Healthcare Financial
Management
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Learning Objectives
• List and describe participants and stages of
the revenue cycle.
• List and explain billing and reimbursement
methodologies.
• Explain the role of the health information
professional in the budgeting process.
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Historical Perspective
• Financial management in health care is
becoming increasingly complex
• Increasing dependence on the health
record’s content to define accurately and
completely for reimbursement purposes:
– The services provided
– The conditions treated
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Historical Perspective
• Health care managers must:
– Know how to adjust their operations to respond
to a shifting economy and changing regulatory
requirements
– Understand the concepts and principles of
financial management
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Historical Perspective
Payment for Health Care Service
• 1930s – primary method of payment for
health care – direct, out-of-pocket
remuneration
• Later – establishment of insurance including
profit and nonprofit
• Greater use of health care also led to greater
demand on the system
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Historical Perspective
Payment for Health Care Service
Payment of health insurance premiums  use
of services paid for by the premiums 
increase in premiums
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Historical Perspective
Payment for Health Care Service
• In 1960s social reform led to the
establishment of Medicare.
• In 1980s the reimbursement formula under
Medicare was revised to restrict
reimbursement and control government
expenditures.
– Mandated a prospective payment system (PPS)
– Attempt to balance payments made for the
same services at a fixed rate
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Historical Perspective
Payment for Health Care Service
• Different types of reimbursement methods now in the
private insurance industry also:
–
–
–
–
–
–
–
–
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Prenegotiated amounts
Reimbursement based on a discount off billed charges
Per diem payments
Reimbursement based on audited costs
DRGs
Ambulatory care groups
Resource utilization groups
Payment for services at full billed or discounted charges
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Historical Perspective
Payment for Health Care Service
• Third party payer concept
– Third party payer pays for the services
– Third party payer receives premium payments
• Resource-based relative value scale
(RBRVS) implemented in 1992
– Intent – to ensure equity in payment for like
services
– Assigns a number of units to each procedure
– Payments based on CPT-4 codes regardless of
specialty
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Historical Perspective
Payment for Health Care Service
• To control costs, insurance companies
reduce the options available to a person to
obtain services
– Growth of managed care programs (HMOs,
PPOs, etc)
– Substantial financial disincentives to using
providers outside the network or without proper
authorization/approval
• Projected that healthcare expenditures will
outpace the rest of the economy and reach
20% of the gross national product by 2018
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Historical Perspective
Payment for Health Care Service
• 2008 – 46 million+ people with no health
insurance
• 2009 – American Recovery and Reinvestment
Act (ARRA) invests in health information
technology incentives
– to improve nationwide health information network
– assist in lowering healthcare costs
– strengthen the economy
• Consensus – information technology and
delivery of health information critical to control
of
health care costs
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Managing the Revenue Cycle
• Emphasis on generating revenue and
maximizing potential sources of revenue
– Because of rising costs of health care
• Revenue may be:
– Operating
• Include revenue sources from actual delivery of
patient care activities and services
– Nonoperating
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•
•
•
•
Include gifts and donations
Endowments
Grants
Interest on investments
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Managing the Revenue Cycle
Front-End Activities
• Actual makeup of the revenue cycle can
vary greatly from organization to
organization.
• Revenue cycle generally consists of:
– All previsit activities
– All postcare activities
– Systems associated with a patient or consumer
entering the healthcare system
– Receipt of services
–
Provider
being
paid
for
the
service
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Managing the Revenue Cycle
Front-End Activities
Contracting
• Major source of revenue is third-party
insurance companies.
• It is important to understand and negotiate
the best reimbursement contract terms.
• Effectiveness of negotiation dictated by
major health players in local market.
– Individual physicians may have more difficulty
than major hospital or particular specialty
• Payer contracts are legally binding on both
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parties.
