Payment Methodologies

Weighted values assigned to health services based on resources needed by the provider to deliver a service or perform a procedure.

A pre-determined set of formulas for making payment determinations. APDRGS and APCs are both examples of Medicare PPS. PPS was initiated to control costs.

Medicare’s payment system for hospital outpatient services implemented on August 1, 2000, under which hospitals are paid a fixed fee for certain services, and payment may be made for multiple APCs in a single patient encounter.

In August 22, 2007, Federal Register and the Centers for Medicare & Medicaid Services (CMS) implemented the most dramatic restructuring of the diagnosis-related groups (DRGs) used in the inpatient prospective payment system (IPPS) since its inception. The MS-DRGs (Medicare Severity DRGs) are a patient classification scheme which provides a means of relating the type of patient a hospital treats to the costs incurred by the hospital and provides a framework for Medicare's hospital reimbursement system. This data contains the MS-DRG definitions as published in the Federal Register, updated annually in October. The payment by MS-DRG incorporates all hospital services provided to the patient during the length of stay.

The amount of payment a health plan allows for a covered service, which may be less than the actual charge by the physician or supplier. This may also be referred to as contractual allowables defined as the amount of payment contractually agreed upon between the provider and health plan for specified services and/or procedures.

Provision regulating payments to eliminate duplicate coverage when a claimant is covered by multiple health plans. This policy prevents double coverage and payment by multiple health plans. Assuring that no more than 100% of the cost of the service is covered, one insurer is deemed the primary payer and others are deemed secondary payers using a specific methodology.

A list of the maximum payments for specified services and procedures as defined by Medicare or other payers. Usually based on the relative value of the procedure or service.

A “carve-out” or “pass-through” is an additional amount paid by the health plan to contractually reimburse the hospital or ambulatory surgery center for specific identifiable items such as high-cost drugs, implants, and prosthetics. The payment is in addition to the per diem, case rate, MS-DRG, or APC.

Hospitals or Ambulatory Surgery Centers are paid an additional amount by the health plan to contractually reimburse for specific identifiable items such as high-cost drugs, implants, and prosthetics. The invoice must be patient-specific and from the manufacturer for the health plan to consider payment.

Health plan has agreed to contractually reimburse the provider based on a negotiated percentage of the provider’s billed charges for specific services or procedures.

An amount paid by a health plan based on a combination of the physician’s usual fee, the customary fee charged by physicians in a specific locality, and the reasonable fee for the service.

An itemized statement of healthcare services and their costs provided by a hospital, physician's office, or other provider facility. Claims are submitted to the insurer or managed care plan by either the plan member or the provider for payment of the costs incurred. Hospitals are billed on a UB-04 claim form and physicians bill using the HCFA-1500 billing form.

A method of cost-sharing in a health plan policy that requires a group member to pay a stated percentage of all remaining eligible medical expenses after the deductible amount has been paid, including their co-pay.

A specified dollar amount that a member must pay out-of-pocket for a specified service at the time the service is rendered.

A flat amount a group member must pay before the insurer will make any benefit payments.

A description, sent to the patient and provider by a health plan after a claim for a service or procedure has been received. The EOB has three sections:

• Service Information – This section identifies the provider (hospital or other facility, doctor, specialist or clinic), dates of service and charges from the provider.
• Coverage Determination – This section summarizes the payment determination, charges which may not be covered by your plan, and the amount you may owe your provider. (Check your provider bill to confirm the amount due before sending any payments.)
• Benefit Payment Information – Indicates who was paid, how much and when.

The provider files claims with the managed care organization (MCO) for all services and procedures performed and should receive payment for all medically necessary services and procedures performed as long as they are covered by the patient’s health plan. Under fee-for-service payment systems, there is no assumption of financial or insurance risk by the provider. Fee-for-service payment under managed care is different from fee-for-service under a traditional indemnity plan where a physician submits a claim and is paid fully for his or her billed charges. Fee-for-service payment systems now use several models that essentially operate to discount the physician’s fees. Therefore, fee-for-service under managed care systems is commonly referred to as “discounted fee-for-service” payment.

Q: Will the Explanation of Benfits (EOB) provide information on whether the service is covered?

A: No, the Explanation of Benefits (EOB) will only indicate if a previous procedure has been covered and paid. For an overview of a patient's benefit, please check the benefit package through your plan administrator prior to providing any services.

Q: Can I be charged the difference between a health plan allowable and what my doctor bills?

A: Generally no. Providers who are contracted with your health company most cannot balance bill. It is important to verify that you are going to an in-network or preferred provider.

Q: What does it mean if a payer’s fee schedule is “based on Medicare”?

A: The values assigned to procedures on the Medicare physician fee schedule are developed in conjunction with the AMA. Many payers view this as the most accurate data on which to base physicians’ cost to provide services, and will thus use the same procedure valuation when developing their own fee schedules.

Q: Which payment methodology is used to pay for cochlear implants (CI) and Baha®?

A: The payment methodology will depend on site of service, payer, and who’s providing the service. In addition, there will likely be two claims submitted for each surgery: one from the hospital and one from the surgeon, each paid under a different methodology. Using Medicare as an example, the surgeon is paid under a fee schedule and the hospital is most commonly paid under APCs for an outpatient CI or Baha.