Chapter 8, Problem 1QAP

To determine

To provide definitions to terms used regularly by third party payers and explain these terms affect the providers’ incentives, fees and overall utilization.

a)

Fee for service payment model.

Answer to Problem 1QAP

The fee for service payment model is a traditional payment method in medical care where the provider bills for each service provided.

Explanation of Solution

Within a fee for service payment model providers can pass reimburse all their costs, with no regard on how inefficient the production of services. This system can be described as a cost-plus pricing system.

There is no incentive for providers to search for more efficient methods of production in a cost-plus environment. Furthermore, patients have no incentive to search for providers who offer lower prices. In comparison, competitive markets reward providers for offering quality products at the lowest price. However, in cost-plus markets, providers are rewarded by offering more services at higher prices while passing on the additional costs to third-party payers.

Economics Concept Introduction

Introduction:

Certain concepts that exist within health care involve certain variances in terms of providers’ incentives, fees and overall utilization.

b)

To determine

Assignment.

Answer to Problem 1QAP

An assignment can be defined as a Medicare policy that provides physicians a guaranteed payment of 80 percent of the allowable fee. By accepting an assignment, physicians agree to accept the allowable fee as full payment and forgo the practice of balance billing.

Explanation of Solution

From the perspective of the physician, the problem of assignment centers on the relationship between the fee usually charged for the service provided and the Medicare allowable fee, which is often much lower. Physicians' issue with the Medicare allowable fee is that it is below their average cost of providing medical services. Even though providing care to the Medicare segment of the market may not cover fully allocated costs, each transaction is reimbursed at a rate that covers the physician’s opportunity cost. Whether the physician is better off or worse off depends on whether the extra profits from private patients offset the losses incurred in providing care to Medicare patients.

c)

To determine

Capitation.

Answer to Problem 1QAP

Capitation can be defined as a payment method that provides a fixed, per capita payment to providers for a specified medical benefits package. Capitation requires the providers to treat a well-defined population for a fixed sum of money, paid in advance, without regard to the number or nature of the services provided to each person.

Explanation of Solution

Providing care for a fixed fee changes the nature of the physician-patient relationship. Capitation has reduced the incentive of providers to purchase services that are largely unnecessary and take advantage of uninformed consumers. However, there is a risk of omitting potentially beneficial care in the name of cost-saving. However, under capitation, all necessary care is provided for a well-defined group. Hence utilization of services is in control of the provider.

d)

To determine

Risk Sharing.

Answer to Problem 1QAP

Risk sharing contracts involves in the spreading of financial risks of health care towards the providers.

Explanation of Solution

Risk-sharing discourages the over utilization of services, the use of expensive technology, brand-name prescription drugs, referrals to specialists, and inpatient hospital procedures. Many managed care plans contract with primary care physicians using either prepayment or capitation (lump-sum payments per enrollee determined in advance). Prepayment shifts the financial risk to the providers. Rather than making payments on a per-service basis, primary care physicians will receive a fixed payment determined in advance to provide all necessary primary and preventive care for a specific group of patients. Some managed care plans involve withholding a percentage of the authorized payment so that providers control utilization and cost. Primary care physicians serve as gatekeepers who are under strict budgets for hospital services, specialty referrals, and prescription drugs for patients they cover. Bonuses are provided to physicians who provide care within the predetermined budgets. Those who do not are penalized. They are penalized through either forfeiting part or all of their withholdings to the plan. This risk-sharing arrangement provides strong incentives for physicians to control utilization.