HealthcarePage 5: Introduction: Today’s healthcare industry and the nation’s economy.
Today, the healthcare industry is just under 20% of the nation’s economy. Yet, US health outcomes rank poorly
when compared to other countries that spend less. Although it is probably technologically superior to any other
health care system - enabling it to produce miraculous cures, it is also plagued by significant inefficiencies
Financial management is the process by which we plan, analyze, prioritize and eventually apply financial principles
and practices. To assist with this, accounting is the tool we use to keep track of these processes, - almost like
keeping score. Both subjects represent core administrative skills that are needed
• Page 7: Access to healthcare in the United States.
the tidal forces that affect people and how they view health care. researchers’ feel that there are three crises in
health care:
1. QUALITY: As health care consumers, we confuse quantity with quality. There is an assumption that all the
services we get are necessary and of high quality but we as patients are incapable of accurately assessing
their need and impact.That health care is usually not paid for out of pocket produces a lack of transparency
and, at the very least produces a high level of duplicated and inefficient care with marginal benefit.
2. DEMAND: Expectations for health care exceed what can be delivered: We all want the best care, the latest
technology and the most effective treatments.Every time some new treatment or diagnostic tool is added, it
inflates the cost of care. Often, the level of cost for these new services exceeds the benefit that they may
give to the patient.
3. ACCESS – High patient expectations and our obsession with quantity requires that health care routinely
expand its infrastructure.Depending on who you are and where you live will affect your access to care:
• ‘Special’ patient populations do not have uniform access. Statistics indicate the higher your level of income and
education the better your health and access to services. That results in select population subgroups often times
becoming vulnerable to diminished health.
● Residents within large metropolitan areas are ‘over served’ in health care. Resources and talent seem to
aggregate in cities which in turn allows for the development of a sophisticated level of health care. many
other areas of the country are clinically underserved, particularly rural areas.
• Page 7: Unaffordable health care- is healthcare not received and generally, when health care becomes deferred it
also becomes more expensive. This in turn, makes it even harder to get what you need to manage an illness.
Health care is expensive and generally unaffordable (at least without insurance). No matter how many services
are available, if you cannot pay for them you will not be able to access these resources.
Underserved populations statistically consume higher levels of healthcare and to access it need the benefit of
government support.
Economics:
• Page 8: Supply & Demand Curves, Equilibrium (Price, Quantity, Point) ***charts pg. 8 textbook
• Page 9: Free Market - characteristics to function properly
Free market operating in a manner where prices for goods and services are determined by unrestricted competition
between privately owned businesses without government intervention
Most markets that we, as consumers use daily act freely - but not all. In those instances where there exists only
limited competition amongst suppliers (ex: monopolies such as utilities for whom there is no competition) our
government may need to intercede to regulate what can become abusive business practices when one group has the
upper hand
To work properly there needs to be six core assumptions in place.
Three of them affect consumers and three affect produces.
What do consumers need for a market to function properly?
1) There needs to be a large number of INDEPENDENT CONSUMERS
2) Consumers need to be INFORMED about the options available to them
3) There need to be NO EXTERNALITIES OF CONSUMPTION
What do producers need for a market to function properly?
1) There needs to be a large number of INDEPENDENT PRODUCERS
2) There need to be NO BARRIERS for a new producer to enter into the market
3) There need to be NO EXTERNALITIES OF PRODUCTION
Externalities can be either beneficial (positive) or detrimental (negative). Think of them as unexpected consequences
that impact on individuals not involved in the transaction
QUASI MARKET- A market that is not free but receives significant external support and regulation to maintain its
functionality. Most analysts agree that at best, health care operates in a quasi-market. As to whether or not this is
preferable to alternatives such as national healthcare is left for you to consider
finance is simply the process of getting money into and out of a business.