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Managing the Revenue Cycle
Front-End Activities
Contracting
• Must identify and agree upon:
– Actual negotiated payment rates
– Specified reimbursement rules
– Technical coding and billing requirements
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Managing the Revenue Cycle
Front-End Activities
Contracting
• Medicare Improvements for Patients and
Providers Act of 2008 (MIPPA)
– Provides incentive payments to physicians who
use e-prescribing technology
– Good through 2012
– In 2012, there will be penalties for physicians
who do not adopt e-prescribing
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Managing the Revenue Cycle
Front-End Activities
Charge Master – Fee Schedule
• HIM professionals’ role:
– Have access to all data associated with
treatments and procedures
– Key to collecting and classifying tests and
procedures performed
– Can assess the costs associated with a service
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Managing the Revenue Cycle
Front-End Activities
Patient Encounter
• Source documents may be in the form of:
–
–
–
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Electronic health records
Automated information systems
Traditional paper health records
Encounter forms
• “If it is not documented, it is not done.”
– True for billable services
– Failure to document properly can result in
nonpayment and lost revenue.
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Managing the Revenue Cycle
Back-End Activities
Reimbursement Analysis
• DRGs – example of a per-case,
fixed payment system
– If payment rates are less than amount charged,
a revenue deduction or adjustment occurs.
– If adjustments are significant, expenses may not
be fully covered.
– If expenses not fully covered, management may
need to consider alternatives.
• Modifying supplies, services, etc.
– Important to consider possible outlier payments
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in addition to the
contracted
DRG
payment.
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Managing the Revenue Cycle
Back-End Activities
Reimbursement Analysis
• Capitation: a payment arrangement
associated with managed care
– Used in HMOs (health maintenance
organizations)
– Providers paid a fixed amount per month
– Providers then provide any care needed during
the period, even if the capitation amount does
not cover the cost
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Financial Aspects of Fraud
and Abuse Compliance
• Centers for Medicare and Medicaid
Services (CMS): focusing on eliminating
fraud and abuse in Medicare and Medicaid.
• Estimated national health care fraud:
between $75 billion and $250 billion
• Recovery Audit Contractor program (RAC):
– Instituted by CMS to identify and recover many
of these improper or inadvertent payments
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Insurance Billing Terms
•
•
•
•
Patient account
Guarantor
Health plan, payers
Subscriber, insured party, enrollee, member,
beneficiary
• Member number, policy number, insurance
ID
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Insurance Billing Terms
(continued)
•
•
•
•
Claims
Assignment of benefits
Adjudication
Explanation of benefits (EOB), remittance
advice
• Allowed amount
• Remittance, reimbursement
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Insurance Billing Terms
(continued)
• Adjustments, contractual adjustment, writedown adjustment
• Coordination of benefits, crossover or
piggyback claims
• Copay, coinsurance amount
• Coinsurance
• Deductible
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Codes For Billing
• Standardized codes required for healthcare
transactions, such as insurance claims and
remittance advice
• Procedure codes assigned for services
rendered and supplies used (HCPCS/CPT-4
codes)
• Diagnosis codes assigned to represent
disease or medical condition treated (ICD9/14/2012
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9-CM codes) ISC471/HCI
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Overview of Codes
• CPT-4
– Numeric standardized codes for reporting
medical services, procedures, treatments
performed by medical staff
– Five digits long
• HCPCS
– Coding system used for billing for procedures,
services, supplies
– Includes CPT-4ISC471/HCI
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Small sample of CPT-4 codes.
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Small sample of HCPCS supply codes and administration codes.
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Overview of Codes
(continued)
• Procedure modifier codes
– Two-digit codes used in conjunction with
HCPCS/CPT-4 codes for billing purposes
• ABC codes
– Used to bill for alternative medicine
– Not part of the CPT or HCPCS code sets; only
accepted by some payers
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Small sample of procedure modifier codes.
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Overview of Codes
(continued)
• ICD-9-CM
– System of standardized codes developed
collaboratively by WHO and 10 international
centers
– The modifier “CM” provides way to code
patient clinical information; makes codes useful
for indexing medical records, medical case
reviews, communicating patient’s condition
precisely
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Small sample of ICD-9-CM codes.
