Section 2
Chapter 1		    Financial
  Reimbursement
  Systems

ORIGINS OF THE PROSPECTIVE PAYMENT SYSTEM: AN OVERVIEW

The prospective payment system (PPS) and diagnosis-related groups (DRGs) were probably the strongest catalysts for the movement of case management from the community to the acute care setting. Under fee-for-service (FFS) plans there were no financial incentives for hospitals to reduce cost and length of stay. In the 1960s and 1970s public policy was focused on improving access to services. Medicare, Medicaid, and other entitlement programs were designed to make services available to the poor, the disabled, and the elderly.
     
By the early 1980s cost containment had become the driving issue. Healthcare policy had begun to shift from the issues of access and entitlements to quality, cost, and fiscal monitoring. The PPS was initiated to control hospital costs by providing a price-per-case reimbursement. The onus of responsibility was shifted to the provider to manage resource utilization as a set reimbursement would be allotted. The tool designed to determine the amount of reimbursement was the DRG. It was believed that the DRG would encourage physicians, nurses, ancillary departments, and administrators to work together to provide the most efficient care and to manage the patient through the system as efficiently as possible. It was also believed that the PPS would help to standardize care and improve the efficiency of the care process. In reality, although the DRG controlled the payment rate the hospital was to receive, it did not control the cost of care. Therefore despite these rather dramatic and strict reimbursement schemes, hospital costs continued to escalate. This resulted in the resurgence of the managed care reimbursement systems in the 1990s, especially capitation.

USE OF DOCUMENTATION

Under the PPS, it was believed that proper documentation could ensure that the DRG assignment would be timely and accurate and that the hospital would be reimbursed as quickly as possible. Therefore it became clear that much of the financial success of the hospital would depend on accurate and appropriate documentation. Some hospitals introduced a new position known as DRG manager, DRG coordinator, or documentation specialist. The DRG coordinator/manager was responsible for disseminating information related to the DRGs, particularly data regarding how the hospital was doing in terms of length of stay, cost of care, and case mix. The coordinator, based on analytical findings, could make recommendations regarding areas for improvement in length of stay or cost, where the hospital might be able to maximize revenues or work with the healthcare providers to help them enhance coding through improvements in their documentation.
    
In 1982 the Tax Equity and Fiscal Responsibility Act (TEFRA) enacted the DRGs (Richards, 1996). They were initially designed to set limits on Medicare reimbursement. The development of the methodology that would determine the reimbursement rates was intricate, complex, and laborious. The first generation of DRGs was based on the ICDA-8 (International Classification of Diseases, Adapted, Eighth Revision) and HICDA-2 (Hospital Adaptation of ICDA, Second Revision) diagnostic coding schemes. The second generation was based on the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes. The "I-8" was a four-digit scheme used to measure the incidence of disease, injury, or illness (Commission on Professional and Hospital Activities, 1975). The "I-9," introduced in 1979, is a five-digit scheme and adds more specificity in terms of location and precision in the reporting of clinical conditions. For example, the I-8 described all fractures (e.g., fracture of the femur), whereas the I-9 added the actual location of the fracture (top or bottom). Tumors of the large intestine could be identified, as well as whether there was an associated obstruction.

DRGs

The DRGs are a patient classification scheme that provides a means of relating the type of patient a hospital treats (also known as its case mix) to the costs incurred by the hospital. The DRGs lump "like" patients together. Patients are considered alike if they demonstrate similar resource utilization and length of stay. Resource utilization is defined by the product or personnel resources used to care for that type of patient. Product resources refer to diagnostic and therapeutic interventions such as use of medications, laboratory tests, radiology, and so on. Personnel costs refer to the use of nursing hours per case or other personnel. Length of stay refers to the number of days that the patient remains in the hospital (also known as bed days).

Major Diagnostic Categories
The DRGs are categorized into major diagnostic categories (MDCs). The number of DRGs in each MDC varies from 1 to 20 or more. The MDCs are consistent with anatomical or pathophysiological groupings and/or the ways in which patients would be clinically managed. Examples include diseases of the central nervous system, diseases of bone and cartilage, and diseases and disorders of the kidney and urinary tract. The major diagnostic categories are broken down into either medical or surgical, meaning the presence or absence of a surgical procedure.