INFLOW, money going into a business is known as REVENUE
OUTFLOW, money coming out of a business is known as EXPENSES
Organizational Chart: Pages 11 & 12 (bullet points 1 to 4)
In any case, from an organizational chart, it should be relatively easy to determine the
1. Level of centralization (or decentralization) of the organization.
2. The formal lines of communication.
3. Decision making hierarchy within the organization.
4. How responsibilities are assigned.
Types of Businesses: Page 13: Profit, Non-Profit, Charities (3 bullet points)
Profit:
In business (including health care), no matter how big or complicated the business, there are two broad categories:
1. For-Profit: Are businesses whose purpose is to financially benefit their owners. Here, the businesses profits are
transferred to the owner(s) for their personal financial benefit. A for-profit business is often referred to as a Proprietary
business
2. Non-Profit: The term itself is a bit of a misnomer. As a business, non-profit does make a profit (if it didn’t it would
not exist for long). However, in this case the profit that it does generate does not benefit any owners. Instead the
profit of such a business is reinvested into achieving the goal or mission of the business. For example, some
insurance companies are non-profit. They still conduct their business – selling insurance – but in this case, excess
profits are not given to shareholders but rather are used to develop innovative insurance products for individuals who
would otherwise not be able to get traditional insurance.
• When a non-profit’s goal or mission is to serve a social need (a public good), then that non-profit can be designated
as a “charity”. In return for their commitment to social needs, charities receive very favorable tax treatment.
●
●
Non-profits are sometimes known as voluntary businesses. Although most employees are compensated,
some of their employees may be volunteering their services.
Government programs are not businesses but offer services often without there being an expectation of
making a profit.
Accounting
• Page 14: Accounting and the Difference between Managerial & Financial Accounting
Accounting is the routine recording of financial transactions relating to a business, so that the
business is able to summarize, analyze and report on its financial wellbeing.
Financial accounting uses a uniform set of financial spreadsheets to report, summarize and
analyze the business finances. Financial accounting is standardized and is used to generate
standard financial reports and financial statements for people outside of the business who are
entitled to it. Examples include auditors, the government (IRS), regulatory agencies and
stockholders of a corporation. Since this is standardized, all companies will generate the same
financial reports
Managerial accounting is set up by the company itself and is used by its own employees to keep
track of the business’s financial transactions. It organizes revenue and expense information in a
way that makes it easy for managers within the company to use that information in their
planning and administrative roles. Since each business is unique, managerial accounting will
differ from one company to another depending on what information their managers need.
To help organize information needs, most businesses will develop a Management Information
System (MIS) to keep track of what goods and services are sold, how much revenue it makes
and how much the company spends on expenses. Small companies will develop a simple MIS –
larger ones will develop complicated systems.
• Page 15: The 4 components of a Management Information System
• Page 16: A general ledger - 5 components
Each business keeps a general ledger to sort out this financial information. A general ledger has 5 components:
1. CASH RECEIPTS: This is the cash we received
2. ACCOUNTS RECEIVABLE: Service Performed but not yet paid for
3. CASH DISBURSEMENT: This is the cash we spent
4. ACCOUNTS PAYABLE: Expenses owed but are not yet paid
5. PAYROLL LEDGER: The amount put aside to make payroll payment
Introduction to Revenue
Revenue is income. It represents the amounts earned by you as compensation for your business-related activities.
When you receive revenue in a consistent and regular manner it is sometimes called your revenue stream or cash
flow.Revenue is always entered into your company’s books based on the full value for your goods and services. Think
of it as your expected monetary inflow from providing your goods or services to your customers at their full price.As
revenue increases, generally it will also increase your businesses equity or net worth.
• Pages 18 & 19: Deductions from revenue
When entered onto your company’s accounting system (the company’s books) revenue is entered at its full value.
But sometimes we don’t actually receive the full amount of our revenue. When that occurs, we need to balance
our books by applying what are known as deductions from revenue.
‘Deduction from Revenue’: An accounting entry that is used when the revenue received falls short of the full value
of our goods or services.
