The payment system used by Medicare is based on

The Basic Inspiration of Prospective Payment Systems

The assumption at the root of a PPS is that any deviation in cost for a stay in a given DRG is because of inefficiency. Economists use the term ‘moral hazard’ to refer to the idea that the payer (the insurer or the regulator) cannot observe, much less monitor the efforts undertaken by hospital managers to minimize costs. Paying hospitals a fixed price per stay in a given DRG provides a powerful incentive for managers to minimize costs. Indeed, hospitals are supposed to keep the rent earned when their costs are lower than the fixed price. Conversely, they risk running operating losses if their costs are above DRG payment rates.

This payment scheme provides a perfect incentive for cost reduction because the payment is a lump sum per stay defined irrespective of a given hospital's actual cost. Yet, the regulator has an informational problem: she does not know how much care costs when the hospital is fully efficient (i.e., the ‘true’ minimal cost for a stay in a given DRG). The level of the lump sum defined by the regulator can lead the hospital to bankruptcy or generate rents that are costly for tax payers (or the insured). This informational problem is solved by assuming that hospitals are homogeneous. In that case, differences in costs are caused only by moral hazard. Hence, an appropriate rule of payment is to offer each hospital a lump sum payment per stay defined on the basis of average costs observed in other hospitals for stays in the same DRG.

Shleifer's yardstick competition model provides the theoretical foundation for a PPS. This model is based on rather unrealistic assumptions: homogeneity of hospitals, homogeneity of patients for the same pathology, and fixed quality of care. Many studies have underscored the great diversity in hospitals’ conditions of care delivery (teaching status, share of low-income patients, local wage level, etc.). Input prices can differ depending on location; care quality may vary, as may the severity of illnesses of admitted patients. These studies highlight the risks of such a PPS, namely selection of patients and a lowering of care quality. Indeed, hospitals which are subject to exogenous factors that lead to higher costs have to find ways to lower costs in order to avoid bankruptcy.

Overview of snf prospective pay system (PPS)

The Medicare payment structure for SNFs is a PPS but is entirely different from the IRF system discussed earlier.13 The SNF benefit under the Medicare system can potentially last up to 100 days per qualifying episode. Residents must have had a 3-day stay in an acute care facility at least 30 days prior to admission to a SNF in order to meet criteria for skilled services. There are no specific diagnostic criteria for admission; however, residents must require skilled services of a nurse, therapist, or both. If Medicare is the primary payor, payment to the SNF is based on a calculated per diem which is, in large part, determined by the amount of rehabilitation services provided.29 To determine the exact amount of this per diem payment, residents are assessed using the minimum data set (MDS).30 The MDS is an instrument that analyzes clinical information as well as utilization of resources and categorizes the resident into a “resource utilization group” or RUG for payment purposes. The MDS and RUG levels are periodically refined, and the MDS 3.0 was implemented in 2010.31

With the MDS 3.0 and the fourth generation of RUGs (RUGs IV), there are 66 different RUG levels. Of those, 23 are directly associated with the amount of rehabilitation provided.13 The RUG level is associated with a per diem payment that lasts for a specified period of time. MDS assessments are required on admission (day 1), day 14, day 30, day 60, and day 90 (and also when there is a significant change in status or a readmission).30 There are “grace days” that can be used for each assessment due date, allowing some flexibility for when the reports are actually generated and which dates are actually used; however, when a RUG level is assigned, the SNF is paid the associated rate for that RUG for the specified assessment window (day 1 through day 14, day 14 through day 30, and so on). A RUG level is assigned for each time interval, so payment can and does vary for each interval.

