16 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
numbers of patients who are under private payer contracts. Is it possible that such a specialty
hospital could provide a limited number of specialized services less expensively than a general
acute care hospital?
Other interesting questions can also arise with circumstances such as those in Case Study 1.11.
For instance, if an individual were brought to the Apex Medical Center’s ED with a severe ortho-
pedic issue, could Apex transfer the patient to the orthopedic specialty hospital even though the
specialty hospital does not have an ED? Interestingly, under current EMTALA (Emergency Medical
Treatment and Labor Act) directives, the answer to this question is “yes.”*
Hospitals are generally licensed at the state level, and their business structuring is based on
a combination of state rules and regulations along with signicant considerations for tax issues.
Layered on top of this are national payment systems, such as those from Medicare that gener-
ate special hospital designations, which then further complicates the payment systems in use.
Forinstance, consider the following special Medicare designations for hospitals:
◾ Critical access hospital (CAH)
◾ Sole community hospital (SCH)
◾ Medicare dependent hospital (MDH)
◾ Disproportionate share hospital (DSH)
◾ Rural referral center (RRC)
With the exception of the CAHs, all of these hospitals are paid through the Medicare inpatient
PPS, MS-DRGs, and the outpatient prospective payment system APCs.
e CAHs are reimbursed on a cost basis; this process is discussed in greater detail in
Chapter 2. Keep in mind that being a CAH is a Medicare concept relative to certain condi-
tions of participation (CoPs) and then also for payment. Outside Medicare, these hospitals are
just hospitals and most likely will be paid on the basis of a variety of payment systems used by
various third-party payers. Note that for CAHs there are some further special payment pro-
cesses in terms of integrating physician/practitioner payment for outpatient services into the
payment of the CAH.
†
e other designations do provide additional reimbursement for Medicare under both the
inpatient and the outpatient PPSs. Beyond these special Medicare designations, there are also
a limited number of very special hospitals, such as cancer hospitals and children’s hospitals. For
Medicare, these are generally cost-based reimbursed. Private third-party payers may or may not
recognize these hospitals for special payment mechanisms.
Most often, hospitals are reimbursed for services through prospective payment for both inpa-
tient and outpatient services. is is particularly true for the Medicare program with the MS-DRG
and APCs. For private third-party payers, PPSs are also used, although there can be a much wider
variety of payment systems, particularly for inpatient services.
Case Study 1.12: Per Diem Payment for Inpatient Services
e Apex Medical Center is reviewing a contract with a private insurance company. e payment
methodology for inpatient services is quite simple. ere is a per diem payment rate for medical
cases and another higher per diem payment rate for surgical cases.
*
For instance, see 42 CFR §489.20 for more information on EMTALA.
†
See the Method II billing and payment process for CAHs discussed in Chapter 2.
Introduction ◾ 17
When payment systems are simple, like Case Study 1.12, there are typically a number of other
questions that arise. In this case study, the insurance company is going to be concerned about the
medical necessity of the patient being in the hospital for a given period of time. Apex will prob-
ably be concerned about extensive surgeries for which there may not be a correspondingly long
in-hospital recovery period. Conversely, there may be accident cases that require extensive stays in
the hospital for extended rehabilitation. Also, there may be cases in which the surgery is performed
and then the patient is transferred to another hospital. All of these are legitimate concerns relative
to receiving proper payment.
Hospitals can become quite creative in the way in which they are organized. For instance,
we have the concept of a hospital within a hospital. As the terminology implies, there is a hospital
inside another hospital. An example of this kind of arrangement would be to have a specialty hos-
pital located inside a general acute care hospital. e specialty hospital might occupy two oors of
the main hospital. What advantage is there to such an arrangement? e primary purpose for such
an arrangement is to take advantage of economies of scale. e specialty hospital can piggyback on
the main hospital for facilities, utilities, maintenance, nursing sta, and the like. Otherwise, the
specialty hospital would have to develop the entire support infrastructure separately.
From a payment system perspective, would a hospital within a hospital require special atten-
tion? e answer is most likely yes. For the Medicare program, there would be concern about
appropriate cost-sharing arrangements through formal rental agreements. Without specic guide-
lines in place, the cost report preparation for the two hospitals could be inappropriately skewed.
Case Study 1.13: Long-Term Care Hospital inside a Short-Term Acute Care Hospital
A large metropolitan hospital has discovered that it has numerous long-term patients, some staying
for up to two months or even longer. Better reimbursement as a long-term care hospital (LTCH)
appears to oer a solution. As a result, the hospital is reorganizing one oor of the hospital to
accommodate a hospital within a hospital. e new hospital will be an LTCH actually inside the
short-term acute care hospital.