Examples of deductions from revenue often used in health care:
• Contract allowances: This is when a health care provider agrees to provide discounts to certain insurance
companies when seeing their patients. Usually there is also something in it for the doctor too; such as more patients
coming to see them because of being promoted as an “in-plan health care provider” and being listed in the insurance
plan’s book of providers. Such arrangements can be a win /win situation if done right. The insurance pays less per
patient but the doctor makes more because of a greater volume of patients seen.
• Doubtful Accounts (bad debt): This is where the patient or the insurance company doesn’t pay the bill. The health
care provider will usually send this out to a collection agency or just write it
Charity Service: This is where you intentionally perform services without any expectation of
payment (pro bono). Most charities (this includes many hospitals) have a legal requirement that they must provide
some level of charity service. Most (but not all) hospitals are non-profit charities and are expected to provide some
free care to those who cannot otherwise afford treatment. This is considered to be part of their mission.
• Page 20: The 4 Types of revenue
Revenue can be classified by its time of receipt
This is very important because in health care, it is rare that we receive payment from patients at the time when health
care services are performed. Health care services can be paid either before or after being done. More often, it is paid
afterwards. Examples of medical payments received
after health care services are performed:
Known as fee-for-service, this is a popular way to pay for health care where you, as a provider, bill the patient (or
their insurance company) for the services you performed. You are paid after the services are completed. When
insurance is billed, at the time of the visit the patient may be responsible for only for a small copayment (or perhaps a
larger deductible with some types of insurance) but, the bulk of the bill is usually paid afterward by the insurance
company.
Before:
Capitation: This is used by an insurance company to pay for health care under a special arrangement with the
doctor. It is when an insurance company contacts with the doctor to pay the doctor a monthly flat fee in advance to
see all their patients.
Salaried doctors are also considered to be paid in advance for the services that they provide to patients.
DRG’s (Diagnostic Related Groups) are prospective payments paid for the diagnosis and treatment of Medicare
in-patients (patients who are admitted overnight to the hospital). These are generally paid at the start of the patient’s
treatment regime
Current Procedural Terminology” (CPT) codes are used to tell the payer what treatments were performed. The
codes are entered on a standardized HICFA1500 form that is sent to the insurance company or government program
that covers the patient. CPT codes are used to identify what the doctor did to treat the patient. Each medical
procedure has a unique CPT code
International Classification of Disease” (ICD) codes are used to reimburse doctors and health facilities for
evaluating a patient. They are diagnosis specific and are also entered onto the HICFA_1500 form
Payer Mix: A payer mix simply describes what percentage of your revenue comes from each of the above payer
categories.As a health care provider, you need to know what percentage of your revenue comes from being
reimbursed through government agencies, like Medicare or Medicaid, by private insurance companies and
‘out-of-pocket’ personal payments from patients.
Business Plan
• Page 102: The 6 sections and each section’s purpose.
• Session 3 folder - Class Handout 1: 3 major sections of a business plans and their contents
• Page 106: Market Summary and SIC Codes.
Market Summary: A market summary is all about the industry your business operates within.
Business is all about adapting to changing conditions with the marketplace as companies keep up with emerging
trends. Market Summary looks at external issues that are affecting the industry which your company is part of. Think
of it this way, what are the opportunities and what are the threats, not only to your company but, all other companies
Key topics for your market summary:
• Size of the industry and is it growing or shrinking?
• What type of customers demographics, use this industry’s products?
• Who are the major players in this industry?
• What is the regulatory environment that affects your industry?
• What are the major trends that shape your industry’s future? What are the industries
opportunities and threats?
US Department of Labor website and their Standard Industrial Classification codes (SIC codes). These are
used by the department to database industry relevant information. You will need to look up the SIC code if you want
the latest government information on your company’s industry.
Government Programs vs. Businesses
• Programs: Operate in a regulated environment, no discretion, restricted to budgets, low accountability.
