Ratio of cost to charges rcc method

Read “Real-World Scenario” at the beginning of Chapter 6 (pages 151–152). After reviewing the types of alternative investments discussed in our unit lesson, respond to the following prompts:

Provide an answer to the three questions Gary has for Alice in the last paragraph of the scenario:
What is his marginal or incremental cost for the Antrim book of business?
Could his competitor handle his present Antrim volume and at what cost?
If Gary’s system were not in Antrim’s network, what percentage of his present Antrim volume would he retain?
Discuss at least one alternative Gary can consider for revenue if the Antrim contract is lost.
Your case study must be at least two pages in length. Adhere to APA Style when constructing this assignment, including in-text citations and references for all sources that are used. Please note that no abstract is needed.

Gary Bentham, CFO of Bartlett Community Hospital, is preparing for contract negotiation with his largest nongovernmental payer, Antrim Healthcare. Antrim currently accounts for approximately 30% of all patient-care revenue at Bartlett and this percentage is growing. The current contract has been in force for 3 years and expires on June 30 of this year. Gary has given Antrim the required 180-day notification of his intent to terminate but is alarmed by the position taken by Antrim’s chief negotiator, Alice Mullins. Alice has told Gary that Antrim is unwilling to increase its present payment schedule beyond 5%. Currently Antrim pays for inpatient care on a diagnosis-related group (DRG) basis using the relative weights employed by the centers for Medicare and Medicaid Services (CMS). The base payment for a case with weight of 1.0 is $4,800. Gary knows that Medicare currently pays the hospital $6,500 for a case with a weight of 1.0. While the outpatient payment from Antrim is more reasonable, Gary is concerned about the hospital’s long-term financial position if the Antrim inpatient rate cannot be increased substantially.

Alice has told Gary that she believes the current inpatient rate is reasonable because Medicare patients are much more resource intensive than Antrim’s younger patient population. To test this hypothesis, Gary compared the average charge by DRG for Medicare traditional patients and Antrim’s patients. Gary was amazed at the similarity when the data analysis was completed. He discovered that on average an Antrim patient consumed 94.5% of the resources of a traditional Medicare patient. Gary further concluded that because the average cost of a traditional Medicare patient with a case weight of 1.0 was $6,200, he would need a payment of $5,859 (0.945 x $6,200) from Antrim to break even. If Alice is serious about their maximum rate increase of 5%, then the best rate that Gary could expect would be $5,040 (1.05 x $4,800), which is well below his estimated cost.

Even after Gary shared his cost analysis with Alice, Alice remains firm in her position. The best inpatient rate that Antrim will offer is $5,040. Alice has told Gary that any rate higher will compromise Antrim’s market position and either destroy its margins or lead to a loss of market share.

Gary must now determine what position his hospital system should take with Antrim. He knows that his system controls about 40% of the capacity in their market, with the remaining 60% controlled by a competitive system. Both systems have some excess capacity, but that excess capacity has narrowed in the last few years as both hospitals have purchased smaller hospitals and consolidated them into their operations. There are also two major health plans that compete with Antrim. Both of these plans as well as Antrim have contracts with both systems. Gary knows that his present rates of payment from the other health plans are higher than Antrim’s. He is also fairly certain that Antrim’s rate of payment to his competitor is higher than their rates of payment to his hospital system.

Gary is attempting to answer the following questions before his next scheduled meeting with Alice. What is his marginal or incremental cost for the Antrim book of business? Could his competitor handle his present Antrim volume and at what cost? If Gary’s system were not in Antrim’s network, what percentage of his present Antrim volume would he retain? These issues and others are central to his negotiation posture with Alice and have profound implications for his hospital system.

Learning Objective 1

Define basic methods of payment for healthcare firms.

▶ Payment Methods and Their Relationship to Price Setting

There are four generic methods of payment for healthcare firms: historical cost, bundled services, billed charges, and capitated rates. (See Chapter 3 for further discussion of payment methods.) TABLE 6-1 presents a scheme for categorizing payment plans by two dimensions:

1. Payment basis

2. Unit of payment

TABLE 6-1 Healthcare Payment Methods

Payment Basis

Unit of Payment

Cost

Fee Schedule

Price Related

Specific services

· High-cost drugs

· Devices

· Resource-based relative value scale

· Ambulatory payment classifications

· No contract

· Self-pay

· Outpatient

Bundled services

· Some government

· clinics paid on an

· annual budget

· DRGs

· Per diem

· Outpatient surgery groups

· Outliers

The payment basis describes the manner by which a payer (Medicare, Medicaid, commercial health plans, and others) determines the amount to be paid for a specific healthcare claim. There are three payment bases: cost, fee schedule, and price related.

