1. Health Care Reimbursement
Types and Applications

2. Types of Reimbursement
Fee-For-Service (FFS)
Case or Episodic
Population

3. Fee-For-Service (FFS)
Definition: Payment for a specific “unit” of service – provider time (e.g. 15 min office visit), procedure (e.g. remove mole), or good (e.g. amount of specific drug)
Technical Basis: allocated costs of specific “unit” divided by number of units –plus some “return” (profit)
Question: Who/how allocated costs and “return” are determined

4. Fee-For-Service (FFS) Examples: Negotiated Fees
Negotiated Fees (Use information from specific providers so typically provider specific)
Usual and Customary Charges (UCC): just your charges (prices) – almost non-existent now
Cost plus: your reported cost per unit plus agreed upon “return”
Ratio of Cost to Charges (RCC): Like cost plus but uses found ratio of charges to costs for provider as a whole to determine specific costs by service type (generalized cost identification)
Contractual Allowance: Negotiated percentage of your charges

5. Fee-For-Service (FFS) Examples: Administered Fees
Adminstered Fees (Use information from classes of providers or models of efficient provider behavior)
Benchmark pricing: Pick reimbursement from distribution of found costs across a class of providers (e.g. 55% of cost per unit distribution)
Modeled pricing: Create a model of “reasonably” efficient service provision and base reimbursement on that (e.g. RVUs – relative value units – model business to “fundamental” cost unit(s) and determine cost weight of each service – if service=1.5 RVUs and RVU=$100 then paid $150)

6. Fee-For-Service (FFS) Opportunities and Challenges
Provider: can reasonably reimburse providers of any scale (# patients/visits) or scope (# different services)
Payer: Relatively easy to “know” what you’re paying for
Challenges:
Provider: Not everything you do can or is classified as a “unit of service” e.g. phone case-management
Payer: Know what you pay for re costs but not what its “value” (quality) is e.g. is whole just sum of parts or more/less than that?

7. Fee-For-Service (FFS) Three Pillars of Sound HFM
Mutually Beneficial Trade: Low – not always clear that what you’re buying is what you want (in volume or unit quality)
Stewardship: Low – little incentive or support for carefully assessing your business model currently or into the future in regard to external environment
Conservativeness: High – FFS puts the least risk on the provider (and to some degree on the payer).

8. Case or Episodic Payment
Definition: Payment for a specific episode of and individual’s care (e.g. hospital stay for specific condition) or time-period of individual’s care (e.g. one month of primary care). Note: episodes tend to have shorter and more certain time lengths, cases have longer and less certain lengths.
Technical Basis: allocated costs of providing episodes divided by number of episodes or costs of providing type of care over period of time divided by time units – each with some “return” (profit)
Questions: What is complete episode or appropriate time unit?

9. Case or Episodic Payment Examples
Diagnoses Related Groups (DRGS) – Hospital payments based on benchmark costs of providing specific hospital episodes of care
Resource Utilization Groups (RUGs) – Monthly SNF case payments based on benchmark costs of providing levels (intensity) of SNF care
Bundled Payments – Negotiated fees for episodes of care across provider types, e.g. bundled hip or knee replacement from pre-op to post-op rehab.

10. Case or Episodic Payment Opportunities and Challenges
Provider: Rewards efficient/effective provision of “complete” or “whole” care within defined scope regardless of type or amount of “units of service” used
Payer: Provides better certainty that “units of service” are combined to create “value”
Challenges:
Provider: Requires adequate scope and scale to be able to provide full episode and smooth out variations in cost per case/episode
Payer: Monitoring whether episodes are complete and necessary

11. Case or Episodic Payment Three Pillars of Sound HFM
Mutually Beneficial Trade: Medium – clearer what you’re buying but may not be clear if necessary or complete
Stewardship: Medium – incentives and support for carefully assessing your business model currently or into the future in regard to specific case/episode types (e.g. value of CHWs or phone case management)– but only to extent that they continue to be valued by external environment
Conservativeness: Medium – Some smoothing of cash flow and loss of risk for unreimbursed effort (e.g. phone case management) but added risk for episode failure.

12. Population-based Payment
Definition: Payment for the costs of defined scope of care for a population whether each member uses care or not
Technical Basis: allocated costs of providing defined scope of care over a period of time (usually a year) divided by number of persons covered (whether “using” of not) and then divided by some time period (usually a month).
Note scope of care usually defined as “full” e.g. broad scope such as all physical health care needs or “partial” e.g. narrow scope such as all mental health. Narrow scope approximates case rates (but adds those not being treated at a point in time).
Questions: What is “meaningful” or feasible scope of care? How does one know that adequate care is being provided across scope?

13. Population-based Payment Examples
Per Member per Month (PMPM): This is the general standard – monthly payment for each member of population that you cover for defined scope of coverage. Often differentiation within population for expenditure risk (e.g. separate rates for high vs. low risk of utilization)/
PMPM=capitation rates=global budgets (e.g. CCOs). Note that these are typically “full” capitation or broad scope of covered services
Partial capitation: just PMPMs for limited scope of services e.g. mental health care or primary care or oncology. Look like case rates but again include persons not using at point in time in denominator

14. Population-based Payment Opportunities and Challenges
Provider: Rewards efficient/effective provision of “complete” or “whole” care within and across entire scope of covered care regardless of type or amount of “units of service” used or type or amount or episodes or cases. Note: You can actually make money by keeping people healthy!
Payer: Provides better incentives (but not necessarily certainty) that “units of service” and “episodes/case” are combined to create “value”
Challenges:
Provider: Requires adequate scope and scale to be able to provide full breadth of covered care and smooth out variations in cost per person. Note additional risks of whether someone does/does not use care along with how much they use.
Payer: Most difficult to clearly set rates for – typically actuarially fair rates based on benchmark of previous payments for scope of care. Monitoring whether adequate care is provided is less clear..