• Businesses: Operate in a market economy, flexible. Use Business Controls, high accountability.
• WIC Program is The Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) is a
federal assistance program of the Food and Nutrition Service (FNS) of the United States Department of Agriculture
(USDA) for heal
Types of Grants https://bizfluent.com/info-8056115-block-grants.html
1) The Federal Government gives funding to state & local governments in the form of
a) block grants which can be used for any purpose decided upon by the state or city, whereas
b) categorical grants (project, program or formula) must be used for a specific, designated purpose.
Taken from the Session 1 folder – Key Concepts document
• Liability: An economic obligation or debt that is payable to outsiders, an outsider claim
• Net Worth: An insider claim Net Worth = Asset - Liability
• Net Worth of a Non-profit organization = fund balance
• For Profit: Issue dividends (part of its Net Worth) to stockholders or issue new shares of stock. May also keep the
money on the company’s books for future use. Known as retained earnings
• Non-Profit: Must keep the company’s earnings on the books for future use known as retained earnings
Study Excel Supplemental Spreadsheet Handouts 1 & 2, YouTube Videos from Session 2 folder. Know:
• Rows and Columns
• How to enter numbers and text
• How to identify, enter, and use formulas
• How to do basic arithmetic functions in Excel (AVG, SUM, formulas must start with = sign)
• ‘AutoSum’ function
Asset: An economic resource that has an expected future benefit to a company
What the company owns or controls
Liability: An economic obligation or debt that is payable to outsiders.Known as an outsider claim
Net Worth: An insider claim
Net Worth = Asset - Liability
Sole Proprietorship = owners equity
Partnership = owners equity
For- Profit Corporation = owners equity
Non profit organization = fund balance
Current Assets (AKA Short Term Assets) an asset that can be turned into cash within 12 months: Cash, account
receivables and inventory
Long Term Assets: an asset that can be turned into cash in a period longer than 12 months:
Building/Real Estate and equipment
Current (AKA short term liabilities) will be paid within 12 months: Loans, Account Payables, Payroll and Lease
payments
Long term liabilities will be paid in a period of time greater than 12 months: Loan and Lease payments beyond a year
Describing Net Worth: How much money an owner of a company or business can take. Profit.
For Profit:
Issue dividends to stock holders or issue new shares of stock. May also keep the money on the company’s books for
future use. Known as retained earnings
Non-Profit:
Must keep the company’s earnings on the books for future use known as retained earnings
Partnership:
Partners can take money out of the business and divide it amongst themselves
Sole Proprietorship:
Owner may take money out of the business or keep the money on the books for future use. Known as retained
earnings.
Session 2- a minimum you should know and understand the following topics from the hybrid session.
• Asset: Definition, Examples Long & Short term(Current Asset)
• Liability (Outsider Claims): Definition, Examples Long & Short term(Current Liability)
• Net Worth (insider claims) definition & formula
• Sole Proprietorship
• Partnership
• For Profit Corporation
• Non Profit Corporation
• Owner’s Equity
• Fund Balance
• Retained Earnings
• Dividends
• Stock
Excel;
• Cells
• Rows
• Columns
• How to enter numbers
• How to enter text
• How to identify, enter, and use formulas
• How to create charts
• How to do basic arithmetic functions in Excel
• ‘Autosum’ function
Financial management is the process by which we plan, analyze, prioritize and eventually apply financial principles
and practices. To assist with this, accounting is the tool we use to keep track of these processes, - almost like
keeping score.
three crises in health care:
1. QUALITY: As health care consumers, we confuse quantity with quality. There is an assumption that all the
services we get are necessary and of high quality but we as patients are incapable of accurately assessing
their need and impact.
2. DEMAND: Expectations for health care exceed what can be delivered:We all want the best care, the latest
technology and the most effective treatments.Every time some new treatment or diagnostic tool is added, it
inflates the cost of care. Often, the level of cost for these new services exceeds the benefit that they may
give to the patient.
