72 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
Note: Healthcare providers have often taken the stance of having the third-party payer indicate
how it, the payer, wants the services coded and billed. en, the provider will accommodate payer
requirements to get paid. is particular approach is contrary to the whole thrust of the HIPPA
TSC. However, getting paid quickly becomes a nancial reality for healthcare providers.
As we discuss contracts and features often found in managed care contracts, keep in mind that
the standardization under the HIPAA TSC is implemented more fully on the healthcare provider
side. While there are standard transactions for activities such as remittance information, require-
ments for standardization in claims adjudication are yet to come. is results from the wide vari-
ety of payment mechanisms. Anticipate that in negotiating contracts with MCOs that there will
be specic requirements for claims ling that may dier from standard guidelines. Often, coding
and billing guidance is not in the contract itself. Companion manuals or guidances from the payer
through Internet access are quite common.
Managed Care Organizations
As indicated in the introduction to this chapter, MCOs come in all sizes, shapes, and congura-
tions. Even a general discussion of MCOs is well beyond the scope of this text. To illustrate con-
cepts in our payment system discussions, including capitation in Chapter 5, we consider two of the
many dierent types of organizations that fall under the general rubric of MCO:
◾ Preferred provider organization (PPO)
◾ Health maintenance organization (HMO)
A PPO is generally a group of physicians, hospitals, and other healthcare providers that have
contracted with an insurance company, TPA, or other healthcare payer to provide services. For
instance, a physician group may contract with an insurance company to provide services to cov-
ered individuals at a discounted rate. While the physicians may give away some reimbursement
because they are a member of the PPO, more patients will come to them. As you might imagine,
the actual organization of a PPO can be very loosely knit, with dierent healthcare providers com-
ing to and going from the PPO. On the other hand, the PPO may be very tightly organized, with
the careful selection of providers allowed to join the PPO being strictly limited.
As with other terminology in this area, PPO can be variously interpreted. You may also see
participating provider organization or preferred provider option. A spin-o is the EPO or exclusive
provider organization. A related concept is the independent practice association or IPA. is is
generally a group of physicians, possibly both primary care and specialists, who have banded
together to negotiate with insurance companies and other payers to provide services. Generally,
discounted rates are provided in return for some sort of preferential status. Note that PPOs gener-
ally involve an emphasis on payment arrangements as opposed to management of care. However,
in some cases there can be some management, although the emphasis will likely be on the nan-
cial side.
Case Study 4.7: Expensive Dermatologist
A PPO has been organized in Anywhere, USA. Almost all the primary care physicians have joined,
and most of the specialists have joined. ere are several dermatologists in the group. Whilepay-
mentto the physicians is on a discounted fee-for-service arrangement, as a part of the PPO contract
Contractual Payment Systems ◾ 73
with insurers, cost containment is monitored by a select committee of physicians in the PPO. One
of the dermatologists uses specially compounded salves and ointments. is compounding is sig-
nicantly driving up the costs to the insurers. e committee of physicians has indicated that this
dermatologist may have to be removed from the PPO, and the dermatologist will lose referrals from
within the PPO unless the compounding is stopped.
For Case Study 4.7, do you think there might be some conict relative to the dermatologist?
Note that in this case study, the issue of quality of care is really not addressed. e compounded
prescriptions may provide higher quality of care. What has been addressed is a nancial concern
with the PPO.
HMOs extend the PPO concept and are typically much more interested in quality of care
along with delimiting services only to those that are really necessary. HMOs typically have a more
formal organization structure than PPOs. HMOs are more likely to have an organized delivery
system that involves physicians, hospitals, skilled nursing homes, home health agencies, and so on.
Of course, there can be enormous dierences in scale and degree of integration for the delivery
system. A special form of the HMO concept is the sta model HMO, in which the physicians are
employed and the other healthcare providers are owned by the HMO.
With a provider network or organized delivery system, HMOs can then negotiate contracts
for services to employers, groups, insurance companies, or even individuals. Typically, the HMO
will receive some sort of periodic payments, for which the HMO will provide services. While this
sounds rather simple, establishing the overall process is far from simple. For instance, there may
be occasions when a covered individual must seek services outside the organized delivery system.
is could be due to specialized services or the fact that the individual is traveling well outside the
geographic range of the HMO providers.
ere are three key characteristics for HMOs:
1. Preferred Providers: HMOs limit the services provided to their organized delivery system.
us, patients are required to go to specied providers. If the patient goes outside the orga-
nized delivery system, then special provisions come into play.