As mentioned, the amount of rehabilitation physical therapy, occupational therapy, and/or speech-language pathology plays a significant role in determining the RUG, that is, payment level. Therapists determine the frequency and duration of services (utilization) on admission. The amount of therapy, inclusive of physical therapy, occupational therapy, and Speech, provided in a week (measured in minutes/week) determines which one of several rehabilitation RUGs best classifies the resident. Please refer to Box 26-2 for a detailed explanation of the Rehab RUGs.29

Logically, per diem payments are higher for RUGs with higher rehabilitation utilization because of the increased cost of providing rehabilitation. It is important to note that physical therapists determine the RUG level when they set frequency and duration of treatment. Clearly, this puts decision making, reimbursement, resource utilization, and staffing levels in the hands of the therapist; such authority is a clear example of autonomous practice in the SNF setting.

A third factor is added to the amount of therapy services provided to determine the final RUG level. This factor includes how much assistance the resident requires with several activities of daily living (ADLs) and how much medical care and oversight the resident requires. Specifically, if in addition to rehabilitation services, the resident requires tracheostomy care, a ventilator or respirator, or isolation for active infectious disease while a resident, the resident will qualify for a higher payment. Varying degrees of ADL assistance without the medical complexity are associated with slightly lower per diem rates.30

As mentioned, if residents require a skilled service, they may stay in an SNF for up to 100 days.29 After that point, the “skilled” benefit is exhausted under Medicare guidelines, and the resident must be discharged or convert to LTC. As one can infer, the SNF benefit was originally intended for individuals with conditions that required daily skilled care over a longer period of time when rapid recovery or discharge was not necessarily anticipated. This provision would include those who are not able to tolerate the intensity of services provided in a rehabilitation hospital, who do not meet the other requirements for rehabilitation hospitals, when the expected length of recovery is relatively long, or in cases where the individual may not be discharged to the community. However, this “typical” resident has changed in recent years. Although SNFs have always been providers of postacute rehabilitation, the emphasis on rehabilitation has grown. This is in large part due to the transition of patients who in the recent past would have gone to an IRF or other postacute settings.12,27 Now, because of regulatory changes, payor mix changes, accessibility, and some outcome data, these individuals are increasingly going to SNFs.18-23 Recent CMS data indicate that the so-called “rehabilitation RUGs” are the most frequently used RUGs, representing 86% of RUG scores for the fourth quarter of 2009, nationwide.32 As recently as 2005, the use of rehabilitation RUGs was 11% lower.32

Clearly, rehabilitation services are a large part of the services provided by SNFs. Of the rehabilitation RUGs used during the same quarter, more than half (54.4%) were in the ultra high, very high, and high categories (Figure 26-1).32

An exception to the PPS reimbursement system in an SNF occurs when a resident has a Medicare Advantage (MA) Plan (formerly known as “Medicare Plus Choice”). In those cases, Medicare beneficiaries sign up with private managed care organizations that contract with and are paid by CMS to manage the beneficiary’s care.33 As of December 2008, 10.1 million (23%) of the nearly 45 million Medicare beneficiaries have enrolled in MA plans.34 Enrollment has steadily grown each year. MA plans offer a different approach to health care delivery than beneficiaries experience under fee-for-service Medicare. Instead of focusing almost exclusively on treating beneficiaries when they are sick, these plans also place an emphasis on preventive health care services that help to keep beneficiaries healthy, detect diseases at an early stage, and avoid preventable illnesses. In addition, many MA plans help reduce beneficiaries’ out-of-pocket costs by providing additional benefits not covered in the Medicare program and reducing cost sharing for Medicare-covered benefits.35 Facilities that accept patients/residents with MA must contract directly with each MA plan. Payment is typically a flat fee per day. It is not uncommon for MA case managers to determine the level of care, including the amount of therapy that will be covered, based primarily on the individual’s admitting diagnosis.

All of these factors combined (i.e., payment and regulatory changes, growth of the Medicare Advantage program, and a lack of accessibility) have led to more acutely ill patients with high rehabilitation needs filling the beds in America’s SNFs. These individuals are treated with aggressive rehabilitation, and most are discharged home in a short time.36 So, although the SNF benefit allows for slower recovery for individuals who require longer lengths of stay, there is a large and growing cohort of residents who have a relatively short stay in an SNF.37 Although SNFs are legally classified as nursing homes, the skilled patient (as opposed to the nonskilled, long-term resident) is clearly different today than 20 years ago.