3. ACCESS – health care is not delivered uniformly in the United States. Depending on who you are and
where you live will affect your access to care:Special’ patient populations do not have uniform access.
Statistics indicate the higher your level of income and education the better your health and access to
service. Residents within large metropolitan areas are ‘over served’ in health care. Resources and
talent seem to aggregate in cities which in turn allows for development of a sophisticated level of health
care.
Free market operating in a manner where prices for goods and services are determined by unrestricted competition
between privately owned businesses without government intervention
What do consumers need for a market to function properly?
1) There needs to be a large number of INDEPENDENT CONSUMERS
2) Consumers need to be INFORMED about the options available to them
3) There need to be NO EXTERNALITIES OF CONSUMPTION
What do producers need for a market to function properly?
1) There needs to be a large number of INDEPENDENT PRODUCERS
2) There need to be NO BARRIERS for a new producer to enter into the market
3) There need to be NO EXTERNALITIES OF PRODUCTION
Externalities can be either beneficial (positive) or detrimental (negative). Think of them as unexpected consequences
that impact on individuals not involved in the transaction – people other than the consumer or the producer of the
goods or services in question.
An example of a negative externality of production is pollution.positive externality related to health care would be
vaccination.Externalities of production in health care. Yes, they exist, and some are good but the ones we worry
about are usually bad and this includes things like defensive medicine, medical fraud and inefficient care which
inflated cost of health care for all.
Are doctors and hospitals independent? As businesses yes but not so much as it relates to how they practice.
Generally, physicians and hospitals need to conform to clinical standards and guidelines for treatment of conditions.
The reality that most health care providers treat in a similar way and this limits competition and stifles innovation.
Does health care operate in a free market?
generally no, it does not, it operates in what is known as a quasi-market…—A market that is not free but receives
significant external support and regulation to maintain its functionality is known as a QUASI MARKET.
When markets fail to function freely, it is usually left to the government address the dysfunction either by regulation or
direct support. Presently, approximately 45% of health care is provided and paid through government programs and
this is highly representative of the need for government intervention into health care.
Finance can be easily described as getting money into and out of a business
INFLOW, money going into a business is known as REVENUE OUTFLOW, money coming out of a business is known
as EXPENSES
managers who are responsible for making sure that the resources needed to provide that care are in place. Every
decision a manager makes has financial implications; as the management of revenue and expenses is central to their
role.
Administrators are embedded within the managerial hierarchy of their organizations. That hierarchy, depending on the
administrator’s position, gives her or him a defined level of responsibility and authority. This hierarchy also defines the
businesses formal lines of communication.
An easy way to determine how an administrator fits into an organization is done by examining the organizational chart
of a business.
In any case, from an organizational chart, it should be relatively easy to determine the
1. Level of centralization (or decentralization) of the organization.
2. The formal lines of communication.
3. Decision making hierarchy within the organization.
4. How responsibilities are assigned.
If producers of health care services are businesses, what type of business are they?
“For profit versus non-profit”
In business (including health care), no matter how big or complicated the business, there are two broad categories:
1. For-Profit:Are businesses whose purpose is to financially benefit their owners. Here, the businesses profits
are transferred to the owner(s) for their personal financial benefit. A for-profit business is often referred to as
a Proprietary business
2. Non profit- As a business, non-profit does make a profit (if it didn’t it would not exist for long). However, in
this case the profit that it does generate does not benefit any owners. Instead the profit of such a business is
reinvested into achieving the goal or mission of the business. For example, some insurance companies are
non-profit. They still conduct their business – selling insurance – but in this case, excess profits are not
given to shareholders but rather are used to develop innovative insurance products for individuals who
would otherwise not be able to get traditional insurance.
When a non-profit’s goal or mission is to serve a social need (a public good), then that non-profit can be designated
as a “charity”
Non-profits are sometimes known as voluntary businesses. Although most employees are compensated, some of
their employees may be volunteering their services.
