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Payment Systems in the American Medical System


The historic payment system for reimbursing hospitals both
by insurers and by Medicare has been Retrospective Cost
Based Reimbursement(RCBR). This system of reimbursement
encourages hospitals to over charge in order to cover the
costs of the uninsured who utilize the hospital. Charges
have continued to rise year after year eventually putting
the employers at a point where they could no longer afford
the payments. For physician reimbursements, both insurers
and Medicare employed the Usual and Customary(U+C) approach
to reimbursement. This practice, which averaged the charges
for a procedure in a region, also encourages doctors to
over-charge in order to raise the average amount paid to
them for a procedure. These two systems, RCBR and U+C
eventually started to suck too much money out of the
insurers, employers, and the Medicare/Social Security trust
fund so that interventions were deemed necessary. Perhaps
the biggest intervention adopted by the private sector to
reduce medical service costs was the trend toward
businesses self-insuring. By doing so, they avoided
state-mandated benefits that were required if they hired a
third-party insurer. In addition, the money was now paid to
claims as they arose rather than prospectively so income
could be earned on this capital as it sat in the bank.
 Other intervention to reduce medical service costs mainly
involved private insurers as it was difficult for small
businesses to self-insure because of low-capitol.
Underwriting was a typical practice of insurance companies;
that is, excluding some employees from coverage if they
have preexisting conditions or if they are employed in
³high-risk² areas. Payment caps are were also employed by
insurers as a way to save medical costs. This practice
meant setting limits for the total amount paid for selected
diagnoses. These interventions ultimately led to
segmentation in the insurance market. A shift occurred in
the way that insurers calculated premium charges. Community
rating used to be the norm. It involves placing all
beneficiaries into a large group and projecting their
claims. Premiums were then spread across the entire group
as were risks. However, as a result of the historical
hospital and physician payments schemes, insurers shifted
to experience rating. That is, a rating that bases a
group¹s premiums on its experienced cost. Therefore, by
only including low-risk, low- cost individuals under
coverage, premiums for those individuals may be minimized.
This effect leaves small groups behind, paying much more in
premiums. These interventions mentioned as well as
increased experience-rating adopted by insurers and the
subsequent phenomena of market segmentation have had
effects on many levels of the health care system:
€ Premiums for small employers have skyrocketed for two
reasons. First, administrative costs for small employers
are proportionally higher than those for larger
firms(Congressional Research Service) and secondly, larger
firms have more market clout and are so able to seal the
contracts that provide lower premiums to their employees.
Larger firms are also able to spread the risks of their
insured employees across a larger beneficiary base with
lots of capitol to absorb any abnormality in claims from
one year to the next. Small firms don¹t have this luxury
and as a result their premiums have increased. € As health
care costs grew, many larger businesses opted to
self-insure and take the risks of their employees rather
than paying an insurance company to perform this role.
These employers also avoided the state mandated benefits
and could use capital not prospectively paid to earn
interest. € It was in the 1980's, when employers were
becoming increasingly concerned about soaring health care
costs, commercial insurers were concerned about the future
of traditional health insurance, and physicians were
increasingly joining health plans to guarantee a steady
flow of customers, that managed care really expand
dramatically. As diagram 1 shows(see attachments), the
number of people enrolled in HMO's in 1976 was 6 million
and by 1991 had reached 38.6 million. The higher costs of
medical care forced different groups into HMO's for
different reasons. Doctors enrolled in HMO's gave up some
autonomy but were guaranteed a steady flow of patients. The
patients enrolled were guaranteed care for a fixed monthly
premium at the expense of visiting only providers covered
in their plan. € The draining of the Social Security trust
fund by traditional hospital RCBR method and physicians by
U+C for Medicare was tackled by alternative payment
mechanisms. The traditional U+C payment to doctors was
replaced with the Resource Based Relative Value
Scale(RBRVS) 1n 1992. This system of payment assigned a
numerical value to every procedure performed in order to
attempt to objectify what goes into a physician's service.
In this way, the payments to physicians could be regulated
and controlled. Hospitals, which were traditionally
reimbursed under RCBR were paid by the Prospective Payment
System(PPS) starting in 1983. Under this system, each
episode of illness was associated with a fixed payment
regardless of resources consumed, time spent, or expenses
incurred. All illnesses were grouped into Diagnostic
Related Groups(DRG) effectively cataloguing hospitalized
patients according to fee payment. € The ever-increasing
costs associated with health care brought along many
cost-saving interventions which have been mentioned. These
interventions had effects at all levels of the health care
industry but especially so in hospitals as they represent
38% of our nation's health expenditure. Hospital admissions
declined sharply as the new payment schemes for hospitals
were introduced in 1983. Since hospitals were being paid by
a PPS system, the incentive was to get the patients out as
soon as possible. Admitting patients is associated with
high costs and hospitals opted for more outpatient care
rather than admissions. This PPS payment structure also
influenced the average length of stay. Hospitals were now
encouraged financially to release patients as soon as
possible since they were reimbursed the same amount
regardless of the duration of the stay. Efficiency was now
of paramount concern as a person sitting in a bed
represented a cost that could be contained if the patient
was released sooner than later. It is no surprise then that
occupancy rates for hospitals have also declined since