3.2 Hospitals

In most countries hospitals consume the greatest portion of health care budgets. By now, various forms of prospective payment systems to hospitals exist in most countries. Prospective payment systems frequently include additional incentives to contain costs, such as allowing hospitals that underspend to keep the difference and average out their costs. Some countries, such as Germany, have prospective per diem rates. Unless they are combined with disincentives to extensive lengths of stay, per diem rates do little to hold down hospital expenditures. Many more countries have already adopted or are shifting to prospective per case rates based on the American Diagnostic-Related Group (DRG) system. In this system each of several hundred categories of diseases and disorders is assigned a numerical value based on service utilization that is then translated into a reimbursement level. Most hospitals responded to the incentives within the DRG system to contain costs by reducing lengths of stay (for example, in Sweden the decline was from an average of 21.3 days in 1985 to 7.8 days in 1995, OECD 1998). The number of hospital beds per population also decreased as a result. However, both of these indicators of reduced hospitalization have occurred in all OECD countries except Korea and Mexico, whether or not countries adopted the DRG system or similar cost containment methods, indicating that a more generalized decline may be occurring in the role of the hospital.

Another prospective payment system, used for years in Britain and Canada, and now being widely adopted elsewhere (France, the Netherlands, Sweden, Finland) is global budgeting on an annual basis. Spending decisions are usually decentralized to the local and even hospital level. In some countries there are strict controls on public sector capital investment in hospitals, sometimes with separate budgeting mechanisms.

A novel form of independent decision making by hospitals has occurred in Britain where hospitals are now self-governing trusts. The move was prompted by the expectation that hospital managers would become more cost conscious if they were responsible for all decisions—purchasing, servicing, delivering, administering, and even paying specialist physicians. Hospitals advertise their services and compete for contracts with, among others, fundholding GPs and local authorities. Similar developments have occurred in Italy and Denmark.

The introduction of cost control measures in hospitals has raised concern about declines in intensity of service and concomitant quality of care. Because of the great diversity among countries in the size of the hospital sector, goals regarding efficiency differ. Countries that are attempting to reduce total hospital output are faced with the challenge of closing hospitals or at least beds that are not being used efficiently (US, Britain). These countries nevertheless join others in striving to encourage hospitals to produce more so as to achieve certain goals, such as reducing waiting times for nonemergency treatments. The ability to regulate hospital costs goes beyond administration, however, for what happens in hospitals is highly dependent on technological advances. Yet, everywhere technology is undergoing contradictory developments.

Regulatory Changes to the US Hospital Industry

A substantial proportion of patients (about 40%) admitted in US hospitals are over the age of 65 years, and therefore covered by public insurance programs, particularly Medicare. About 5% of patients are covered by Medicaid, which is another public insurance program that provides insurance for children under the age of 18 years, pregnant women, and disabled individuals. Private insurance programs usually mirror the structure of public programs, particularly with respect to setting reimbursement rates and reimbursement mechanisms. For example, it is common for private insurance patients to negotiate ‘Medicare rates’ with hospitals. The method of payment for hospitals services for patients covered by public insurance programs has witnessed considerable changes, which has direct impacts on hospital revenue and cost functions. We can classify the major price-regulatory changes for Medicare patients that have occurred over the last 50 years into three phases – the indemnity phase, the PPS phase, and the ACA phase.

The first price-regulatory phase that lasted until the mid-1980s was the indemnity phase wherein hospitals were reimbursed for their costs of treating patients based on the actual cost of treatment plus a mark-up to buffer against risks. Because cost-plus reimbursement provided no incentives to be efficient, hospitals started competing on the basis on quality, which ushered a period of rapidly rising costs. Because of health insurance, the patient was not the payer and therefore demand was not price sensitive. During this period, hospitals competed to offer superior technology and extensive services to attract doctors and their patients resulting in the ‘medical arms race.’