Government programs are not businesses but offer services often without there being an expectation of making a
profit
Accounting is the routine recording of financial transactions relating to a business, so that the
business is able to summarize, analyze and report on its financial wellbeing. Toward this end,
each business will set up a mechanism to keep track of its finances.
When that system is usedprimarily to keep track of finances internally (for its own employees) then it is known as
managerial accounting
. If it used to report financial information to interested parties outside of the organization then it uses financial
accounting.
Financial accounting uses a uniform set of financial spreadsheets to report, summarize and
analyze the businesses finances. Financial accounting is standardized and is used to generate
standard financial reports and financial statements for people outside of the business who are
entitled to it. Examples include auditors, the government (IRS), regulatory agencies and
stockholders of a corporation. Since this is standardized, all companies will generate the same
financial reports and populate those standardized reports with their businesses own financial
particulars.
Managerial accounting is set up by the company itself and is used by its own employees to keep
track of the business’s financial transactions. It organizes revenue and expense information in a
way that makes it easy for managers within the company to use that information in their
planning and administrative roles. Since each business is unique, managerial accounting will
differ from one company to another depending on what information their managers need.
To help organize information needs, most businesses will develop a Management Information
System (MIS) to keep track of what goods and services are sold, how much revenue it makes
and how much the company spends on expenses.
each business keeps a general ledger to sort out this financial information. A general ledger has 5 components:
1. CASH RECEIPTS: This is the cash we received
2. ACCOUNTS RECEIVABLE: Service Performed but not yet paid for
3. CASH DISBURSEMENT: This is the cash we spent
4. ACCOUNTS PAYABLE: Expenses owed but are not yet paid
5. PAYROLL LEDGER: The amount put aside to make payroll payments
Session 2
You are to create your own personal Excel Balance sheet. Use the format shown in the You Tube videos. Your
spreadsheet is not just a document with numbers entered into the cells. It must include all appropriate formulas and
or relationships.
1) Include a column for Income and another column for Expenses. You can include any items you wish for each of the
columns but you should have a minimum of 5 income and 5 expense items.
2) Using the appropriate Excel function make a sum for each of the column
3) Calculate the value for the Net Worth using this formula: Net Worth = Assets – Liabilities.
• The sum for each of the columns (assets & liabilities) must be calculated by formulas.• The Net Worth value must
also be from a formula.
4) Your spreadsheet should also contain a graphic chart that pictorially presents your data. The chart
should be appropriately titled and contain a caption or legend that explains the chart’s components.
Session 3
Revenue is income. It represents the amounts earned by you as compensation for your business-related activities.
When you receive revenue in a consistent and regular manner it is sometimes called your revenue stream or cash
flow.
Revenue is always entered into you company’s books based on the full value for your goods and services. Think of it
as your expected monetary inflow from providing your goods or services to your customers at their full price.
Examples of Revenue: What are some of the revenue sources typically generated by businesses?
Any income received by a business is revenue. Most revenue comes from a business selling its goods and services.
But businesses may also receive income from investments, interest, or sale of assets. Also, revenue does not
necessarily come only from money. There are non-cash forms of income as well. An example would be bartering
where you accept something other than money as compensation for your goods or services. As revenue increases,
generally it will also increase your businesses equity or net worth.
When entered onto your company’s accounting system (the company’s books) revenue is entered at its full value. But
sometimes we don’t actually receive the full amount of our revenue. When that occurs, we need to balance our books
by applying what are known as deductions from revenue.
Deduction from Revenue’: An accounting entry that is used when the revenue received falls short of the full value of
our goods or services. Why would we not get our full price?
Sometimes a business can intentionally put its items on sale or enter into an arrangement with specific customers
where they agree to provide services at a discount. Other times, a customer may unexpectedly not pay their bill either
in part or worse, ignore it altogether thus leaving you with a loss.
