IHP 630 Module 4 Reimbursement Paper Example

Following the Medicare Dollar: How Stonebridge Is Paid for Inpatient, Outpatient and Physician Care

[Student Name]

Southern New Hampshire University

IHP 630: Healthcare Finance and Reimbursement

Module Four Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Following the Medicare Dollar: How Stonebridge Is Paid for Inpatient, Outpatient and Physician Care

Medicare pays for nearly half of Stonebridge Regional Medical Center's care, but department leaders often speak of Medicare payments as if they were charges discounted by some mysterious formula. They are not. This paper explains the main Medicare payment systems that affect the hospital and its employed physicians, with worked examples, and draws out what each means for managers.

From Costs to Prospective Prices

When Medicare began in 1966, hospitals were reimbursed for their reasonable costs, which gave them little reason to control spending. Mayes (2006) traced how rising costs, research on diagnosis-related groups at Yale and political pressure in the early 1980s led Congress to adopt a prospective payment system in 1983. Under it, each admission earns a preset sum tied to the patient's diagnosis group, so hospitals keep the difference if they spend less and absorb losses if they spend more. The change shifted financial risk from the program to hospitals and shortened hospital stays across the country.

How a DRG Payment Is Calculated

Coders place every inpatient stay into one of several hundred MS-DRGs, using the recorded diagnoses, procedures and complications. Each group has a relative weight reflecting average resource use. The payment is the hospital's base rate, adjusted for local wages, multiplied by that weight, with add-ons for teaching and for serving many low-income patients where applicable and extra outlier payments for unusually costly cases.

A Worked Example

Consider a hip replacement without major complications. Suppose the group's relative weight is about 1.9 and Stonebridge's wage-adjusted base rate is about $6,500. The operating payment is 1.9 times $6,500, or $12,350, regardless of whether the patient stays two days or four. If Stonebridge's cost for the stay is $14,100, as its cost accounting suggests, it loses about $1,750 on each such case. The hospital cannot change the payment; it can only change its cost or its coding accuracy.

Table 1. Illustrative Medicare Inpatient Payment for a Hip Replacement

Note. Figures are illustrative; actual weights and rates are updated annually by CMS.

Outpatient Payment

Hospital outpatient services are paid under a separate prospective system that groups services into Ambulatory Payment Classifications with similar clinical characteristics and costs. Each classification has a weight and a payment rate, and some items are packaged into the main service rather than paid separately. Because outpatient payment rates for the same service are often higher at hospital outpatient departments than in physician offices, Congress and CMS have moved toward site-neutral payment for some services, which could reduce Stonebridge's revenue from newly acquired off-campus clinics.

Documentation and Coding

Because the diagnosis group determines payment, the accuracy of clinical documentation directly affects revenue. A patient with pneumonia and acute respiratory failure documented as a major complication falls into a higher-weighted group than the same patient documented with pneumonia alone. Stonebridge's clinical documentation specialists review charts while patients are still in the hospital and query physicians when records are incomplete. An internal audit found that about 4% of reviewed cases were under-coded, worth an estimated $1.3 million a year, while a smaller share were over-coded, which creates compliance risk. The goal is accuracy in both directions, not maximizing payment, since Medicare audits and the False Claims Act penalize overbilling.

The Physician Fee Schedule

Medicare pays physicians using a fee schedule based on the resource-based relative value scale. Every billable service receives three separate values, one reflecting the clinician's effort, one the costs of running a practice and one liability insurance; each is adjusted by a geographic practice cost index, summed and multiplied by a national conversion factor set each year. Hsiao et al. (1988) led the research that estimated physician work for hundreds of services by measuring time, mental effort, technical skill and stress, which became the foundation of the work component.

A Physician Payment Example

A moderately complex return visit in a clinic carries roughly 3.8 total relative value units in an office setting. Multiplying by a conversion factor of about $33 gives roughly $125 before geographic adjustment. The same visit in a hospital outpatient department pays the physician less, because the hospital bills separately for its facility costs, but total Medicare payment across both bills is often higher. Stonebridge's employed physicians generate relative value units that the hospital tracks as a measure of productivity.

Payment Tied to Quality

Medicare increasingly adjusts payments for performance. The Hospital Readmissions Reduction Program reduces inpatient payments when a hospital readmits more patients with certain conditions than its case mix would predict. Zuckerman et al. (2016) found that after the program was enacted, readmission rates for targeted conditions fell faster than for other conditions, and that the concurrent rise in observation stays was not associated with the readmission declines, easing concerns that hospitals had simply reclassified patients. Stonebridge paid a readmission penalty of 0.8% of base inpatient payments last year, about $620,000.

Medicare Advantage

About 38% of Stonebridge's Medicare patients are enrolled in private Medicare Advantage plans, which pay the hospital under negotiated contracts, often pegged to traditional Medicare rates but with their own prior authorization and denial practices. Growth in these plans has contributed to the rising denial rate noted in Milestone One.

Other Value-Based Adjustments

Two further programs affect Stonebridge's inpatient payments. The Hospital Value-Based Purchasing Program withholds a small percentage of base payments from all hospitals and redistributes it according to performance on clinical outcomes, safety, patient experience and efficiency. The Hospital-Acquired Condition Reduction Program cuts payments by 1% for hospitals in the worst-performing quarter on measures such as central line infections and surgical site infections. Stonebridge earned back slightly more than it contributed under value-based purchasing last year and avoided the hospital-acquired condition penalty.

Implications for Stonebridge

Four implications follow. Because payments are fixed per case, reducing cost per case, such as implant and length-of-stay costs for joint replacement, directly improves margins. Accurate clinical documentation ensures cases are assigned to the correct group. Readmission reduction protects revenue as well as patients. And site-neutral policy makes aggressive expansion of hospital-based outpatient clinics a riskier strategy.

Conclusion

Medicare pays Stonebridge through fixed, prospectively set amounts for inpatient stays, outpatient services and physician work, increasingly adjusted for quality. Understanding those formulas shifts managers' attention from what the hospital charges to what care costs and how well it is documented and delivered.

References

Hsiao, W. C., Braun, P., Yntema, D., & Becker, E. R. (1988). Estimating physicians' work for a resource-based relative-value scale. New England Journal of Medicine, 319(13), 835-841. https://doi.org/10.1056/NEJM198809293191305

Mayes, R. (2006). The origins, development, and passage of Medicare's revolutionary prospective payment system. Journal of the History of Medicine and Allied Sciences, 62(1), 21-55. https://doi.org/10.1093/jhmas/jrj038

Zuckerman, R. B., Sheingold, S. H., Orav, E. J., Ruhter, J., & Epstein, A. M. (2016). Readmissions, observation, and the Hospital Readmissions Reduction Program. New England Journal of Medicine, 374(16), 1543-1551. https://doi.org/10.1056/NEJMsa1513024