2. Utilization Management: Great emphasis is placed on managing care through screening,
preauthorizations, medical necessity, and even using primary care physicians as gatekeepers.
3. Cost Containment: HMOs make every eort to hold down costs. By using preferred provid-
ers and closely monitoring the care that is being provided along with nancial incentives for
both the providers and the patients, cost can be contained. Cost containment then means
protability for the HMO based on the periodic payments that are received.
Even the Medicare program uses the HMO approach. is is the Medicare Advantage (MA)
program. Within the Medicare approach, there are variations. Basically, a sponsor, ostensibly an
HMO, will contract with Medicare to provide Part A and Part B services in return for a xed pay-
ment from the Medicare program. Medicare beneciaries enrolling with a MA plan will not use
the Medicare supplemental insurance, that is, Medigap coverage. Deductibles and copayments
may be used, although in altered forms. Note that there are many variables in establishing these
programs. Healthcare providers that participate, that is, are part of the preferred provider network
or HMO, need to fully understand how claims will be adjudicated and paid. MA is further dis-
cussed toward the end of this chapter.
Next, we discuss general contract features primarily from the healthcare providers’ perspective.
74 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
Terminology and Contract Features
We now discuss, on a generic basis, some of the language, terminology, and features that are
contained in these contracts. We generally take the perspective of the healthcare providers. ese
contracts are generally written by the MCOs and thus tend to slant advantages to the third-party
payer.
Note: All proposed contracts should be carefully reviewed for both legal form and then sub-
stantive features. Healthcare providers of all types may need to negotiate dozens of contracts.
While each contract will have some basic similarities, there can be enormously dierent types of
contracts.
As we discuss these contracts, keep in mind the fundamental steps for adjudicating a health-
care claim. From Chapter 1, we have the following:
a. e patient must be covered.
b. e services rendered and items dispensed must be covered.
c. e services are ordered and provided by qualied medical persons.
d. e services are medically necessary.
e. e services must be appropriately documented.
f. A correct claim is led on a timely basis.
Definitions
Here are some common terms along with a brief discussion of their meaning and use. Keep in
mind that contracts may use the same term with dierent meanings or dierent terms with essen-
tially the same meaning.
Allowed Amount. Most third-party payers will not fully consider the charges made by
the healthcare provider. Instead, for a given service or item that is being billed, a lower
allowed amount will be used for the calculations involving the payment of the claim. In
some cases, the allowed amount may be signicantly lower than the charged amount.
Managed care contracts must be specic regarding what or how the allowed amounts are
determined.
Capitated. e concept of capitated or per head payment is discussed in Chapter 5. Certainly,
if a healthcare provider is reimbursed based on a capitated arrangement by a third-party
payer, there will be a signicant contractual relationship.
Claim. is is the mechanism by which a healthcare provider submits an itemization of services
that were provided to the patient or enrollee of the MCO. Typically, there is an itemized
statement of some sort and then an actual claim on a standardized form in a standardized
format. e two most used forms are the 1500 (CMS-1500) and the UB-04 (CMS-1450).
Note that electronic transmission is now the norm, so paper-based claims are used only
when necessary.
Note: See the NUBC website (http://www.nubc.org) for information concerning the UB-04
(Universal Billing 2004) and the National Uniform Claim Committee (NUCC) website (http://
www.nucc.org) for information regarding the 1500 claim form. See also the previous discussion
concerning the HIPAA TSC.
Contractual Payment Systems ◾ 75
Coinsurance. is is a percentage, generally the percentage as applied to the allowed pay-
ment. e application of this percentage to the overall payment then becomes the enrollee’s
responsibility, and the dollar amount becomes the copayment. Care should be taken to
determine the relationship between the charged amount and the allowable amount relative
to applying the coinsurance percentage. On occasion, there may be dierent coinsurance
percentages based on the specic type of service.
Companion Manuals. ese are manuals or directives from third-party payers providing
instructions on how to code, bill, and le claims for services provided under a contractual
arrangement. Guidance from payers may be quite extensive. In other cases, there may be
little guidance. However, the true test is how the claims are adjudicated, that is, how the
payer’s computer systems are programmed. Note that there may be separate manuals, or
there may be a series of directives. is information may not be in printed form. Greater use
of the Internet or even secure intranets is becoming more common.
Coordination of Benets (COB). e COB is the process of coordinating the payment for
healthcare services between dierent payers. ere may be a primary payer along with a
secondary payer and even a tertiary payer. Coordination can become extremely complex and
should be well delineated in any managed care contract.