Whether the strategy illustrated in Case Study 1.13 will bear fruit is an interesting question.
However, this case study does illustrate the organizational complexity that can evolve in lieu of
dierent kinds of payment mechanisms for hospitals.
Hospitals and Integrated Delivery Systems
Over the past several decades, there has been signicant movement to consolidate various types
of healthcare providers into seamless delivery systems. Even smaller hospitals may have clinics, an
SNF, and a home health agency (HHA) and provide DME. As you might imagine, IDSs are paid
through a variety of payment systems, including various prospective payment and fee schedules.
Hospitals often provide the core element in IDSs. In addition, hospitals also form systems, and
associated with each hospital there may also be a separate IDS. Or, the hospital system may decide
to have a system of HHAs that are associated with the hospitals in the system, but the organiza-
tional structuring and reporting are separate for the hospitals and the HHAs.
In other words, in the real world of healthcare, there can be many dierent types of organiza-
tional structuring. e way in which payment systems accommodate these various organization
structures can become quite complicated. In turn, the way payment systems are established may
actually drive the way services are organized.
18 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
Case Study 1.14: Apogee Healthcare System
e Apex Medical Center has been invited to join the Apogee Healthcare System. Currently, Apogee
has three hospitals in the region along with half a dozen skilled nursing facilities (SNFs), eight home
health agencies, two dozen physician clinics, and a reference laboratory. One of the attractions for
joining Apogee is that there are sophisticated billing processes that can for used by Apex.
e basic information given in Case Study 1.14 would suggest that Apex is joining a rather
loosely organized IDS. It appears that the IDS may actually function as a management services
organization (MSO) that provides various administrative functions for the various member pro-
viders of the IDS.
In other cases, an IDS or system of hospitals may be hierarchically structured with tight own-
ership and highly structured management. Regardless of the specics of the IDS, there will be
many dierent payment mechanisms used, including various contractual arrangements.
With the enactment of the Aordable Care Act of 2010, a new type of organization is now
being developed. ese are accountable care organizations or ACOs. Generally, these organiza-
tions will be IDSs that have the possibility to share in savings generated from more ecient deliv-
ery of healthcare under the Medicare program. e payment systems for the individual parts of
the ACO may not really change, but the accounting for services will certainly need to be changed
to identify savings that could possibly be shared.
Special Provider Organizations
ere are a number of provider organizational structures that provide limited services or products.
Variable types of payment systems are used for these special organizations.
DME Suppliers
Durable medical equipment, or using the full acronym, DMEPOS for DME, prosthetics, orthot-
ics, and supplies, represents a major area for healthcare.* e range of products is extensive,
including crutches, canes, walkers, commodes, braces, and diabetic shoes, and the list can go
on extensively. While there are many compliance issues surrounding DME, particularly medical
necessity, the payment process can also become complicated.
Most communities have stand-alone DME suppliers along with providers like hospitals that
also have DME companies. Medicare has an extensive DME fee schedule through which DME
for Medicare beneciaries is paid. Many private third-party payers also use a fee schedule or some
modied form of a fee schedule. In addition, some DME is provided by physicians, hospitals,
home health, and even SNFs.
DME is dierent from other aspects of healthcare, even those aspects providing some sort of a
product or supply item. DME can be new, used, rented, or rent to own. us, the ability of health-
care payers to provide payment must be quite adaptable to these dierent ways of dispensing DME.
Case Study 1.15: Competing DME Suppliers
Anywhere, USA, has the distinction of having nearly a dozen DME suppliers in the immediate
area. e Apex Medical Center has attempted to use selected DME suppliers, but the competition
is so erce that Apex has decided to become a DME supplier itself to avoid complaints concerning
favoritism from local suppliers.
*
DME is also an area with signicant compliance concerns, including fraudulent activities.
Introduction ◾ 19
While there are many variations on the theme illustrated in Case Study 1.15, being a DME
supplier attracts many organizations. For hospitals, compliance issues can complicate the ways in
which DME is supplied to hospital patients.
Skilled Nursing Facilities
SNFs are abundant in most communities. ey may be freestanding SNFs, or they may be inte-
grated into a hospital setting. For small, generally rural hospitals, we have the concept of swing
beds; a hospital bed can be used for inpatient care and then transferred over to providing skilled
nursing care. e patient stays in the same bed, but the services and associated payment process
change.
