitals has almost disappeared as a method of payment.
Don Samuels, a member of the Kaiser Health Plan, suffers a sudden overwhelming headache and is hospitalized for 1 week at Kaiser Hospital in Oakland, California, for an acute cerebral hemorrhage. He goes into a coma and dies. No hospital bill is generated as a result of Mr. Samuels’ admission, and no capitation payments are made from any insurance plan to the hospital.
Kaiser Health Plan is a large integrated delivery system that in some regions of the United States operates its own hospitals. Kaiser hospitals are paid by the Kaiser Health Plan through a global budget: a fixed payment is made for all hospital services for 1 year. Global budgets are also used in Veterans Health Administration, Department of Defense, and local municipal or county hospitals in the United States, as well as being a standard payment method in Canada and many European nations. In managed care par-lance, one might say that the hospital is entirely at risk because no matter how many patients are admitted and how many expensive services are performed, the hospital must figure out how to stay within its fixed budget. Global budgets represent the most extensive bundling of services: Every service performed on every patient during 1 year is aggregated into one payment.
During the 1990s, the push for cost containment created a movement to change—in two ways—how physicians and hospitals are paid:
1. Private insurers, Medicare, and Medicaid often replaced fee-for-service payment, which encourages use of more services, with reimbursement mechanisms that place economic pressure on physicians and hospitals to limit the number and cost of services offered. The bundling of services into one payment tends to shift financial risk away from payers toward physicians and hospitals.
2. Whereas levels of payment were formerly set largely by providers themselves (reasonable cost reimbursement for hospitals and usual, customary, and reasonable fees for physicians), payment levels are increasingly determined by negotiation between payers and providers or by fee schedules set by payers.
The second of these trends appears to be a permanent feature of provider payment. But the first change, the substitution of capitation and other bundled mechanisms in place of fee-for-service, was largely reversed for physician payment, although more bundled forms of payment are still common for hospital reimbursement. Fee-for-service made a comeback. However, with the accelerating health cost crisis, a great deal of discussion has been taking place since 2010 about reintroducing alternatives to fee for service.
One of the challenges in designing an optimal payment system is striking the right balance between economic incentives for overtreatment and undertreatment (Casalino, 1992). The British National Health Service has traditionally mixed units of payment for general practitioners, paying a global budget for overhead costs (eg, office rent and staff), a capitation payment for each patient enrolled in the practice, and fee-for-service payments selectively for preventive services (eg, vaccinations and Pap tests) and some home visits in order to encourage provision of these items. In the United States, some managed care organizations are following the British example, creating blended payments for physicians that include elements of both capitation and fee for service (Robinson, 1999). This innovation has the potential to balance overtreatment and undertreatment incentives.
Bodenheimer T et al. The primary care-specialty income gap: Why it matters. Ann Intern Med. 2007;146:301.
Brown J et al. Does Risk Adjustment Reduce Selection in the Private Health Insurance Market?, 2010. www.wcas.north-western.edu/csio/Conferences/DugganPaper.pdf. Accessed November 23, 2011.
Casalino LP. Balancing incentives: How should physicians be reimbursed? JAMA. 1992;267:403.
Law SA. Blue Cross: What Went Wrong? New Haven, CT: Yale University Press; 1974.
Pham HH et al. Episode-Based Payments: Charting a Course for Health Care Payment Reform. Center for Studying Health System Change Policy Analysis, January 2010. www.hschange.com.
Relman A. Second Opinion: Rescuing America’s Health Care. New York: Public Affairs; 2007.
Robinson JC. Blended payment methods in physician organizations under managed care. JAMA. 1999;282:1258.
Robinson JC, Casalino LP. The growth of medical groups paid through capitation in California. N Engl J Med. 1995;333:1684.
Rodwin MA. Medicine, Money, and Morals: Physicians’ Conflicts of Interest. New York, NY: Oxford University Press; 1993.