Copayment. is is the dollar amount that the patient or enrollee must pay relative to ser-
vices. e copayment is generally calculated by multiplying the coinsurance percentage
times the payment that is made for the services. Note that this term can be used in a general
sense with a specic dollar amount, while in other instances the copayment is pegged to the
payment being made. See Case Study 4.8 for an illustration. ere can be great variability
in this area.
Case Study 4.8: Copayment for Physician Visit
Stanley has health insurance coverage through his employer. However, when Stanley goes to the
doctor, there is a general $20.00 copayment for the visit. In addition, if any other services are pro-
vided outside of an evaluation, then there is a 15-percent coinsurance amount. e copayment and
coinsurance do not apply to an annual physical examination.
Covered Service. Virtually all third-party payers of any type exclude certain services. us,
for healthcare providers it is important to work with the patient or managed care enrollee
to understand what is or is not covered by the payer. Note that noncoverage can result from
dierent types of situations. For example, there may be certain services that are never cov-
ered. Other services, such as experimental services or drugs, may not be covered. One of the
big issues is noncoverage due to lack of medical necessity. Healthcare providers must be very
careful to understand how medical necessity issues are addressed under a given contract.
Deductible. Typically, this is a dollar amount that must be paid by patients or enrollees before
medical services are paid or fully paid by the third-party payer. As with other concepts, this
term can be used in variable ways. For instance, there may be no deductible relative to physi-
cian oce visits, but there will be a deductible for therapeutic services provided at a hospital.
Also, deductibles can be relatively modest, involving only a few hundred dollars. In other
cases, the deductible may be thousands of dollars.
Emergency Condition. Emergency services generally are treated dierently from nonemergent
situations. Coverage for emergencies is generally going to be made, and various preauthori-
zation processes will be suspended. us, the denition of an emergency condition within
76 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
a given contract is important. While there can be signicant variations, there is a formal
denition contained in the EMTALA (Emergency Medical Treatment and Labor Act) law
and associated Medicare rules and regulations.*
Enrollee. An individual who has purchased health insurance coverage from a third-party payer
or is otherwise covered under the third-party payer plan. Contacts may use this term or
generally equivalent terms such as member or covered individual.
Experimental Service. Experimental services, pharmaceuticals, and devices are generally not
covered under various health plans. Care should be taken to have specic denitions in a
contract regarding what is experimental or how decisions are made concerning experimental
status. In certain circumstances, a given denition or process relative to experimental sta-
tus can create signicant consternation on the part of the healthcare provider, patient, and
third-party payer.
Fee for Service. Fee-for-service payment means that as services are provided, the third-party
payer makes payments for the services. e more services that are provided, the more the
payer pays to the healthcare provider. In some sense, this is the opposite of capitation, for
which a xed payment is made regardless of the number of services that are provided.
Because of this generalized payment approach, third-party payers are generally very sensi-
tive to the need to provide services.
Holdback. MCOs, particularly HMOs and PPOs, in determining their payment to healthcare
providers may want to hold back some of the payments until the end of the contract year.
en, based on the experience for the year, the holdback payment can be distributed or not.
Usually, performance formulas are established in advance so that healthcare providers are
incentivized to constrain the amount and cost of healthcare provision.
MCO Reimbursement. is is the amount that the MCO will approve for payment for a given
service or item. Taking into account deductibles and copayments, the actual amount that
the MCO will pay will probably be less than the approved or allowed amount.
Medically Necessary. is is a subjective judgment on the part of medical professionals
regarding whether a specic service is necessary. MCO contracts should carefully specify
how medical necessity decisions are made relative to diagnoses or other procedures used
by the MCO. Medical necessity can become an area of great contention, so denitions and
associated processes for medical necessity determination should be clearly enunciated in any
contract.
Noncovered Services. is relates to services, pharmaceuticals, and other items that are
not covered by the given third-party payer plan. See the discussion regarding covered
services.
Notices. Periodic communications from the MCO to healthcare providers are necessary to
keep everyone up to date. ere may be formal notices that involve possible changes to the
contract itself. More likely, most of the communications will involve changes in coding, bill-
ing, and reimbursement processing. In some cases, a healthcare provider that is under con-
tract may need to contact the MCO relative to issues such as contract renewal or requested
changes in the contract.
Payer. is refers to the MCO itself or whatever organization is making payment for services.
We may generically refer to a third-party payer. Also, reference may be made to private
third-party payers to distinguish contractual situations from government programs such as
Medicare and Medicaid, which may be called public third-party payers.
*
For more information on EMTALA, see 42 CFR §489.20.
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