By 1980, there were increasing concerns about the excessive inflation in health-care costs. In response, the PPS price regulation was introduced in 1983. Under the PPS, ailments and treatments were classified into diagnosis-related groups or ‘DRGs.’ Hospitals received a fixed amount per DRG, based on the national average cost of treating a patient in that DRG, with some adjustments for the cost of living of the area where the hospital was located, the proportion of indigent patient population, and teaching status. The PPS caused a massive shift to hospital revenue functions. Previously hospital revenues functions matched their cost functions, but under the PPS, hospital revenues were capped. As a result, the risks of cost overruns, which had been entirely borne by Medicare and other insurers, now completely shifted to the hospitals. PPS changed the nature of competition in the industry from quality to cost. A large body of literature has examined the effect of PPS on hospital behaviors and outcomes. Overall, the PPS resulted in the following outcomes.

large and steady decrease in the lengths of stay for hospital inpatients;

an increase in the proportion of outpatients;

shifting of costs from fixed-fee services to services that were still indemnity based (such as specialized procedures and outpatient care);

substantial merger and acquisition activity in the hospital sector aimed at increasing the price negotiating power with insurers and other payers;

reduced access to unprofitable services such as trauma care and drug detox, because of changes in hospital service mix, selective closures, and relocation.

marginal slowing down of health-care cost inflation rate;

marginal increases in productivity;

large variability in margins across hospital types and hospital markets;

increased use of bonus-based compensation contracts aimed at increasing managerial effort toward improving hospital efficiency.

The third and most recent regulatory change is the Patient Protection and ACA signed into law in 2010. The ACA has three broad components, which influence health insurance markets and individual citizens. First, it includes changes to the nongroup insurance market by disallowing discriminatory practices such as exclusions for preexisting conditions, and limiting the ability of insurers to charge differential prices by health status. Second, like in most EU countries, the ACA requires individual citizens to have insurance coverage or to pay a penalty. Third, low-income families can obtain insurance coverage through government subsidies.

Two provisions of the ACA have substantial influence on hospital revenue functions. First, the ACA began phasing in reductions in Medicare reimbursement by diminishing the annual Medicare inflation adjustment. Second, it introduced a pay-for-performance system through the value-based purchasing (VBP) program. The VBP program measures hospital quality on four dimensions: patient satisfaction, medical outcomes, process protocols, and cost efficiency. Based on their national performance, hospitals could receive upward or downward adjustments to their DRG base rate. Specifically, high-performing hospitals could receive an upward adjustment of up to 1% while poorly performing hospitals could receive a 1% reduction to their DRG base rate. The 1% bonus/penalty is slated to increase to 2% by 2017. Operation of health-care exchanges under the ACA, where individuals can choose to buy health insurance from a number of competing offers, will change the nature of health insurance business, which previously negotiated group insurance policies mainly with large employers and other groups. Thus the ACA has implications on the demand side (through health insurance) as well as the supply side (through hospital-based incentives and quality measurement), which can have major influences on health-care markets in the future.

Home health services

Geriatric rehabilitation taking place in the home is largely a result of legislative and regulatory decisions made in the 1980s. At that time, the prospective payment system (PPS) with diagnosis-related groups (DRGs) was enacted, which encouraged hospitals to discharge people as quickly as possible. The concept behind this PPS was that the efficient hospitals would benefit and the inefficient hospitals would suffer financial demise. However, as the late Senator John Heinz reported, the DRG system encouraged patients to leave hospitals ‘sicker and quicker’.

As a result, the home healthcare industry grew so rapidly that, by the late 1990s, it had become a major concern for budget watchers because of the increase in home healthcare costs. In 2013 a prospective payment system will go into effect for home health agencies and is expected to reduce costs to Medicare by 0.01 % (CMS.gov, 2012).