Examples of deductions from revenue often used in health care:
1. Contract allowances: This is when a health care provider agrees to provide discounts to certain insurance
companies when seeing their patients. Usually there is also something in it for the doctor too; such as more
patients coming to see them because of being promoted as an “in-plan health care provider” and being listed
in the insurance plan’s book of providers.
2. Doubtful Accounts (bad debt): This is where the patient or the insurance company doesn’t pay the bill. The
health care provider will usually send this out to a collection agency or just write it In the case of a doubtful
account, it is highly improbable that the money will ever be received.
3. • Charity Service: This is where you intentionally perform services without any expectation of payment (pro
bono). Most charities (this includes many hospitals) have a legal requirement that they must provide some
level of charity service. Most (but not all) hospitals are non-profit charities and are expected to provide some
free care to those who cannot otherwise afford treatment.
Types of Revenue:
IRS classifies revenue into a number of different types. It does this because it treats tax deductions and maximum tax
rates differently depending on the type of revenue:
1. Earned income: is revenue earned from your active participation in a trade or business, including wages, salary,
tips, commissions and bonuses. This is the most common type of revenue and represents what you get in return for
your work either as an employee or business owner.
2. Passive income-are earnings an individual derives from the rental of property or other
investments in a business enterprise where you are inactive – not actively involved in the
business’s operations (also known as a silent partner)
3. Unearned income is personal income that comes from investments unrelated to work or business activities.
Dividend and profit from stocks and bonds are examples.
4.imputed income- free lunch in income. If you financially gain by avoiding something, then you have imputed income.
The biggest example of imputed income is when you have loan forgiveness. If a lender forgives a part of your loan,
you have become enriched. This amount is considered to be ‘imputed’ and you are liable for the income tax on the
amount forgiven.
———You will clearly find that some sources of income have preferential tax rates and receive better treatment under
the tax code. Earned income, the most common type of obesity income has the highest tax rate.
Revenue can be cash or something other than cash:
Revenue can be classified by its time of receipt
Examples of medical payments received after health care services are performed:
Known as fee-for-service, this is a popular way to pay for health care where you, as a provider, bill the patient (or their
insurance company) for the services you performed. You are paid after the services are completed. When insurance
is billed, at the time of the visit the patient may be responsible for only for a small copayment (or perhaps a larger
deductible with some types of insurance) but, the bulk of the bill is usually paid afterward by the insurance company.
Examples of medical payments received before health care services are performed:
Sometimes health care is paid for in advance (prepaid health care).
Capitation: This is used by an insurance company to pay for health care under a special arrangement with the doctor.
It is when an insurance company contacts with the doctor to pay the doctor a monthly flat fee in advance to see all
their patients. A working example of a ‘capitated’ arrangement would be an insurance company agreeing to pay a
doctor $1000 a month in advance for the doctor to treat any and all of the insurance company’s covered patients; no
matter how many of their patients present to the office for care.
Salaried doctors are also considered to be paid in advance for the services that they provide to patients.
DRG’s (Diagnostic Related Groups) are prospective payments paid for the diagnosis and treatment of Medicare
in-patients (patients who are admitted overnight to the hospital). These are generally paid at the start of the patient’s
treatment regime.
For health care, the bulk of revenue comes from the performance of health-related services. Billing and coding
procedures are used to transmit information from the health care provider to the insurance company (payer) so that
the provider can be paid for their services.
•
Revenue is earned by providers by performing services related to the diagnosis and treatment of the patient. “Current
Procedural Terminology” (CPT) codes are used to tell the payer what treatments were performed. The codes are
entered on a standardized HICFA1500 form that is sent to the insurance company or government program that
covers the patient. CPT codes are used to identify what the doctor did to treat the patient. Each medical procedure
has a unique CPT code.
Revenue is also earned by making a diagnosis. “International Classification of Disease” (ICD) codes are used to
reimburse doctors and health facilities for evaluating a patient. They are diagnosis specific and are also entered onto
the HICFA_1500 form that is sent to the insurance company or government program that covers the patient.