Relative Weights and Case Mix Index
Each DRG is assigned a relative weight. Weights are based on length of stay and cost. The assigned weight is relative to the number 1, meaning that the number 1 represents a DRG class using an average amount of resources. The assigned weight is intended to reflect the relative resource consumption associated with each DRG. The higher the relative weight, the greater the payment to the hospital. DRGs with relative weights above 1.00 represent those of greater case mix complexity and the use of greater amounts of resources. Those with a relative weight that falls below 1.00 represent lower resource use and lesser complexity.
     
The weight assigned to the DRG for the hospital is based on the case mix index (CMI). The CMI is the sum of all DRG-relative weights divided by the number of cases (patients) cared for over a period, usually one calendar year. The higher the CMI, the higher the assumed case mix complexity of the hospital. Case mix is affected by the following: Hospital payment is calculated by multiplying the CMI with the hospital's assigned base rate. Each hospital is assigned a base rate for reimbursement by the federal government, that is, the Centers for Medicare and Medicaid Services (CMS). The base rate is determined based on the specific hospital (teaching, academic, community), geographical location, population served, cost of living in that area, and types of services provided. CMI and base rates are reviewed periodically by the CMS and adjustments made as needed based on actuarial data.

Measuring the Elements in Case Mix
Severity of illness and prognosis reflect the complexity of services or the types of services provided. Severity of illness is made up of objective, clinical indicators of the patient's illness that reflect the need for hospitalization (Box 1-1). Prognosis indicates the patient's likelihood of recovering and to what extent. Treatment difficulty, need for intervention, and resource intensity comprise the intensity of service or the number of services per patient day or hospital stay (Box 1-2). The case mix influences hospital costs. It is not the number of patients that affects the costs incurred by the hospital but rather the types of patients and their use of resources. Table 1-1 presents some examples of the components of a Medicare DRG.

Assigning the DRG
Assignment of a DRG is made based on the documentation in the medical record. For the proper information to be obtained the record must be comprehensive and complete. The documentation must be timely, legible, thorough, and proper.
     
The DRG assignment is made after discharge. Once that assignment has been made, the hospital receives one lump-sum payment based on the relative weight (Case Manager's Tip 1-1). Some DRGs are given a higher relative weight based on existing complications or comorbidities. Complications are defined as conditions occurring during the hospitalization that prolong the length of stay at least 1 day in 75% of the cases. Comorbidities are preexisting conditions that increase the length of stay about 1 day in 75% of the cases.

Outliers
Patients with atypically long or short lengths of stay are referred to as outliers. All other patients are considered to be inliers. The placement of a patient as an outlier depends on the trim points for the DRG. Each DRG has a high length-of-stay trim. Some DRGs also have a short length-of-stay trim. Trim points are based on medical and statistical criteria and represent the lowest and highest average lengths of stay for the DRG (see components of a DRG, earlier in this chapter). Patients may also fall into a cost outlier category. These are patients who have fallen within the appropriate length of stay but who have used an exceptional amount of resources. This may be determined by a flat amount (such as $500) or by determining that the charges exceed the rate by at least 50%.

Managing the DRGs
In 1985 the PPS was advanced to allow some states to designate reimbursement rates for Medicaid and all other third-party payers. Based on hospitals' experiences with the Medicare DRGs and the advent of the system at the state level, strong incentives appeared for the control of hospital resources. Regardless of the cost incurred for caring for a particular case type, the hospital would still be reimbursed a fixed amount of money based on the coded DRG.
     
It was recognized rather quickly that the registered nurse (RN) could play a vital role in managing these dwindling healthcare dollars. The RN's role became increasingly important in terms of the following: In the past, much of the care process had a life of its own, running its course to completion. There were few financial incentives to control the healthcare process; in fact, there were disincentives. In an FFS environment, longer lengths of stay and greater use of product resources translated into greater revenue and financial success for the hospital. The PPS changed all that. It became important to maximize the patient's hospital stay by coordinating the flow of patient care activities. This meant coordination of the patient's tests, treatments, and procedures so that delays could be avoided. Additional strategies included the confirmation of physician orders and/or questioning of their appropriateness when necessary. Getting the patient into the hospital on time and out of the hospital on time were other strategies for maximization.
     
Finally, documentation in the medical record, although always important, carried even greater weight under this system. Because reimbursement is contingent on the diagnoses and surgical procedures, charting must be complete and accurate. In some hospitals the utilization manager monitors the medical record documentation to ensure that it is accurate, timely, and reflective of what is currently happening in the case. Under case management this is often a role assigned to the case manager.

