Health Care Financing Health Article

PAYING HEALTH CARE PROVIDERS

A number of methods exist for paying health care providers (physicians, hospitals, clinics, labs, and other individuals and firms supplying health care services). This section presents an overview of the most important of these payment methods.

Paying for Care: Physicians and Other Health Care Professionals. Physicians and other health care professionals are generally paid using one of three payment methods: fee-for-service, capitation, and salary. In many cases, professionals are paid by more than one method. For example, a third-party payer may use a combination of payment methods or a professional might be paid by several different third parties, each using a different payment method.

Fee-for-service. Under the fee-for-service method of payment, professionals receive a fee (or payment) for each service they provide. The actual medical service is the unit of payment and there is some discretion regarding what constitutes a medical service. A service unit can be very distinct (i.e., urinalysis test) or relatively comprehensive (i.e., an appendectomy where the physician payment covers all care associated with the procedure including the preoperative visit, the surgical procedure itself, and some follow-up care). Thus, the service for which payment is made can actually be several separate, discrete services.

Fee-for-service payments to professionals are based on charges that are either set by professionals or by third-party fee schedules. A fee schedule defines the maximum acceptable charge for medical services. One of the most widely used the schedules in the United States is the Medicare Fee Schedule, which was developed by the Medicare program to pay professionals for care used by Medicare beneficiaries.

Capitation. The capitation method of payment provides professionals with a defined, periodic, per-patient payment (usually monthly) for every individual enrolled in insurance plan, regardless of how many individuals seek care or how much care is provided. Capitation agreements with providers specify what services are covered and those can vary considerably among agreements. The capitation payment may be based on the characteristics of individuals (such as age) enrolled in the plan. This helps compensate providers for differences in the expected use of medical care by groups of patients with similar characteristics.

Salary. The salary method of payment provides professionals with a fixed payment or salary (usually monthly or yearly) that does not vary with the number of people in the plan or the number of patients treated or the number of services provided. In the United States, this method is frequently used for nonphysician professionals in a variety of the employment settings. Physicians working for government agencies, some HMOs, or large group practices may also receive payment by the salary method.

A professional can receive payment under a single payment method while third-party payers make payments for that professional's services using several different payment methods. For example, a physician belonging to a large group practice may receive a salary from the group practice while the group practice receives payments for the physician's services from third-party payers using a capitation method.

Paying for Care: Hospitals and Other Institutional Providers. Numerous methods are used to pay for hospital services, such as payment based on established charges, retrospective costs, per-diem rates, per-case rates, capitated payments, or budgets. Countries, such as the United States, with many different third-party payers use a broader mix of these methods.

Charge-based payments. Prevalent only in the United States, the charge-based method requires hospitals to define a price or "charge" for each hospital service. This hospital-established charge is then paid either directly by the patient or the patient's health insurance company. Under this method of payment, hospitals determine the charge. This method is not used by government payers.

Cost-based payments. The retrospective cost-based method is designed to pay the actual costs of hospital services as opposed to whatever charge hospitals may request. Under this method, a set of accounting rules defines what the hospital costs are for a defined group of patients. Although relatively common in the United States from 1966 to 1983 because it was used by the Medicare program, most state Medicare programs, and some large insurers, this method has lost importance since the mid-1980s.

Per-diem payments. Hospitals paid by the perdiem method receive payments based on the number of days a patient spends in the hospital. This payment is usually not adjusted to allow for differences in patient characteristics (i.e., the same payment is paid for patients undergoing heart surgery as for maternity cases). However, per-diem payments may vary by hospital. The payment is agreed upon through negotiations between a third-party payer and a hospital. The per-diem method is relatively common in Europe.

Per-case payments. The per-case method pays hospitals a fixed payment for each patient the hospital discharges. In the most extreme form of the per-case method, the payment is the same for all patients regardless of a patient's medical condition. More commonly, patients are classified into groups based on expected costs for necessary care (known as case-mix formulations) and payment varies according to a patient's group classification. The payment may also differ for different types of hospitals (teaching hospitals, community hospitals). Per-case payment methods may contain provisions for additional payments for patients whose treatment costs are exceptionally high (called outlier payments). The Medicare program uses the per-case payment method and payment is based on a patient classification system called DRGs (diagnosis-related groups).

Capitation payments. Under the capitation method, the hospital receives a fixed monthly payment for person enrolled in a health plan. This payment method shifts financial risk from the third-party payer to the hospital itself and the use of this method for hospitals is relatively rare.

Budget payments. The budget method provides hospitals with a global budget or payment designed to cover all services provided by the hospital over the course of the year. The global budget may be unilaterally set by government agencies or established by formulas that account for inflation and expected changes in the size of the inpatient population or negotiated between a payer and a hospital. In some countries, global budgets account for expected differences in patient illnesses. This method is used in United States primarily for hospitals owned by the federal government.