While SNF payments, at least under Medicare, use a PPS, fee schedules are still used by the
physicians and practitioners providing services. Also, there are nursing facilities (i.e., not at the
skilled level), assisted living, and other arrangements that provide varying degrees of less-acute
care. Outside the more typical fee schedules and prospective payment, there are numerous con-
tractual arrangements that are used by private third-party payers.
Home Health Agencies
Home health agencies are used extensively with the Medicare population and to a more limited
extent with the population covered by private insurance. While physicians and practitioners must
order and substantiate medical necessity for home health services, the payment system used for
these services is a special HHA PPS. Also, home health services are often provided after an inpa-
tient discharge, so there can be a payment interface between MS-DRGs for the hospital and the
PPS used by HHAs.
Case Study 1.16: Private Pay Home Health Services
e Apex Medical Center has established a home health service as a part of its integrated ser-
vices strategy. Most of the patients are Medicare beneciaries, and payment is made through the
Medicare home health PPS. However, there is increasing diculty in qualifying patients for these
services under the Medicare program. As a result, there are requests for these services on a private
basis, with direct payment from the patients.
Case Study 1.16 illustrates some of the frustrations that healthcare providers encounter when
they are actually trying to provide needed services. Qualifying for home health services under
Medicare can be an involved process. For example, there is the issue of being homebound. What,
exactly, does it mean to be homebound? Also, when a healthcare provider provides services to
a Medicare patient, there is generally an expectation that the healthcare provider will bill the
Medicare program. In this case study, there are individuals requesting the services on a private pay
basis. Do you think this might present some special challenges?
Independent Diagnostic Testing Facilities
Independent diagnostic testing facilities (IDTFs) generally provide a limited range of mainly
radiological diagnostic tests. is is a provider entity recognized by the Medicare program, and
payment is made through the MPFS. ere are special supervision requirements mandated by the
20 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
Medicare program for diagnostic tests. Also, the MPFS has a mechanism to separate the radiologi-
cal services into a technical component, professional component, and total component. us, the
MPFS can accommodate dierent arrangements by dierent providers.
Case Study 1.17: IDTF Billing for Radiology Services
Anywhere, USA, has an IDTF across town from the Apex Medical Center. Due to its location, many
patients and physicians nd that it is convenient to use. In some cases, physicians near the IDTF
simply use it as a place to have radiology services provided. e ordering physician may elect to bill
for the professional interpretation, while the IDTF bills only for the technical component. In other
cases, a radiologist at the IDTF interprets the test so the IDTF bills for the total component—both
the professional and technical components.
For Medicare and many other private payers, IDTFs are paid through a physician fee schedule.
For the circumstances delineated in Case Study 1.17, a fee schedule payment system will have to be
able to pay for the professional only, the technical component only, and then the combined total
of both professional and technical.
For non-Medicare patients, you may nd that what is recognized by Medicare as an IDTF
for a limited range of diagnostic services may provide a much wider range of services delimited
only by state, local, or professional guidelines. Payment processes for these expanded IDTFs can
become quite complex.
Case Study 1.18: IDTF Acquired by Apex and Converted to Provider-Based
e Apex Medical Center has decided to purchase the IDTF that is located across town
(seeCase Study1.17.) e hospital takes the necessary steps to convert this into a hospital-based
facility. is means that the radiology services are now provided as an extension of the radiology
department of the hospital.
When a change like that described in Case Study 1.18 occurs, the entire billing and payment
process may change. In this case, with the change to provider based, the payment system will
switch from MPFS over to the outpatient PPS, namely APCs. Of course, this is for Medicare. How
will such a change be addressed by other third-party payers? e answer to this question can be
quite variable depending on the type of payment mechanisms used by a given third-party payer
for the specic services involved.
Comprehensive Outpatient Rehabilitation Facilities
As the name implies, comprehensive outpatient rehabilitation facilities (CORFs) provide outpatient
rehabilitation services. ese are generally freestanding facilities, although hospitals can establish
CORFs. For hospital-based CORFs, the provider-based rule does not directly apply because the
same fee schedule payment is made as with freestanding CORFs. Payment for services comes from
the MPFS utilizing the nonfacility RVUs (relative value units). Various services, such as physical and
occupational therapy, are typically provided, utilizing a comprehensive multidisciplinary approach.
Clinical Laboratories
Laboratory services abound in many dierent settings. Hospitals and clinics typically have clinical
laboratories, although the range of tests may be more delimited for a physician oce laboratory
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