DRG Assignment
After discharge, the medical record coders review the patient's record. The DRG assignment requires a thorough accounting of the following: The principal diagnosis (or primary diagnosis) is the condition determined to have been chiefly responsible for the admission to the hospital. The major diagnosis is that which consumed the most hospital resources. The principal diagnosis and the major diagnosis are not necessarily the same. The secondary diagnosis is the next priority in terms of resource consumption. Principal procedures are those performed to treat the chief complaint or complication rather than those performed for diagnostic purposes. If more than one procedure is performed, then the one most closely related to the principal diagnosis will become the principal procedure. Any other surgical procedures are considered as secondary. Operating room procedures other than those performed for diagnostic purposes are also considered as principal procedures. Complications and comorbidities, as defined previously, are also considered. Age is a determining factor for about one fifth of the DRGs. Age 65 is a demarcation line for some. For a small number of DRGs, the patient's discharge status is considered. Discharge status refers to the final patient destination after discharge, such as nursing home, home, or home with services.
     
In some cases the DRG is used for per diem rate setting. States with these rate-setting programs use the DRGs to adjust per diem rates. In addition, there are some DRG-exempt categories in some states. These may include the following: Payments are calculated by multiplying the relative weight by the current reimbursement rate. The relative weight is determined by the final DRG coding. Short stays, or patients discharged below the short trim point, are paid at 150% of the daily rate. Outliers, those above the high trim point, are paid 60% of the daily rate for each day above (Box 1-3).

IMPACT OF DRGS ON THE HEALTHCARE INDUSTRY

In addition to the move toward case management after the institution of the DRG system, other changes have occurred in response to this reimbursement system.

Increased Number of Outpatient Procedures
For some low–relative-weight DRGs it is more financially lucrative for the hospital to treat patients on an outpatient basis. Generally the adjusted per diem rate will reimburse less than the DRG reimbursement but more than the short trim outlier payment. This financial incentive led many hospitals to open ambulatory or day surgery facilities, outpatient dialysis, and same-day surgery programs.

Reduced Length of Stay via Preoperative Testing, Home Healthcare, and Discharge Planning
The industry quickly realized that the management of the length of stay on the preadmission and postdischarge sides was extremely important. No longer could the focus be on the inpatient days only. Preoperative or preadmission testing departments were created to respond to these changes. The expense to the hospital and the reimbursement were greater if the hospital did as many tests before admission as possible. Conversely, the better the discharge planning process, as well as the availability of community-based programs, the sooner the patient could be discharged to a less-costly care setting.

USE OF DRGs TODAY

Today we find a mixture of reimbursement systems and schemes. Although more and more patients are being reimbursed under managed care contracts, which is the subject of the next section, others remain under either state or federal reimbursement systems. These systems continue to use the DRG as a measuring stick for either flat rates of reimbursement for the hospital stay or in negotiating discounted rates.

APCs: MEDICARE'S OUTPATIENT PROSPECTIVE PAYMENT SYSTEM

Years after the implementation of the inpatient PPS, the CMS, formerly the Health Care Financing Administration (HCFA), turned its attention to other care delivery settings across the continuum. It was only logical that great attention would be paid to ambulatory and outpatient settings, including ambulatory surgery, emergency departments (EDs), and clinics. As healthcare delivery shifted away from the acute care setting, more and more complex (and therefore more expensive) services were being provided in outpatient settings.
     
The Balanced Budget Act of 1997 instructed CMS to develop and implement a PPS for hospital outpatient services. The September 1998 Federal Register published, in review form, the proposed form for the outpatient prospective payment system (OPPS), including the implementation regulations. Finally, in 1999, the Balanced Budget Refinement Act (BBRA) was passed and the OPPS was a go.
     
As a follow-up to the previous publication in the Federal Register, the final regulations were published in the April 2000 edition, including an expected implementation date of July 1, 2000. With such an ambitious implementation date, it was no surprise when CMS extended the deadline by 1 month to August 1, 2000.

APCs

The ambulatory payment classification (APC) system is an encounter-based patient classification system. The system approaches outpatient reimbursement from the same philosophical vantage point as the inpatient PPS. Similar groupings of patients are identified, and predetermined reimbursement amounts are allotted (Case Manager's Tip 1-2). The system attempts to predict the amount and type of resources used for a variety of types of ambulatory visits.
     
