In this chapter, we will discuss the following topics:

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  What is the current cost of healthcare in the United States?

  
  
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  What changes are being faced in healthcare reimbursement models?

  
  
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  How does a hospital chief financial officer (CFO) measure success?

  
  
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  What are some of the key payment mechanisms received by a hospital?

  
  
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  How does a physician benefit by understanding hospital finance?

The Centers for Medicare and Medicaid Services (CMS) calculate the historical and projected National Health Expenditure (NHE) data. The historical spending NHE measures annual health spending in the United States by the type of good or service delivered (hospital care, physician and clinical services, retail prescription drugs, etc.) and the source of funding for those services (private health insurance, Medicare, Medicaid, out-of-pocket spending, etc.), and the NHE projections are estimates of spending for healthcare in the United States over the next decade using the same information as the historical NHE.¹ Included in Table 11-1 are the historical NHE for 2015 and the projected NHE between 2016 and 2025.

In 2015, hospital expenditures were $1.361 trillion, which accounts for approximately 32% of the total NHE of $3.2 trillion; physician and clinical service expenditures were $634.9 billion, which accounts for approximately 20% of the total; and prescription drug spending was $324.6 billion, which accounts for about 10% of the total.²

When originally established in 1965, Medicare was reimbursed retrospectively through an itemized report of the actual cost of services and supplies as determined through a facility’s filed/audited cost report. This method of reimbursement paid hospitals after services were rendered, based on the costs, and essentially allowed unlimited cost growth. To curb this behavior, the US Congress created the Prospective Payment System (PPS) in 1982 to cap hospital spending. The PPS relies on coding to group patient cases into specific Diagnosis-Related Groups (DRGs), which are categories of similar diagnoses with varying complexities that are estimated to have comparable costs. The DRGs are paid at a flat rate, calculated by Medicare to be the average cost of the service for that specific diagnosis group. In general, Medicare recognizes that hospitals incur costs for providing certain services to patients over and above those services specific to the DRGs, and so they will pay their share of those services based on the Medicare utilization (the number of Medicare patients as a percentage of the total patient population). The program provides additional payments through the cost report reconciliation process, which includes organ acquisition, bad debt, paramedical education, and graduate medical education. In 1996, Medicare set a cap on the number of residents for which it would pay for graduate medical education.

One of the newer developments over the last few years has been the establishment of accountable care organizations (ACOs) and clinically integrated networks (CINs), in which various providers (including primary care physicians, specialists, and hospitals) join together to provide services. These networks have evolved, and in many cases, they bring together large groups of providers. One of the largest CINs is Advocate Physician Partners, which brings together more than 5000 physicians in Chicago, and its associated ACO, Advocate Physician Partners Accountable Care Inc. Its publicly reported data shows consistent improvement in its ACO measures, resulting in $33 million of shared savings in payments from the CMS.

As healthcare costs have increased, payers continue to introduce alternative reimbursement models to shift the risk of healthcare costs to hospitals. The Patient Protection and Affordability Care Act (PPACA) of 2010 ushered in an era of accountability and creating value for providers, helping to spark a consumer-oriented movement in healthcare. Hospital payments have been moving from a fee-for-service methodology toward a more risk-based system, including such elements as pay for performance, bundled payments, shared savings, shared risk, and full risk. To support this shift in reimbursement models, Medicaid moved its payment models from per-diems (where they pay for each day of service) to APR DRGs (much like Medicare), which is an expansion of the basic DRGs to the non-Medicare population.

Commercial payers have created similar models, shifting the risk to providers. Examples of this include Medicare Advantage plans, where the hospital assumes the risk for certain populations, and bundled payment plans, where the payment typically covers the facility fee, physician fee, anesthesiology, implants and instrumentation, pain management, rehabilitation, and all other care costs for a specific period of time. In this model, the healthcare provider is responsible for all the costs associated with the care provided to the patient for a defined time period either at the hospital, an acute rehab, skilled nursing facility, or even the patient’s home. Bundled payment programs have been used particularly in orthopedics and cardiac surgery. This model can allow a hospital to reduce the length of stay, decrease discharges to skilled nursing facilities, and cut back on readmissions, all for the purpose of maximizing its margins.

Another transformative event was the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015. MACRA is landmark legislation enacted to replace the Sustainable Growth Rate (SGR) formula for physician payment. In October 2016, CMS detailed the final regulations for the implementation of MACRA. This is a game changer in terms of how physicians will be reimbursed by Medicare and includes quality metrics and rewards physicians who have joined ACOs. We will not go into the details of MACRA in this chapter, but the American Medical Associataion (AMA) has an excellent presentation on the subject that can be accessed at https://www.ama-assn.org/sites/default/files/media-browser/public/physicians/macra/macra-qpp-summary.pdf.

There are two MACRA programs:

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  Merit-Based Incentive Payment System (MIPS): Providers earn payment adjustments based on evidence-based and practice-specific quality data.

  
  
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  Alternative Payment Model (APM): In this payment approach, added incentive payments are given to provide high-quality, cost-effective care.

Although payment adjustments begin in 2019, performance measurements for the new models begin in 2017, making now a critical time for physicians to begin learning about the details and implications of MACRA. Understanding and tracking quality indicators have become necessary for reimbursement and increase the need to develop complex governance models, share data across the continuum, and measure performance accurately.

As the healthcare industry transitions from volume-based to value-based reimbursement, the areas of quality and cost are increasingly intertwined. For instance, during the first year of the Medicare Hospital Readmissions Reduction Program, which was established by the PPACA, CMS cut Medicare reimbursement by up to 1% for 2213 hospitals with high readmission rates for heart attack, heart failure, and pneumonia. The second round of penalties started October 1, 2013, when CMS cut reimbursements for 2225 hospitals by up to 2%. In fiscal year 2015, hospitals received cuts as big as 3%, and penalties for chronic obstructive pulmonary disease (COPD) and total hip and knee replacement were added to the program.

Due to these developments, Medicare and private payers continue to link pay to performance through readmission penalties, bundled payment programs, and ACOs; therefore the set of metrics that chief financial officers (CFOs) focus on is expanding to encompass not only core financial numbers but also quality indicators. Improved clinical documentation to reflect the care provided to the patient plays a very important role in this process. Most hospitals today have a clinical documentation program in which nurses and physicians work closely with coders to ensure that the appropriate ICD-10-Procedural Classification System (ICD-10-PCS) diagnoses and procedures are documented. These programs help to improve both the quality and the financial reimbursement that hospitals and physicians receive from payers.