Currently, the healthcare system primarily uses two reimbursement methods: fee-for-service and pay-for-performance. The two are not mutually exclusive, and each affects the revenue cycle in a distinct manner. Moreover, recent developments, such as the expansion of Medicare and the introduction of various new systems and requirements for hospitals, have further complicated the landscape with new requirements and opportunities. As such, an update in the hospital’s understanding of how each reimbursement method operates and how they influence performance is necessary to design changes. This report will analyze the two methodologies and consider the impacts of programs such as MIPS and MACRA on the financial situations of hospitals.
The revenue cycle is the repeated set of activities that are performed to provide services to the patient and receive compensation for them. As such, it involves items that take place before, during, and after the patient interaction as well as continuously as part of operations. Gapenski (2016) lists the following activities: preservice insurance verification, precertification, patient financial counseling, time-of-service insurance verification, service documentation, claims submission, third-party follow-up, denials management, payment receipt and posting, monitoring, and review and improvement. Not all of these actions are necessary in every case, but many are, and the organization needs to be prepared to perform the others at any time.
As part of the Medicare program, the U.S. government has introduced value-based criteria and incentives for medical facilities to adhere to them. The purpose of these measures is to ensure that the medical system provides the highest quality of care to patients, expressed as both excellent health outcomes and low costs. As such, to maximize its reimbursement, the healthcare entity needs to first study and understand the criteria set by the government. Then, it can develop cost-effective programs aimed at meeting these targets and improving the overall care quality that it provides. With those initiatives in place, it can match the targets and improve reimbursement.
In the fee-for-service methodology, the healthcare provider is compensated for each service they render, regardless of the outcome. It incentivizes facilities to focus on the volume of treatments they provide overtime to maximize the reimbursement they receive. Outpatient clinics are more likely to resort to this approach than physician practices because of the challenges of appropriately billing every service in a complex diagnosis (Gapenski, 2016). With that said, a variety of different facilities employ different variations of the methodology, some of which were designed to address this issue. In terms of the payer, fee-for-service tends to be used more by government programs such as Medicare than by private insurers.
The pay for performance model attempts to introduce additional requirements for healthcare providers, driving them to deliver better results. It does so by either rewarding facilities that meet set targets or penalizing those that do not. As such, providers are driven to emphasize the review and improvement aspects of their revenue cycles if they intend to maximize reimbursement. Providers that emphasize quality, such as physician practices, tend to benefit from this arrangement, while those with high volume, notable hospitals, can struggle to match the standards. Both private and public insurance programs are attempting to implement this approach, and there are few to no impact differences between the two.
To improve patient outcomes, insurers have imposed various requirements on hospitals, such as reductions in the rates of hospital-acquired infections or readmissions. Per Hicks (2020), in 2017, hospitals were at risk of losing up to 6% of the base operating payments or 5% of total operating payments if they failed to adhere to these standards. Moreover, additional requirements, such as electronic health system introduction mandates and programs such as MIPS and MACRA, have provided additional incentives for hospitals to adopt the latest practices. Overall, the shift to pay-for-performance approaches has driven health providers to improve the quality of the services that they provide, though some concerns still remain.
Overall, the shift from fee-for-service to pay-for-performance models has resulted in the movement of reimbursement money from facilities that did not match the criteria to those that did. Both promote the volume of care provided, but the latter incentivize the achievement of improved results while the former does not. As a result, the quality of treatments provided is leveling out over time as underperforming facilities work to catch up and increase their reimbursement. With that said, Garrison and Towse (2017) note that for pay-for-performance to work, satisfactory and specific criteria need to be set for providers to follow. As such, fee-for-service remains a sound foundation for reimbursement while pay-for-performance acts as a vessel for improvement initiatives.
Overall, both the methodologies are used at most healthcare facilities, working together to set objectives for the providers. They are incentivized to serve as many people as possible, but the pay-for-performance system also drives them to ensure that they provide high-quality treatments. Additionally, the other components of the standards healthcare providers are subjected to motivate them to modernize their systems and approaches. Ultimately, the goals of the two practices are the same regardless of the identity of the insurer or the provider, and the differences these factors create in the practical effects are not necessarily large. The hospital should be prepared to handle both systems, improving the quality of its services while retaining the ability to serve all patients that visit.
Gapenski, L. (2016) Healthcare finance: an introduction to accounting and financial management. 6th edn. Chicago, IL: Health Administration Press.
Garrison, L.P. and Towse, A. (2017) “Value-based pricing and reimbursement in personalised healthcare: introduction to the basic health economics”, Journal of Personalized Medicine, 7(3). doi:10.3390/jpm7030010
Hicks, L. (2020) Economics of health and medical care. 6th edn. Burlington, MA: Jones & Bartlett Learning.