The initial program identified 451 ambulatory payment classification groups. Table 1-2 outlines the categories of APCs and the number of APCs in each category. The groups and payment rates are based on categories of services that are similar in cost and resource utilization. Current Procedural Terminology (CPT)-4 or Health Care Financing Administrators Common Procedure Coding System (HCPCS) codes are mapped, or identified with, an APC. Each APC has an associated status indicator. The status indicator defines if and how a service will be paid. Some status indicators are paid under an APC, whereas others are not. In total, 936 new codes have been added; 645 of these are codes for billing pass-through and new technology items.
     
CMS has also identified certain procedures as "inpatient only." These are mainly surgeries that CMS has identified as requiring more services than can be provided in an outpatient setting. Hospitals must be very careful to ensure that patients are placed in the appropriate setting so that revenue is not lost (see Section 3, Chapter 1).
     
Procedure APCs include surgical and nonsurgical procedures (see Table 1-2). Included under nonsurgical procedures are nuclear medicine, magnetic resonance imaging (MRI), radiation therapy, and psychotherapy.
     
Pass-through items include drugs, biologicals, and devices that can be claimed for reimbursement in addition to the APC payment if they meet certain criteria as set by CMS. Examples of these items would be pacemaker devices, cataract lenses, and cardiac catheterization lead wires. In addition, certain services are packaged. Packaged services include the following: It is important to note that, unlike the inpatient PPS in which only one DRG can be assigned to a hospital stay, under an OPPS, an outpatient visit may consist of multiple APCs. The total reimbursement equals the sum of the individual payments for each service. Therefore a single outpatient visit might include APC as well as non–APC-related payments. The total of all of these will determine the final reimbursement.

The Scope of the OPPS
OPPS applies to acute care hospitals and includes hospitals that are currently exempt from an inpatient PPS. Also included are partial hospitalization services provided by community mental health centers (CMHCs). Cancer centers that are exempted from the inpatient PPS are not exempt from OPPS, but they are held permanently harmless for payment reductions. Simply stated, this means that they must implement the same infrastructure for mapping and billing under the OPPS, but should their reimbursement be negatively affected, the reimbursement will be supplemented. Similarly, small rural hospitals of less than 100 beds will be held harmless, but only through 2003.
     
Box 1-4 lists the services included in the OPPS. Additionally, there are services that are excluded from OPPS (Box 1-5).

Clinics, Emergency Departments, and Critical Care Services
Clinic visits, ED visits, and critical care are assigned to one of seven Medical APC groups. Assignment into the APC is based on 31 Evaluation and Management (E & M) CPT-4 codes. Hospital-based clinics have three APCs, identified as low, medium, and high. Assignment into one of these would be based on the CPT-4 code identified. The ED also has three categories, identified as low, medium, and high, and these would also be identified based on the CPT-4 code. Critical care has one CPT (CPT 99291).

Observation Services
Under the new system, observation is no longer reimbursed separately but would be included as part of the APC payment, either ED or ambulatory surgery. Exceptions to this are congestive heart failure, asthma, and chest pain. Patients admitted to observation with one of these diagnoses are mapped to their own APC.

Mapping
Hospitals are required to develop their own internal system for "mapping" provided services to the different levels of resource utilization represented by the APC groupings. The process includes each hospital's own identification of which CPT-4 codes they would map into either the low, medium, or high APC groupings and then to derive computerized systems for linking the coding to the APC and, finally, to the billing.

HOME CARE PROSPECTIVE PAYMENT SYSTEM

On October 1, 2000, CMS implemented prospective payment for home care visits. Unlike inpatient PPS, home care's system would be based on a prospective nursing assessment completed at the time the patient was entered for home care services. Home care, like acute care before it, was no longer paid based on a visit. Care would be reimbursed for an episode of care or 60 days. The dollar amount reimbursed would be fixed regardless of the number of visits the patient received. The final dollar amount reimbursed is based on the Outcome and Assessment Information Set (OASIS) (Case Manager's Tip 1-3).

OASIS
Scores in the OASIS are based on three categories. The first category is clinical and consists of four items, the second category is functional and consists of five items, and the third category includes service utilization and consists of four items. The final score results in the assignment of 1 of 80 resource groups called home health resource groups (HHRGs). Like the DRGs, each HHRG has a dollar amount attached to it.