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Overview of Codes
(continued)
• DRG
– Used to classify ICD-9-CM codes into 25 major
diagnostic categories (MDCs)
– Old DRG system had 538 codes; newer MSDRG system has 745 codes
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Reimbursement Examples
• Fee for service: Control what provider can
charge
• Allowed amount: Discounted fees agreed to
by provider for services; listed on EOB
• Managed care: Control patients’ utilization
of services
• Capitation: Flat rate paid to provider by
HMO based on per member per month
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Reimbursement Examples
(continued)
• PPO: Allows patients to use both PPO and
non-PPO providers, but pay more when
going out of network
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Reimbursement Examples
(continued)
• Government-funded health plans: Largest
payers in U.S. and include:
– CHAMPVA
– VA
– TRICARE
– IHS
– FECA
– WC
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– Medicaid, Medicare
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Medicare
• Part A
– Covers inpatient hospital stays, skilled nursing
facilities
– Most beneficiaries do not pay premiums
(previously collected as Medicare taxes)
• Part B
– Covers professional services
– Beneficiaries pay premium; uses fee-for-service
model based on RBRVS
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Medicare (continued)
• Part C (Medicare Advantage Plans)
– HMO plans authorized by Medicare
– Patient pays HMO a premium, which supplies
all of patient’s Part A, Part B, Medigap, and
sometimes Part D coverage
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Medicare (continued)
• Part D
– Helps patients purchase prescription drugs at
lower cost
– Patients pay premium to private insurance plans
this coverage
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Medicare (continued)
• Medigap
– Supplemental private insurance
– Pays portion of Medicare claims and
deductibles for which patient is responsible
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Managed Care/HMOs
• Developed to help control costs of use of
healthcare services
• Designed to make PCP into gatekeepers
who control access to additional services
– HMOs act as both insurer and provider
– HMO patients must use HMO for all services,
except emergencies
• Authorized by Congress in 1973
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Managed Care Plan Examples
• Staff model
– HMO owns facilities and employs doctors
• Group practice model
– HMO contracts with facilities and physicians to
provide services
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Managed Care Plan Examples
(continued)
• IPA model
– Independent physicians form business
arrangement for purpose of contracting with
HMO and thus receives payment from HMO
• IDN model
– Facilities and physicians form business
arrangement for purpose of contracting with
HMO to provide both hospital and physician
services
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PPS Reimbursement
• Hospitals do not bill insurance plans in
same way as physicians
• Hospitals use UB-04 claim form instead of
CMS-1500 form
• Hospital claim coders must identify
principal diagnosis and associate revenue
codes with procedures
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PPS Reimbursement
(continued)
• Not used for children’s hospitals, cancer
hospitals, critical access hospitals
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Other Medicare PPS
• Inpatient psychiatric hospital prospective
payment system
• Long-term care hospital prospective
payment system
• Skilled nursing facility prospective payment
system
• Home health prospective payment system
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Medicare Part A and MSDRGs
• PPS uses DRGs to determine
reimbursement for inpatient stays
• PPS determines DRG from principal
diagnosis
– Assigns to higher DRG if relevant diagnoses of
comorbidities or complications exist
– MS-DRGs better account for medical severity
of health-related situations
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Medicare Part A and MSDRGs (continued)
• DRG code assigned RW
– Reflects average relative costliness of group’s
cases compared with costliness for average
Medicare case
• PPS adjusts RW of DRG for geographic and
wage differences
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Medicare Part A and MSDRGs (continued)
• Hospital reimbursement calculated by
multiplying hospital’s PPS rate (operating
and capital base rate) times RW of DRG
code
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Determining the hospital’s capital base rate.
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Flow of MS-DRG Grouper logic.