1980. This combination of reduced admissions and shorter
length of stay per visit resulted in few people in
hospitals at any given time. These trends present special
problems for smaller, rural hospitals which have more
difficulty gathering resources, staying technologically
current, and maintaining financial strength. As a result,
more and more smaller hospitals are closing, especially in
these rural areas. € The high level of unemployment in the
early 1980's along with stricter eligibility requirements
for Medicaid led to a rise in the number of uninsured
individuals in the U.S.(see diagram 2). Market segmentation
beginning in the early 80's also contributed to the number
of uninsured as those with pre-existing conditions or
high-risk jobs were denied coverage. Because of the highly
competitive hospital market created by payment changes, the
incentive to treat the uninsured is lost and these people
are increasingly marginalized. No longer may hospitals
subsidize the treatment of the uninsured by over-charging
employers or insurance companies. Many cuts have proposed
by the Republicans in Congress that aim to trim down the
cost of health care. Medicare is at the root of many of
these proposed policy changes. Among them are increases in
co-payments made by beneficiaries, caps on payments to
beneficiaries, a reduction in the amount paid to
beneficiaries per episode of illness, a holding of the
rates of increase for hospitals and doctors so that if
services increase, payments decrease, and letting the
market naturally move people into HMOs. These proposed
policy changes are likely to effect hospitals in many ways,
some of which are already being seen. It is likely that
hospital admissions will continue to decline as hospitals
have no incentive to admit. Payments are the same to
hospitals whether the treat outpatient or they admit the
patient, so to save money the natural tendency is to treat
with ambulatory or outpatient care. Even more incentive is
present for hospitals not to admit a patient as the amount
paid to them will decrease as they increase services.
ŒIncentive to not treat¹ is what it may be called. For
those that are admitted to hospitals, we will continue to
see a reduction in the number of days each patient stays in
the hospital. The motivation for the hospital to release
the patient persists because of the payment schemes in
place. For the patient who is paying a higher co- payment,
the incentive is also to leave the hospital as soon as they
feel well enough...and sometimes before! What we are likely
to see are increasing numbers of rural hospital closures as
they are unable to survive the drop in hospital visits and
stays. Empty beds mean administrative costs for the
hospital that need to be defrayed by treating people. If
there is nobody to treat, the hospital must inevitably shut
down. As people continue to move into HMO's to receive some
sort of coverage, hospitals will perhaps see an increase in
the number of visitors at hospitals but they will be
required to receive prior approval for most procedures and
the amount paid to the hospitals will remain the same
regardless of the number of procedures so the incentive to
treat more is lost. As Medicare cuts continue to prevail,
it is likely that more and more beneficiaries of Medicare
will be drawn into HMO's. Just as this has led to increased
market segmentation in the private-insurance community so
would it lead to the same dynamic in the Medicare
community. Those hospitals or physicians that sign
contracts with HMO's will be securing their patient-base
while the HMO will be cornering more of the
hospital/physician market. For those who are not enrolled
in HMO's, their costs will not be controlled. Higher fees
will be the likely result. Since the Medicare reform
proposals pay less per episode of illness, the patient will
be responsible for more of this increased amount. The
amount of Medigap payments for Medicare beneficiaries is
also likely to go up as a result of the current Medicare
reform proposals. Medicare will pay less per episode of
illness. If we assume that the charge per episode of
illness will not come down, then the amount that must come
out of the pocket of the beneficiary must increase. This
increase will be a direct result of the cuts to the
Medicare program. Long-term care in the United States has
received much attention in recent years as the baby-boomers
soon will be the population requiring this type of care.
For those seeking long-term care there are several options
available with different payments sources for each. They
are briefly outlined here: € Nursing Homes: nursing home
care may be provided in different settings with differing
payment options for each. They are consumer payment-this
type of care may include anything qualifying as daily care
for an elderly or mentally-ill patient requiring long-term
care. There is generally a daily charge rate for the
custodial care. Mediacaid covers custodial and general care
once personal funds are depleted. Medicare covers skilled
nursing and skilled therapies following hospitalization
This coverage is limited to 100 days maximum per episode.
€ Home/Community-Based Care: this type of care consists of
skilled nursing care and therapies, homemaker/home health
aid care, high technology home therapy, and durable medical
equipment. Consumer bought care may include personal care,
including the aforementioned home health aids and
homemakers and chore services. Also, any RN time spent
beyond that authorized would be covered by the patient.
Medicaid covers personal care and assistance for eligible
frail elderly or disabled individuals. Medicare covers
skilled nursing, physical or speech therapy.
€ Housing/Retirement Community: this is an enhanced service
package and often includes more supportive or custodial
care. A combination of both Medicare and Medicaid may be
used to pay for this type of service. One organized method
to do just this is the Program of All-Inclusive Care for
the Elderly(PACE). The idea is that for qualified
individuals, PACE merges Medicaid and Medicare funding into
an integrated system that enables a care-manager to
allocate resources by need. PACE must be seen for what it
is, care for acute and chronic conditions within a
long-term care package.
Diagram 1
Diagram 2
Source: U.S. Bureau of the Census, Unpublished Current
Population Survey Data, Health 

Insurance Coverage Status by State, Table Hi-4.


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