Health Care Reform – My Fingers Never Left My Hands

 January 5, 2010

Author:  Kathy Spiliotopoulos

“My Fingers Never Left My Hands” said the clever accountant when she made the company’s books look good!  Her skills pale when compared to the clever accountants (and actuaries) that come up with nearly incomprehensible formulas to reimburse providers, and their counterparts that help providers invent amazingly complicated cost accounting and billing techniques to recoup their costs and maybe show a profit.

In my previous article, I cited “Three Steps to Achieve Health Care Reform Goals.”  The second step is the subject of this article: To establish uniform provider reimbursement methodologies that are auditable to reduce fraud and waste, and that provide incentives for outstanding performance centering around quality of care and efficiency of care delivery.  OK, so reforming our health care system is just as scintillating as an in-depth discussion of cost accounting.  BUT, if we are going to reform it, and reform it WE CAN, then we must tackle the provider reimbursement problem.

Cost shifting is the name of the game, and the heart of the problem in today’s health care system.  Each third party payer, including insurance companies, the federal government and state governments set payment methods and rates they are willing to pay providers.  Whoever gets the best deal, or deepest discount, shifts the cost to the rest of the payers.  The government is the biggest cost shifter, and unfortunately the current health care reform bill centers around cost shifting to pay for itself.  All of the cuts to Medicare that have been in the news relate to cutting payments to providers.  What the government doesn’t pay, must be picked up by the other payers, whether insurance companies that pass the costs to their members, or individuals that have no insurance.  Those who are the least able to pay, the uninsured, wind up in many cases being billed more than the big insurers.  AND, some of the best providers, merely put up signs in their waiting rooms “Medicare and Medicaid are not accepted by this office!”

A recent hospital bill that I received is an example of how cost shifting works. Using round numbers, the invoice for a one day stay was a little over $12,000.  My insurance company paid about $1,800 to the hospital and I paid about $450 deductible/coinsurance.  The bill was then adjusted down approximately $9,750 because my insurance coverage does not permit the provider to balance bill me.  If I didn’t have health insurance, I would be billed the whole amount, $12,000, and if this hospital was out of my network or my insurer did not protect me from balance billing, I might have been liable for more than $10,000.  Medicare or Medicaid might pay even less for this type of one day stay, and some insurers will pay more, especially under a so called “Cadillac” insurance policy.  An uninsured patient would owe the full $12,000, unless they could convince Medicaid to come to the rescue.

The cost to the hospital for my one day stay was somewhere between the roughly $2,300 that the hospital received, and the $12,000 that the hospital charged.  In the end, the hospital must recoup its costs and show a profit if it as a for-profit institution.  Thus the hospital bill is based on complex formulas, in some cases set by the state, that take into account the cost of the services, administrative and overhead costs, and the mix of payers the hospital anticipates to collect from, so that on average, the hospital would receive enough reimbursements to cover its costs and profit margin.

What does uniformity have to do with this?  Let’s get back to “My fingers never left my hands!”  Hospital payment arrangements might be based on an episode of care with a comprehensive payment for a specific diagnosis, for example an appendectomy. Another payer might have hospitals charge per day, regardless of the diagnosis.  Yet another might establish fees for services, where the hospital presents an itemized bill for the patient’s stay and payment is limited to the fee schedule set by the payer for each item.

For physicians and medical groups, there may be fee for service schedules or capitation fees whereby a physician or medical group is paid a fee for each covered patient  that encompasses either a basic set of services or the entire care of the patient.  (For more information on provider reimbursement, there are two publications available on the internet that are very informative:

Principles of Health Care Reimbursement from the American Health Information Management Association, and Oregon Health Care Payment Reform and Provider Reimbursement from the State of Oregon Health Policy and Research.)

The bottom line is that for the most part, provider bills are the result of incredibly creative accounting, evolved from the equally creative rate setting rules imposed by the federal government, state governments and insurers.  If all of this cleverness were eliminated from the system, we could actually understand what we were paying for, and the government and insurers would have to compete on quality, service and cost, instead of a never ending game of “hot potato.”  The focus of provider networks could be on quality and availability versus capturing deep discounts that shift the costs to other payers.

Coupled with the need for uniform (simplified?) provider reimbursement methodologies is the need to establish quality performance expectations and guidelines.  Establishing tighter quality control should include credentialing of health care providers and institutions. Providers who do not meet quality benchmarks can be retrained and/or culled from the system which sets the stage for torte reform.  Tracking performance and providing nationwide comparisons against standards in an understandable format enhances consumer choice.

I believe that the states/commonwealths should have primary responsibility for quality control.  The federal government could provide grants for demonstration projects that increase quality, reduce fraud and abuse and support sharing of best practices. This will support the goals of reducing costs and improving quality.

Other components of the health care system such as drug producers, pharmacies, laboratories, durable medical equipment and medical supplies producers and distributors also need to have accountable reimbursement methodologies and quality standards.  These components contribute significant costs and complexity to the health care system.

Establishing a uniform reimbursement method for providers based on cost and performance would minimize cost shifting, and simplify the health care system, saving an enormous amount of administrative cost.  A cost based system would facilitate audits to reduce waste, fraud and abuse.  Performance incentives could be used to reward providers that have both excellent patient care and economical practices.

We can reduce cost, increase quality and increase accessibility.  When we ask the question: “What does one and one equal?”  We should receive the answer, “Why, two, of course!”  NOT “What do you want it to be?” 

About the Author:

Kathy Spiliotopoulos has spent more than three decades consulting to the health care industry, both to institutional providers and health insurance companies.  Her efforts have resulted in administrative cost reductions and improved service, saving her clients collectively hundreds of millions of dollars. Ms. Spiliotopoulos, now semi-retired, consulted independently through her company Nestor Advisory Services, and earlier in her career was a consultant with Booz Allen and with Touche Ross, now Deloitte-Touche.