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Outpatient PPS
• Reimburses hospital outpatient services
• Does not use DRGs nor apply to doctor’s
offices
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Outpatient PPS (continued)
• Determines payment based on procedures
that are assigned to an APC
– Relative weights represent resource
requirements of service
– Calculates reimbursement from RW of APC
times national conversion factor; adjusts for
wage, geographic differences
• Allows outpatient claim to have multiple
APCs
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Examples of Fraud and Abuse
• Medically unnecessary services performed
to increase reimbursement
• Upcoding, or deliberately incorrectly coding
hospital claim to trick Grouper software
into assigning higher DRG
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Examples of Fraud and Abuse
(continued)
• Unbundling, or coding components of a
comprehensive service as several HCPCS
codes instead using comprehensive code
• Billing for services not provided
• Billing for levels of service not supported
by documentation in patient’s health record
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Setting Priorities for Financial Decisions
Management Accounting
• Provides economic information and an internal
framework to enable health care leaders to
make effective decisions concerning the
activities and overall performance within an
organization.
• Includes information in the form of:
–
–
–
–
–
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Internal accounting reports
Budgets
Business plans
Cost analysis
Other reports
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Setting Priorities for Financial Decisions
Management Accounting
• Strategic and operational plans set targets for
performance.
• Budgets are plans for the financial resources
associated with performance plans.
• Most organizations have:
– Mission
– Goals
– Objectives
• Mission, goals, and objectives are used to develop
and link departmental objectives and budgets to
organizational goals.
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Setting Priorities for Financial Decisions
Mission
• A statement of the organization’s purpose in
broad terms
• Defines the geographic environment and
population served by the organization
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Setting Priorities for Financial Decisions
Goals
• Defined by organizational leaders to support
and implement the mission
• Statement of what the organization wants to
do
• Foundation to determine the organization’s
intent
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Setting Priorities for Financial Decisions
Objectives
• Formed once the intent is known
• More specific than goals
• To define the expectations or outcomes
given the goal direction
• To provide clear guidelines for management
and supervisors
• To define the action steps to achieve the
objective
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Setting Priorities for Financial Decisions
Objectives
• Action steps define:
– The dates when certain activities are to be
completed
– How much labor or funding will be required
– How resources will be used
– Expected outcomes or results
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The Budget and Business Plan
Budgets
• Budgets are detailed numerical documents.
• They translate goals, objectives and action
steps into forecasts of volume and monetary
resources needed.
• Planning and preparing budgets is part of
the managerial accounting process.
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The Budget and Business Plan
Budgets
Statistics Budget
• Future volumes predicted by assessing data from
historical trends
• HIM department is primary source of historical data
such as:
– Discharges by:
•
•
•
•
clinical service
payer types
DRG
physician
– Operative procedures by
• type
• surgeon
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The Budget and Business Plan
Budgets
Statistics Budget
– Length of stay by:
•
•
•
•
DRG
Diagnosis
Clinical service
Physician
– Number and type of:
•
•
•
•
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Ambulatory visits
Home health visits
Ambulatory surgery cases
Emergency department visits
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The Budget and Business Plan
Budgets
Statistics Budget
• Second source of volume predictions:
– Interviews with key medical and clinical staff
– Medical staff may be aware of plans for service
changes and expansions of competing
organizations.
• Third source of volume predictions:
– Comparison of data within the HIM department
from month to month
– Identifying trends in utilization of the enterprise
by different physicians or geographic location
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Preparing a Business Plan
The Four Ms
• Must manage:
–
–
–
–
Manpower
Machinery
Materials
Money
• All proposed expenditures must balance
these 4 Ms.
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Financial Accounting
• Refers to recording and reporting the
financial transactions of the organization
for:
– Internal management
– Users outside of the organization
• External users might include:
– Loan officers
– Creditors
– Investors
– Payers
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Financial Accounting
• Organizations must adhere to generally
accepted accounting principles promulgated
by the Financial Standards Accounting
Board (FASB).
– Rule-making body of the American Institute of
Certified Public Accountants (AICPA)
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Other Phases of Financial Management
Role of the HIM Professional in Financial
Management
• HIM professionals must become more adept
in fiscal activities.
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