Initial Claims
Home care agencies can make an initial claim for payment known as an advance request for payment (ARP) at the time the initial OASIS assessment is completed. This initial payment equals 60% of the designated HHRG. One of home care's first challenges following the implementation of this new system was to be sure that claims were processed as quickly as possible after the first assessment (no greater than 48 hours). A rapid turnaround time would better ensure that cash flow problems did not occur.
     
The dollar amount reimbursed for the HHRG is calculated based on several factors. The payment rate corresponds to the level of home health services for that HHRG. The national payment rate for a 60-day episode of home healthcare services is standard and is then adjusted based on several factors. The standard amount is for all home health services, excluding durable medical equipment, and osteoporosis drugs will continue to be paid by a fee schedule. It is inclusive of the per-visit amounts for all disciplines, as well as nonroutine medical supplies and the cost of managing the OASIS process. The national payment rate is proportioned at 77.668% for labor and 22.332% for nonlabor. It is expected that the national rate ($2,037.04) will be adjusted at predetermined times to allow for changes in the cost of goods and services necessary to provide home health services. Adjustments will be made to this rate on a periodic basis.

Final Payment
The final claim is paid at the end of the episode and must include all line-item visit information that was rendered during the 60-day period

Adjustments
The national payment rate is adjusted for the case mix and the wage index area of the patient. The case mix payment rate is based on the level of home health services for the particular HHRG. Finally, an adjustment is made for the wage index for the area in which the patient lives. This is split by labor and nonlabor in the percentages previously mentioned (see Example).

Partial Episode Payments
Similar to a short-trim point in the DRG system, CMS has allowed for situations in which the 60 days for home care services are interrupted. These Partial Episode Payments (PEPs) occur under only two circumstances. The first would be when a patient elects to transfer from one home health agency to another. The second would be when a patient is discharged and then returns to the same agency within the 60-day period. The PEP would only apply if the transfer or discharge/return was not related to a significant change in the patient's condition. The reimbursable amount is prorated based on the number of days the patient was seen. For example, if the patient was seen for 15 of the 60 days, the PEP would be calculated as 15/60 multiplied by the full original payment amount.

EXAMPLE
Standard Prospective Payment Rate $2,037.04
Case Mix Payment Rate for C0F050 × 0.5265%
Case Mix Adjusted PPS Payment Amount $1,072.50
Wage Index Adjustments  
Case Mix Adjusted PPS Payment Amount $1,072.50
Labor Percentage of PPS Payment Rate × 0.77668%
Labor Portion $832.99
The labor portion is then multiplied by the Wage Index Factor:
  $832.99
Wage Index Factor × 1.1 (example)
Adjusted Labor Portion $916.29
Nonlabor Portion  
Case Mix Adjusted Amount $1,072.50
Nonlabor Percentage × 0.2233
Adjusted Nonlabor Portion $239.49
Labor Portion $916.29
Nonlabor Portion + 239.49
Total Case Mix and Wage Adjusted  
PPS Rate $1155.78

Significant Change in Condition Payment
For circumstances in which the patient's condition results in a new OASIS, a new HHRG, and a new set of physician orders, CMS has established a special payment rate. The change must not have been originally expected and must signify an interruption in the 60-day episode and the plan of care. As in the PEP, a prorated amount would be determined. Of the 60 days, a partial amount would be paid at the original HHRG level, and an additional payment would be made at the significant change in condition payment (SCIC) level.

EXAMPLE
Original HHRG 20 days of 60 days $1,155.78 × 0.33= $381.40
SCIC HHRG 40 days of 60 days $2,200.00 × 0.66= $1,452.00
(new HHRG reimbursement)
Total Reimbursement= $1,833.40

Low-Utilization Payment
A low-utilization payment adjustment (LUPA) would be made for patients who require minimal visits during their 60-day episode. For patients who receive four or fewer visits during their 60-day encounter period, the home health agency will be paid based on the national standard per visit amount by discipline. These amounts are adjusted based on wage area index but not on case mix.

Outlier Payments
Finally, when unusual variations occur in the amount of medically necessary home health services, an outlier payment may be considered. These unusual variations are determined based on two principles: (1) that the cost of services should exceed the payment and (2) that the outlier payment should cover less than the total amount of cost above the outlier threshold.
The amount of the outlier payment is limited to 5% of the total PPS payment. The fixed dollar loss amount is now 1.13 times the standard episode amount.