15. Population-based Payment Three Pillars of Sound HFM
Mutually Beneficial Trade: High – actually providers incentives for providers to care about your health, what creates or maintains it, and the actual necessity of using care. This is, however, contingent upon reasonable ability to monitor reasonable care provision/quality or assumption that low provision/quality will incur costs that provider would want to avoid.
Stewardship: High – greatest (potential) incentives and support for carefully assessing broad view of health care business model currently and into the future. Not focused on any specific volume or type of service but what produces or maintains health.
Conservativeness: Low – Some smoothing of cash flow and loss of risk for unreimbursed effort or innovative service provision (e.g. add social services that reduce health care costs/increase health) but lots of added risk related to scale (smoothing to average payment) and case-mix (are the people I cover the same on average as the basis for the payments).

16. Quality-Based Payment
Each of the three classes of reimbursement noted above lack any explicit measurement of treatment quality – so how do we know we’re paying for value?
There are implicit expectations for quality in that providers paid under case/episode or population-based payment are more likely to fail if providing inadequate care.
Quality-based payment is then additive to any of the three basic types we’ve discussed.
It is interesting to note that quality measurement as we know it started with providers paid on population-based rates (i.e. “managed care providers”) who recognized that this payment type was the least clear in terms of “what is actually being received/provided for payment”.

17. Quality-Based Payment Examples
Pay-for-Performance (P4P): This involves some additive bonus payments to providers for meeting quality measures related to the services they provide. These additional payments are presumed to be cost-effective e.g. buying more value per $.
Shared Savings: This involves splitting any savings by the payer in health care expenditures with the provider that result from providing better quality care. This assumes that higher quality lowers (overall) cost of care and requires measurement of cost change across all interrelated areas (clear cause and effect) and quality metrics generally as in P4P.

18. Quality-Based Payment FFS Payment
P4P is generally aligned with FFS payment. Quality measurement here though needs to be very “unit of service” specific so metrics are typically “process” measures e.g. did Diabetic patient get HbA1C tested during year) as opposed to true outcome (are Diabetic patients actually staying healthy).
Difficulty in measurement has led to modest and even negative effects e.g. working to contracted quality measures while neglecting uncontracted ones or providing higher “process” quality that doesn’t really increase (patient health) outcomes.
Shared savings are difficult to apply as the savings are “external” to the service provided – this requires some clear measurement of cause/effect - why you see “umbrella” organizations like Accountable Care Organizations” that provide a “population” in which it might be possible to measure external savings and “share” them.

19. Quality-Based Payment Case/Episode Payment
Shared savings are often internalized in case/episode payments – at least within the specific scope of care. Payments/prices often reflect expectations of savings (e.g. payer expects 10% against history so pays 95% of historic payments).
Sharing of “external” (to the case/episode) savings has the same difficulty as FFS but may be somewhat easier as the these are better defined “pieces” of health care provision.
P4P is more common here now but often internalized to some extent. Bundled payment prices often reflect ability to measure increased quality – so higher prices with higher quality.
More explicit P4P can be seen in Medicare’s penalties to hospitals with high re-admission rates – effectively higher payment for higher quality.

20. Quality-Based Payment Population-based Payment
Shared savings are typically internalized in population-based payments. Payments/prices often reflect expectations of savings (e.g. payer expects 10% savings against history so pays 95% of historic payments).
In “full” population-based rates the breadth of coverage makes shared savings more feasible but P4P is important both as a way to assure monitoring of care provision (i.e. don’t count “widgets” count outcome) and to pay for quality that may be cost-effective but not directly cost saving (i.e. improves population health but not immediate savings in other areas for doing so).
P4P and shared savings are both implicit and explicit in CCOs as they are paid through PMPMs (called global budget) based on history so can keep (or more hopefully re-distribute) savings against historical expenditure levels but also get bonus payments for hitting state set quality metrics.
Note that most of complex health care organizations we are seeing are designed to provide a breadth of integrated care and that both requires and allows more complex (e.g. beyond FFS) payment methods typically tied with quality payments. Organizational structure and payment go together!

21. Thoughts on Payment and Our Business Model
We get paid FFS – which works fine – but really neither pushes us to think through what we’re doing or reward us for doing it better. Why provide CHWs, phone case management or even consults if there is no explicit (or decent) payment for it?
If we were paid on case rate basis (say fixed amount per month high/low risk per patient treated we might be interested in thinking about what is a more complete episode and what makes it work and work better – maybe CHWs and phone case management are keys to more complete and higher quality cases? Shouldn’t we be rewarded for doing that (and incentivized to do it)? Would this payment method reflect our mission more closely?
What if we were part of an umbrella organization that covered a large breadth of services – would we want to receive some shared savings for keeping persons with Diabetes out of the hospital? Might that also re-focus how we look at the parts of our business model?