Payment Systems In The American Medical System

Essay, Research Paper

Payment systems in the American Medical systemThe historic payment system for reimbursing hospitals both by insurers and by Medicarehas been Retrospective Cost Based Reimbursement(RCBR). This system of reimbursementencourages hospitals to over charge in order to cover the costs of the uninsured who utilize thehospital. Charges have continued to rise year after year eventually putting the employers at a pointwhere they could no longer afford the payments.For physician reimbursements, both insurers and Medicare employed the Usual andCustomary(U+C) approach to reimbursement. This practice, which averaged the charges for aprocedure in a region, also encourages doctors to over-charge in order to raise the average amountpaid to them for a procedure. These two systems, RCBR and U+C eventually started to suck toomuch money out of the insurers, employers, and the Medicare/Social Security trust fund so thatinterventions were deemed necessary. Perhaps the biggest intervention adopted by the private sector to reduce medical servicecosts was the trend toward businesses self-insuring. By doing so, they avoided state-mandatedbenefits that were required if they hired a third-party insurer. In addition, the money was now paidto claims as they arose rather than prospectively so income could be earned on this capital as it satin the bank.Other intervention to reduce medical service costs mainly involved private insurers as itwas difficult for small businesses to self-insure because of low-capitol. Underwriting was a typicalpractice of insurance companies; that is, excluding some employees from coverage if they havepreexisting conditions or if they are employed in |high-riskX areas. Payment caps are were alsoemployed by insurers as a way to save medical costs. This practice meant setting limits for thetotal amount paid for selected diagnoses.These interventions ultimately led to segmentation in the insurance market. A shiftoccurred in the way that insurers calculated premium charges. Community rating used to be thenorm. It involves placing all beneficiaries into a large group and projecting their claims. Premiumswere then spread across the entire group as were risks. However, as a result of the historicalhospital and physician payments schemes, insurers shifted to experience rating. That is, a ratingthat bases a group+s premiums on its experienced cost. Therefore, by only including low-risk, low-cost individuals under coverage, premiums for those individuals may be minimized. This effectleaves small groups behind, paying much more in premiums. These interventions mentioned as well as increased experience-rating adopted by insurersand the subsequent phenomena of market segmentation have had effects on many levels of thehealth care system: Premiums for small employers have skyrocketed for two reasons. First, administrative costsfor small employers are proportionally higher than those for larger firms(CongressionalResearch Service) and secondly, larger firms have more market clout and are so able to seal thecontracts that provide lower premiums to their employees. Larger firms are also able to spreadthe risks of their insured employees across a larger beneficiary base with lots of capitol toabsorb any abnormality in claims from one year to the next. Small firms don+t have this luxuryand as a result their premiums have increased. As health care costs grew, many larger businesses opted to self-insure and take the risks oftheir employees rather than paying an insurance company to perform this role. Theseemployers also avoided the state mandated benefits and could use capital not prospectively paidto earn interest. It was in the 1980’s, when employers were becoming increasingly concerned about soaringhealth care costs, commercial insurers were concerned about the future of traditional healthinsurance, and physicians were increasingly joining health plans to guarantee a steady flow ofcustomers, that managed care really expand dramatically. As diagram 1 shows(seeattachments), the number of people enrolled in HMO’s in 1976 was 6 million and by 1991 hadreached 38.6 million. The higher costs of medical care forced different groups into HMO’s fordifferent reasons. Doctors enrolled in HMO’s gave up some autonomy but were guaranteed asteady flow of patients. The patients enrolled were guaranteed care for a fixed monthlypremium at the expense of visiting only providers covered in their plan. The draining of the Social Security trust fund by traditional hospital RCBR method andphysicians by U+C for Medicare was tackled by alternative payment mechanisms. Thetraditional U+C payment to doctors was replaced with the Resource Based Relative ValueScale(RBRVS) 1n 1992. This system of payment assigned a numerical value to everyprocedure performed in order to attempt to objectify what goes into a physician’s service. Inthis way, the payments to physicians could be regulated and controlled. Hospitals, which weretraditionally 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 fixedpayment regardless of resources consumed, time spent, or expenses incurred. All illnesseswere grouped into Diagnostic Related Groups(DRG) effectively cataloguing hospitalizedpatients according to fee payment. The ever-increasing costs associated with health care brought along many cost-savinginterventions which have been mentioned.