EXAMPLE
Standard Prospective $2,037.04
   Payment Rate  
Fixed Dollar Loss Amount $2,037.04× 1.13= $2,301.86
Case Mix Adjusted PPS +1,072.50
   Payment Amount  
Outlier Threshold Total Amount $3,374.36

Important Points to Consider
Under the home care PPS, the old paradigm of more visits, more incurred cost, more medicare reimbursement is now extinct. under pps it is essential to coordinate the clinical and financial aspects of the agency. in other words, it is imperative that the patient receive the appropriate number of visits by the appropriate clinicians but that those visits not be in excess of the patient's true clinical needs.
     
In addition, the OASIS data must be accurate and timely because this is what drives reimbursement. Going forward, home care agencies, like hospitals before them, will need to identify their costs on an HHRG basis. This data will serve as the benchmark for identifying areas of profit and loss for the agency and lead to new product lines, elimination of old ones, or improvement in resource utilization for existing patient groups.
     
Home health agencies need to implement strategies similar to those applied in the acute care setting. For example, implementation of clinical practice guidelines will help to prospectively identify the expected resources to be applied to various case types and to standardize the care for that group of patients. Strategies such as this will better ensure that patients receive just the right amount of resources: not too much and not too little. Case managers will be deployed to manage high-risk populations who have a greater likelihood of falling outside the norms of the clinical practice guidelines. Because of the variation in these high-risk groups, it can be assumed that they will have a greater likelihood of using excess resources if not proactively managed.
    
Identification of these high-risk groups will have to be made based on high-risk assessment strategies so that patients can be immediately identified and the case manager can be deployed as quickly as possible. The OASIS data may provide the foundation for much of the data that will be necessary to identify patients at greater risk for poor outcomes or greater resource utilization.

INPATIENT REHABILITATION FACILITY PROSPECTIVE PAYMENT SYSTEM

Among its other mandates, the Balanced Budget Act of 1997 mandated prospective payment for inpatient or acute rehabilitation effective January 1, 2002. This new reimbursement scheme replaces the prior reimbursement structure as directed by TEFRA in 1982. TEFRA mandated the CMS regulations for Medicare reimbursement, Medicare health maintenance organizations (HMOs), and risk contracts.
     
Reimbursement is based on patient assessment forms completed on admission to and discharge from the acute rehabilitation unit (Case Manager's Tip 1-4). The assessment form, the Inpatient Rehabilitation Facilities Patient Assessment Instrument (IRF-PAI), contains 54 data items and takes approximately 45 minutes to complete.
     
The admission assessment reference date is calendar day 3 of stay. Completion date is calendar day 4. The discharge assessment reference date is day of discharge or death. Completion date is calendar day 4 after discharge/death.

The IRF-PAI
The PAI is used to classify patients into distinct groups based on clinical characteristics and expected resource needs. Patients are classified as follows:

Completion of the PAI requires a skilled assessor. It cannot be completed by clerical staff but must be completed by a qualified clinician such as a physician, RN, or physical or occupational therapist. Therefore many organizations use RN case managers to complete the PAI, which contains physician, nursing therapy, and other care elements. In this way the case manager can complete the PAI and perform other case management functions so critical to financial survival under this system, such as monitoring of resource utilization, cost per case, and length of stay.
     
Each CMG has a relative weight that determines the base payment rate the IRF will receive. Included in the payment rates are the operating costs and capital costs of furnishing covered inpatient rehabilitation hospital services, including routine, ancillary, and capital costs. Not included are the costs of bad debts or approved educational activities.

Payment Adjustments
Payment may be adjusted for the following reasons: Although the admission assessment will be used to place a patient into a CMG, the discharge assessment is used to determine the relevant weighting factors associated with any existing comorbidities.
     
The short-stay category contains only one CMG. For patients who have expired there are the following four CMGs: Method of Payment
A standardized amount per discharge is adjusted based on case mix, disproportionate share hospital (DSH), and a rural hospital add-on of 15.89%. Other adjustments include high-cost outlier payments. Transfer cases are reimbursed at a per diem rate. Interrupted stays, defined as cases in which the beneficiary returns to the inpatient rehabilitation facility by midnight of the third day after a discharge, are reimbursed as a single discharge. Payment is based on the CMG classification determined from the initial PAI assessment.