A cost-payment basis simply means that the underlying method for payment will be the provider’s cost. The rules for determining cost will be specified in the contract between the payer and the healthcare provider. For example, payment may be defined as the provider’s ratio of cost to charges (RCC) multiplied times the total charges for a specific healthcare claim. Payment for a claim with $1,000 of charges and a provider RCC of 50% would be paid $500 (50% times $1,000).

A fee-schedule basis means that the actual payment will be predetermined and will be unrelated to either the provider’s cost or the provider’s actual prices. For example, Medicare payment to a hospital for a patient with a DRG assignment of 470 (major joint replacement or reattachment of lower extremity w/o MCC) will have a predetermined payment (e.g., $14,000). The actual charges, services provided, or the cost are not relevant once the DRG assignment has been made. The vast majority of physician payment from most payers is usually related to fee schedules. Usually fee schedules are negotiated in advance with the payer or are accepted as a condition of participation in programs such as Medicare and Medicaid.

A price-related payment basis means that the provider will be paid for services based on some relationship to its total charges or price for the services delivered to the patient. For example, a payer may negotiate payment with a healthcare provider at 75% of billed charges. In this situation, a claim with total charges of $10,000 would be paid $7,500 (75% times $10,000).

While there are three different payment basis methods, there are also two alternative methods for grouping the services provided to a patient that are referred to as the unit of payment ( Table 6-1 ). These two different units of payment are called specific services or bundled services.

Bundled services aggregates services provided to a patient in an encounter of care into one payment unit. For example, many health plan contracts often pay for inpatient services on a per day or DRG basis. Payment is fixed in advance, based on an agreed fee schedule (e.g., $1,000 per day to cover all services provided) and is a bundled unit of payment because the provider’s payment is the same regardless of the level of ancillary services per day.

In a specific services payment method the individual services provided to a patient in an encounter of care are not aggregated. An example of this might be a contract that makes payment for outpatient services based on a discount from billed charges (e.g., 75% of billed charges). This outpatient provision is related to the provider’s prices and it is based on the prices of specific services that constitute the total claim for the patient, including radiology procedures, lab tests, and other procedures provided to the patient.

In many cases health plan contracts will have elements that may appear in more than one of the six cells displayed in Table 6-1 . Many contracts that pay hospitals on a DRG basis will have a separate provision for outliers. Payment for outliers is often related to charges. For example, a contract may stipulate that for all claims in excess of $75,000 in billed charges, the payer will pay the claim not on a DRG basis, but at 80% of billed charges. Assume that a claim had a DRG payment of $15,000, but the patient incurred total charges of $90,000. The payer in this case would not pay $15,000, but 80% of $90,000, or $72,000. An interesting case is a health plan that has not negotiated a contract with a provider. In that case, the payment method would be billed charges and it would be related to the specific services provided. The apportionment of payment responsibility between the patient and their health plan would need to be worked out because the patient may have gone out of network, but the hospital in this case would expect payment based on billed charges.

▶ Methods for Controlling Revenue

Healthcare providers have three major ways that they can control their revenue function in today’s economic climate:

1. Price setting

2. Payer contract negotiation

3. Billing/coding management

Price setting is the process of establishing specific prices for the services provided by the healthcare provider. The actual list of services to be priced can be quite large and could be as large as 80,000 in some hospitals. Pricing by healthcare firms is still a very important element of the revenue function even though the majority of revenue may not be related to prices. For example, a nursing home may have 80% of its revenue derived from Medicare and Medicaid that make payment on a fixed-fee-schedule basis that is unrelated to specific prices. The remaining 20% of the nursing home’s business is affected by its set prices, and these prices may well mean the difference between a profit and a loss.

Contract negotiation is a critical activity for all healthcare firms that derive substantial portions of their revenue from commercial insurers. Any provider that negotiates a payment schedule that is lower than its costs is digging itself a deep hole, from which it may not be able to recover.

Billing and coding issues are very important in the current world of healthcare payment. Providers that fail to include delivered services on a claim are not paid for those services. For example, if an injectable drug is administered to a patient but the drug administration for that drug is not coded, lost payment will result. In a similar fashion, if secondary diagnosis codes are not included on a hospital claim, then the claim may be assigned to a lower weighted DRG, resulting in lost payment. See Chapter 2 for further discussion of coding and billing issues.

Our focus in this chapter is on the first two areas of revenue determination: pricing and payer contract negotiation. Improving performance in these areas will have a very positive impact on the firm’s total revenue function.