C812 Task 1 Reimbursement Systems Analysis Example

Who Pays, How Much and for What: Examining Insurance Plan Components and Payment Systems Through One Patient's Hernia Repair

Student Name

Leavitt School of Health, Western Governors University

C812: Healthcare Reimbursement, Task 1

Course Instructor

Month Day, Year

Who Pays, How Much and for What: Examining Insurance Plan Components and Payment Systems Through One Patient's Hernia Repair

Introduction

Healthcare reimbursement is the set of rules that decides how much a provider is paid for a service and how that amount is divided between an insurer and a patient. Revenue cycle staff, coders and HIM professionals all work within those rules, and mistakes in understanding them lead to denied claims, surprised patients and compliance risk. This paper examines the components of a health insurance plan through a worked example, compares fee-for-service and managed care arrangements, describes the main Medicare prospective payment systems by setting and considers what each payment method encourages. It follows one composite patient, a 52-year-old warehouse supervisor with employer coverage who has an outpatient hernia repair, and then contrasts how Medicare would pay for similar care.

Components of an Insurance Plan

Every insurance plan combines the same basic components, and patients experience them as costs. The premium is the amount paid to keep coverage in force, usually monthly and, for employer plans, shared between the employer and the employee. In 2024, average annual premiums for employer-sponsored coverage were about $8,951 for single coverage and $25,572 for family coverage, and the average deductible for single coverage among workers with one was $1,787 (KFF, 2024). The deductible is the amount the patient pays for covered services each year before the plan begins to share costs. After the deductible, coinsurance is the percentage of the allowed amount the patient pays, and a copayment is a fixed dollar amount for a service, such as $30 for an office visit. The out-of-pocket maximum caps the patient's total cost sharing for covered, in-network services in a year. Finally, the allowed amount is the price the plan has agreed to pay a network provider for a service, which is usually less than the provider's charge.

Worked Example: The Patient's Costs

The patient's employer plan has a $1,500 deductible, 20% coinsurance, a $30 copayment for office visits and a $4,000 out-of-pocket maximum. He has not yet met his deductible this year. His care includes a surgeon's office visit, the outpatient surgery at an in-network hospital and a follow-up visit.

The two office visits cost him $30 each, or $60 in copayments. For the surgery, the hospital's charge is $14,200, but the plan's allowed amount for the hospital facility and the surgeon together is $6,000. The patient first pays the full $1,500 deductible. The remaining $4,500 is shared: the patient pays 20%, or $900, and the plan pays 80%, or $3,600. The patient's total cost is $2,460 ($60 + $1,500 + $900), well under the out-of-pocket maximum. The plan pays $3,600 plus the balance of the office visits, and the hospital cannot bill the patient for the difference between its $14,200 charge and the allowed amount, because it is in the plan's network.

The example shows why patients are often surprised: the allowed amount and the order in which deductible and coinsurance apply are invisible until the explanation of benefits arrives. Revenue cycle staff who can explain these steps before a procedure help patients plan and reduce bad debt.

Fee-for-Service and Managed Care Compared

Under traditional fee-for-service, a provider is paid separately for each service, and the patient may see any provider. Payment rises with volume, so the model rewards doing more, and it gives the payer little control over cost. Managed care arrangements combine payment with rules intended to control cost and coordinate care. A health maintenance organization (HMO) typically requires members to use its network, choose a primary care provider and obtain referrals for specialists; out-of-network care is usually not covered except in emergencies. A preferred provider organization (PPO) offers a network with lower cost sharing but still covers out-of-network care at higher cost, trading some cost control for member choice. Point-of-service plans sit between the two.

Managed care also changes how providers are paid. Under capitation, a provider receives a fixed amount per member per month regardless of how many services each member uses. A primary care group paid $45 per member per month for 2,000 members receives $90,000 each month whether its patients visit once or ten times. Capitation shifts financial risk to the provider and rewards efficient care and prevention, but it can also encourage too little care if quality is not monitored. Many contracts now blend models, such as fee-for-service with shared savings or bonuses tied to quality.

Medicare Payment Systems by Setting

Medicare pays most providers through prospective payment systems, in which the payment is set in advance based on the patient's classification rather than on the provider's charges. For hospital inpatient stays, the inpatient prospective payment system assigns each discharge to a Medicare Severity Diagnosis Related Group (MS-DRG) based on diagnoses, procedures and complications. Each MS-DRG carries a relative weight, and the hospital's payment equals its adjusted base rate multiplied by that weight, with further adjustments for teaching status, low-income patients and unusually costly cases (Medicare Payment Advisory Commission [MedPAC], 2024a). A hospital with an adjusted base rate of $6,500 treating a patient in an MS-DRG with a weight of 1.25 would be paid about $8,125, whether the stay costs it more or less.

For hospital outpatient services, including the patient's hernia repair if he were a Medicare beneficiary, the outpatient prospective payment system assigns services to Ambulatory Payment Classifications, groups of clinically similar services with similar costs, and pays a set rate for each, with many minor services packaged into the main procedure's payment. For physicians and other practitioners, Medicare pays from the physician fee schedule, in which each service has relative value units for physician work, practice expense and malpractice expense; these are adjusted for geography and multiplied by a dollar conversion factor set each year (Medicare Payment Advisory Commission, 2024b). Other settings, including skilled nursing facilities, home health agencies and inpatient rehabilitation facilities, have their own prospective systems based on patient classification.

What Each Payment Method Encourages

Each method shapes behavior. Fee-for-service encourages volume and gives providers little reason to coordinate care or avoid unnecessary services. Prospective payment by MS-DRG encourages hospitals to manage length of stay and costs within each stay, since they keep the difference when care costs less than the payment, but it can encourage early discharge and places great weight on accurate coding, because the diagnosis group determines the payment. Capitation encourages prevention and efficient use of services but transfers risk to providers and requires quality monitoring to guard against underuse. Cost sharing for patients discourages unnecessary care but can also discourage needed care, especially for people with lower incomes and high deductibles.

For HIM and revenue cycle professionals, the lesson is that documentation and coding sit at the center of every method. Whether payment depends on a diagnosis group, an outpatient classification or a relative value unit, the claim is only as accurate as the codes, and the codes only as accurate as the documentation behind them.

References

KFF. (2024). 2024 employer health benefits survey. https://www.kff.org/health-costs/report/2024-employer-health-benefits-survey/

Medicare Payment Advisory Commission. (2024a). Hospital acute inpatient services payment system (Payment basics). https://www.medpac.gov/document/hospital-acute-inpatient-services-payment-system/

Medicare Payment Advisory Commission. (2024b). Physician and other health professional payment system (Payment basics). https://www.medpac.gov/document/physician-and-other-health-professional-payment-system/