EXAMPLE
CMG Relative Weights for RIC 03: Nontraumatic Brain Injury
CMG Description CMG Weight Payment Comorbidity Add-On Payment with Comorbidity Add-On
0301 M= 33-0 and C = 22-35 0.6399  $3,855 12.6%  $4,342
0302 M= 33-0 and C = 5-21 0.8393  $5,056 12.6%  $5,695
0303 M= 46-34 0.9467  $5,703 12.6%  $6,424
0304 M= 56-47 1.2605  $7,593 12.6%  $8,553
0305 M= 78-57 1.7517 $10,552 12.6% $11,886
C, Cognitive; M, Motor.

Three-Step Process
Calculating the reimbursement encompasses a three-step process. First the patient is assigned to an RIC. Within the RIC, the patient is assigned to a CMG. Within the CMG, the patient is designated as either having or not having a relevant comorbidity. Relevant comorbidities are represented by codes.
     
The 21 RICs represent the primary cause of the rehabilitation stay. The RICs are clinically homogeneous. See the example at the top of the page.

Conversion Factor
As in the inpatient DRG system, each CMG is assigned a relative weight. Weights represent the variance in the cost per discharge and resource utilization among payment groups. Basic payment in 2001 was $6,024, and from that, each CMG payment was based on the relative weight multiplied by the payment amount.

Short-Stay Cases
There is one relative weight for short-stay cases. Short-stay cases are defined as patients with a length of stay of less than or equal to 3 days who do not meet the definition of a transfer case; for example, patients who leave against medical advice or patients who are unable to tolerate intensive rehabilitation services. See the example below.

EXAMPLE
CMG Relative Weight for Short-Stay Cases
CMG Description CMG Weight Payment Add-On Comorbidity Payment with Comorbidity Add-On
5001 Short-stay
cases (LOS ≤ 3 days)		 0.1908  $1,149 0.0%  $1,149

LOS, Length of stay.

 Expired Patients
Relative weights have also been identified for patients who have expired.

Wage Index
The hospital location will determine the classified wage index. The rate excludes 100% of wages for teaching physicians, interns and residents, and nonphysician anesthesiologists. The wage adjustment is to the laborrelated portion of the payment only. The labor portion is 71.301%, and the nonlabor portion is 28.699% of the rate.
     
The disproportionate patient percentage (DPP) is calculated as Medicare supplemental security income (SSI) days (as a percentage of total Medicare days) plus Medicaid days (as a percentage of total days).

Outlier Cases
Additional payments are made for high-cost patients. These are calculated based on 80% of the case loss exceeding a deductible. Loss is determined by charges multiplied by the overall facility-specific ratio of cost-to-charges (RCC) minus the IRF PPS payment. The deductible, also known as the threshold, is $7,066 multiplied by the wage index, multiplied by the DSH adjustment. Outlier payments can be attributed to 3% to 5% of total program payments.

Transfer Cases
Transfer cases are those with a length of stay less than the arithmetic mean length of stay for the relevant CMG. Transfer cases would include those that were discharged to another inpatient site of care, such as an inpatient hospital, long-term care hospital, rehabilitation facility, or nursing home that accepts Medicare and/or Medicaid. Discharges to home health, outpatient therapy, or day programs are not considered as transfer cases.
     
Payment is based on a per diem inlier payment, which is divided by the mean length of stay for the CMG, multiplied by the number of actual days, plus an outlier payment. Unlike inpatient prospective payment systems, the first day is reimbursed only one per diem.

LONG-TERM CARE REIMBURSEMENT (SKILLED NURSING FACILITY)

Under the Balanced Budget Act of 1997, CMS implemented a PPS for services provided to nursing home residents during a Medicare Part A–covered stay. Implemented on July 1, 1998, PPS rates reimburse for routine, ancillary, and capital-related costs.
     
Residents of the nursing home are assessed on a schedule at certain points during their stay (on the fifth, fourteenth, thirtieth, sixtieth, and ninetieth days after admission to the skilled nursing facility [SNF]). Unlike inpatient rehabilitation, SNFs have a window in which to perform each assessment. As an example, a Day 14 assessment can have a reference date of Days 6, 7, 8, 9, 10, 11, 12, 13, or 14. Additional assessments would be required when a resident experiences a significant change in status or care needs.
     
The Minimum Data Set (MDS) is the assessment tool used in the SNF setting. The MDS collects comprehensive information, which includes the patient diagnosis, activities of daily living (ADLs) capabilities, cognition, and minutes per day of rehabilitation services received. The exception to this is the Day 5 assessment, which requests information regarding estimated rehabilitation minutes.
     