Home health services are usually covered under Medicare Part A, provided certain criteria are met. As stated above, the patient must have an appropriate diagnosis, and there should be a reasonable expectation that the patient will recover from the condition. Obviously, in the geriatric setting, the functional declines are not always clearly attributable to an acute episode and this creates some ambiguity about medical necessity.

A person who requires skilled rehabilitative services must be determined to be confined to home in order to receive home healthcare. Also, the physician must certify that the patient is confined to home. If the patient is able to leave home, it should be achievable only with considerable and taxing effort. The patient may leave home for short durations to obtain medical care such as outpatient dialysis, chemotherapy, radiation or for an occasional trip to a barber or a walk or drive around the block.

Further, the patient is considered housebound if he or she has a condition or illness that restricts the ability to leave home except with assistance from another person or requires special transportation, or leaving home is contraindicated. Any condition such as a stroke that may cause the loss of the use of the upper extremities so that the patient is unable to open doors or use handrails will fit the criteria of being housebound. Post-hospital care with resultant asthenia or weakness, pain or other medical conditions that restrict activities also qualify the patient for home healthcare. For example, a person with atherosclerotic cardiovascular disease may have cardiac risk with physical activity and should not be leaving home. Additionally, a psychiatric problem in which a patient refuses to leave home or a circumstance in which it is unsafe to leave a person unattended may qualify the person as housebound.

The patient is not confined to home if he or she has the ability to obtain healthcare in an outpatient setting. The aged person who does not often travel from home because of feebleness and insecurity brought on by advanced age would not be considered to be housebound for the purposes of receiving home health services unless he or she meets one of the above conditions.

Cromwell's model

Cromwell (1976) extended Feldstein's model above by imposing a payment constraint, that is, prospective payment, based on inpatient days or per case. After the imposition of the prospective payment system, the hospital will be paid a reduced fixed amount per case or per inpatient day. The revenue ceiling imposed by the prospective payment does not allow the hospital to provide care that is more expensive than the value of the inputs needed to provide the initial amount of quality per unit of services. At the new equilibrium, the hospital will produce more units of service, but at a lower level of quality. This model predicts that the imposition of prospective payment will provide the hospital with an incentive to reduce service quality and increase service quantity, as defined by the payment system.

Reimbursement Validation Tool

The record is often used to prove to commercial insurance companies and federal agencies that medical necessity requirements for treatment were met and that services billed were actually performed. With the implementation of the Medicare prospective payment system, Diagnosis-Related Groups (DRGs) in 1982, and Ambulatory Payment Classification (APC) in 2000, the patient record has become more important for validating the services billed. Likewise, the implementation of Relative Value Units, or RVUs, for physician reimbursement, has also enhanced focus on the patient record.

Often, copies of patient records are requested by CMS's QIO and federal fiscal intermediaries and carriers so that services provided can be confirmed, and information filed on the claim can be validated. Audits are performed, using the itemized bill and the patient record, to justify all charges. If a treatment or test is not recorded by those providing the care, charges for such services may be denied. Physicians and other health care providers should be following the Documentation Guidelines of Key Components of Evaluation and Management Services in documenting services provided to patients in their practice. Hospitals, physicians, and other health care providers have been required to return millions of dollars to the government either for services that were not performed or for services that were not supported by the documentation in the patient record.

Likewise, managed care payers have increased their requirements for delineating covered services, and the information in the patient record is often used for justifying services. With increasing frequency, pre-admission screening is used to determine whether services are required. The record must include consistent information that verifies the facts as provided at the time of admission.

With costs for health care rising so rapidly, the record will be brought under closer scrutiny by more and more third-party payers. The caregivers who will survive financially are those who maintain a clear understanding of payer requirements and who provide a detailed and accurate account of the status of the patient that includes all services performed and the diagnoses for which those services were provided.

Which payment system is used by Medicare quizlet?

What's a prospective payment system for Medicare patients quizlet?

Which replaced the reasonable cost based payment system?

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