Sources of revenue, The Payer Mix: Generally, a health care provider will see patients that are covered for their
medical services from a number of different sources.
A payer mix simply describes what percentage of your revenue comes from each of the above payer categories. As a
healthcare provider, you need to know what percentage of your revenue comes
from being reimbursed through government agencies, like Medicare or Medicaid, by private
insurance companies and ‘out-of-pocket’ personal payments from patients
Medicare: is generally used by individuals 65 or older, or people who are chronically disabled or individuals who are
under treatment for chronic renal failure and in dialysis.
How do hospitals get paid by Medicare for in-patient care?
DRG’s: What’s a DRG?
DRG’s are a system used by Medicare to make prospective payments to hospitals for in-patient (patients admitted
overnight) services for eligible Medicare patients. DRG’s originally came from Major Diagnostic Groups (MDC’s) – a
system used to group medical conditions that will be discussed in depth later. Each DRG represents a specific
diagnosis within an MDC category. In total, there are approximately 500 DRGS that came from the 25 MDC
categories.
What do you need to know about DRGs?
1.They represent a GLOBAL, PROSPECTIVE payment for treatments given to take care of hospitalized Medicare
patients. It is diagnosis specific.
i. Global – one payment for the management of the patient (all services provided to the patient)
ii. Prospective – generally submitted to Medicare at the onset of the patient’s care when they were admitted to the
hospital. Consequently, this is a type of payment is mostly paid in advance if services being done.
iii. Diagnosis Specific: What is paid will depend on the patient’s diagnosis. Each diagnosis is paid differently.
Think of DRGs as almost a ‘block grant’ to manage the patient. Within reason, a hospital can choose to clinically treat
the patient any way it feels best. If it does so efficiently and there is money left over, the hospital gets to keep it. On
the other hand, if the patient needed more care that was expected, then there is no additional reimbursement to make
up for the added treatment.
2 . DRG’s came from MDC’s. Major Diagnostic Categories are 25 mutually exclusive disease categories based on the
human body’s various organ systems. They were around long before
DRG’s were developed and are used even now to understand the financial costs and benefits of
treating different types of patients
How does Medicare pay doctors to threat ambulatory (non-hospitalized) patients?
We know Medicare uses DRGs for hospital payments but what about patients that doctors see in their office.
Medicare uses relevant value units to pay doctors for treatment of patients that are not admitted to a hospital. This is
a type of fee for service payment that is paid after care is given.
RELEVANT VALUE UNITS (also known as Resource Based Payments): are ‘weights’ applied to a base fee in order
to increase or decrease the payments made due to variations in practice. Medicare oversight from the Federal
government is through the Centers for Medicare & Medicaid Services. It is that agency that determines base fees and
weightings for all covered ambulatory care payments under Medicare.
What are some of the weighting applied? Medicare will adjust its payment by a number of weights but the most
common will depend on the type of doctor providing the service and where it was performed.
Under Medicare, who is a Physician?
These three types of doctors may treat conditions located throughout the patient’s body. All three have similar
responsibilities. To diagnose the patient, accept and treat the patient or refer them to another more appropriate
clinician should their diagnosis be outside of the doctor’s area of expertise.
MD Medical (allopathic) physician
DO Osteopathic physician
DC Chiropractic physician
These doctors are usually limited to treating only specific parts of the body:
DDS (or DMD) DPM
OD
PhD
Dentist.
Podiatrist
Optometrist
usually a Clinical Psychologist
Who are not considered physicians by Medicare?
Therapists, physician assistants, general nurses and most other health care workers
How do relevant value payments work?
• Depending on the type of clinician, different types of health providers will have a different weighting applied to the
services for which they are paid.
• Medicare will also change the payment to the doctor depending on where the doctor / clinician treated the patient–
was it in the doctor’s office, hospital or perhaps the patient’s home?