Code Blue
Introduction to Terms
Reimbursement and Managed Care
Chapters One through Seven
Accounting Version
Question
• Why is it important for students to understand a
little about managed care?
• Because controls placed on the healthcare
industry by government, insurance companies
and businesses influence the way the healthcare
is delivered.
• Every one from the hospital administrator to the
floor nurse is impacted in one way or another.
Chapter Two Terms
• Prospective Payment --a hospital payment
system where the price of a product or
service is established in advance of
rendering services
• Retrospective Payment--synonymous with
Cost Reimbursement. The price is
established after the product or service
has been rendered.
Health Maintenance
Organizations (HMOs)
• HMOs were one of the first organizations to
use prospective reimbursement to control
physician behavior.
• HMOs attempt to shift economic risk from
the patient to the healthcare provider.
– This will be discussed in more detail in
chapters eight through fourteen
Payment Systems
• A prospective payment system, in which
the price is determined before the product
is delivered is analogous to a fixed price
contract in the construction industry
• A retrospective payment system is
analogous to a cost reimbursement
contract
Incentives for Cost Control
• Fixed price contracts provide more
incentives for cost control as the provider
absorbs the difference between estimated
costs and actual costs.
Payment Systems
• We will discuss payment systems in more
detail in chapters eight through fourteen
• At this point we need to understand
– In the early 1980s many insurance programs
changed from retrospective payment systems
to prospective payment systems
– This changed physician cost behavior
– This also created a need for cost accounting
Chapter 3--Prospective Reimbursement
• In the textbook/novel, the board thinks
PBCH has been hurt by prospective (or
fixed-price) reimbursement.
• They are not certain, however . . .
– Without a cost accounting system they don’t
know the actual costs of their products.
What do they know?
• Their financial accounting system gives
them
– Total revenues and total costs by department
– Total revenues and total costs by patient day
How is that possible?
In Supplement One, Helen Ingersol, a board member,
challenges the Controller’s assertion that the hospital
does not know the actual costs of the individual
products and procedures it provides. “I have trouble
believing that’s true,” Helen said. “Whenever I’ve had
a family member in the hospital, I’ve received a bill
itemizing costs down to the last aspirin!”
How could the hospital provide an itemized bill if it
didn’t know the true cost what it was billing for?
Answer
• Prior to the implementation of cost
accounting charges were not based on
costs.
– Prices were set based upon what competition
was doing and what the market would bear
– Total hospital revenues had to exceed total
hospital costs, but individual prices didn’t
necessarily reflect actual costs
Traditional Pricing Systems
• Billed charges--not necessarily based on
individual product costs
• Cost reimbursement--costs per patient day
were calculated in the aggregate and
reimbursed by some organizations such as
Medicare
Why was cost reimbursement
initially used by Medicare and
Blue Cross?
• Since most hospitals were non-profit
organizations, insurance companies
reasoned they should receive full cost
plus a percentage for capital.
• The problem was that it provided no
incentive for cost control!
Cost reimbursement incentives
• If a hospital receives an “excess” of 6%
over costs, how does it increase its
“profit”?
– By allowing costs to increase.
Do non-profits need a profit?
• Remember that even non-profit
organizations have to earn more than costs
to cover
– Inflation on buildings and equipment that must
be replaced periodically
– Future building and equipment needs
attributable to growth in patient volumes
How could hospitals get away
with this?
• There was no price competition
• Costs were not that high
• Insurance companies paid what was billed
without auditing individual product costs
• Some products subsidized others
– Without price competition no one seemed to
care
Wes Douglas was initially hired as a
consultant to install a cost accounting
system that would allow administration and
the board to know . . .
• Actual product and service costs
• The actual amount of money Peter Brannan
Community Hospital (PBCH) was making or
losing by
– Product
– Physician
– Customer (e.g employer or insurance
company)
Review of Homework
Questions
End of Chapters 1 - 7