Based on the data captured in the MDS, the patient is placed into one of 44 Resource Utilization Group III (RUG-III) categories (Case Manager's Tip 1-5). Each MDS assigned is "locked-in" within 7 days of completion of the MDS and cannot be changed. Each RUG is assigned a case mix weight, which is used to adjust the federal portion of the SNF's reimbursement for that resident.
     
The RUG-III system (Table 1-3) classifies patients into seven major clinical hierarchies and 44 groups. The RUG-III grouper, a computer software program, will classify the patient into the group with the highest payment. The seven major hierarchies are rehabilitation, extensive services, special care, clinically complex, impaired cognition, behavioral problems, and reduced physical function. A patient who classifies into a lower category may be covered if the coverage guidelines of the SNF are met.

GOVERNMENT PROGRAMS
Medicare
In 1966 the federal government enacted Title XVIII of the Social Security Act. Known as the Medicare program, it was designed to finance medical care for persons age 65 years and older and disabled persons who are entitled to Social Security benefits (Case Manager's Tip 1-6). Medicare also covers individuals with end-stage renal disease. Disabled individuals and those under age 65 with end-stage renal disease make up approximately 12% of Medicare beneficiaries.
     
The Medicare program is a federal program under the administrative oversight of CMS. CMS is a branch of the United States Department of Health and Human Services (DHHS).

Medicare's Dual Structure
Medicare consists of two parts. Part A is a hospital or acute care insurance program. Included in Part A are the following:

Part A is financed by special payroll taxes collected under the Social Security program. Employer and employee share equally in financing this portion of the Social Security income known as the hospital insurance trust fund. The amount an individual contributes to this fund is distinctly identified on an employee's pay stub. This mandatory tax is paid by all working individuals, including those who are self-employed.

OBRA-93

The Omnibus Budget Reconciliation Act of 1993 (OBRA-93) eliminated the maximum taxable earnings base so that as of 1993, all earnings are now subject to Medicare tax. Despite OBRA, there still remains concern that the Hospital Insurance Trust Fund may eventually run out of money. Debates continue to focus on precisely when this may happen and as to whether the Fund should be financially supplemented in some other way. Some politicians have suggested that the minimum age to receive Medicare be increased to age 70.

Overview of Services
A maximum of 90 days of inpatient hospital care is allowed per benefit period. Once the 90 days are exhausted, there is a lifetime reserve of 60 hospital inpatient days. A benefit period is a spell of illness beginning with hospitalization and ending when a beneficiary has not been an inpatient in a hospital or SNF for 60 consecutive days. There is no limit to the number of benefit periods.
     
The beneficiary pays a deductible for each benefit period and copayments based on the duration of services.
     
Medicare pays for up to 100 days of care in a Medicare-certified SNF, provided that the beneficiary has been hospitalized for at least 3 consecutive days, not including the day of discharge. Admission to the SNF must occur within 30 days of hospital discharge.
     
Medicare pays for home healthcare when a person is homebound and requires intermittent or part-time skilled nursing care or rehabilitation care. There are no time or visit limits. For terminally ill patients, Medicare pays for care provided by a Medicare-certified hospice.

Supplementary Medical Insurance Part B
     
The Supplementary Medical Insurance (SMI) program is a voluntary program financed partly by general tax revenues and partly by required premium contributions. The main services covered by SMI include the following: Services not covered by SMI include the following: Exceptions for Part B Enrollees are as follows: Managed Medicare
In September of 1982, the laws treating Medicare HMOs were passed as part of TEFRA. The regulations became effective in 1985. In 1982 CMS funded several demonstration contracts to test the concepts of risk HMOs. These were known as the Medicare competition demonstration projects. These operated under a variety of waivers as part of the Social Security Act. By 1985 there were about 300,000 members enrolled out of a total of about 30 million Medicare beneficiaries. By 1995 nearly 3 million Medicare members had enrolled in TEFRA-risk HMOs.
     
TEFRA also modified the HMO contracting rules to permit CMS to contract with a new type of entity known as the comprehensive medical plan (CMP). A CMP is defined as an entity that is state licensed, provides healthcare on a prepaid capitated basis, provides care through physicians who are employees or partners of the entity, assumes full financial risk on a prospective basis, and meets the Public Health Service Act requirements against insolvency. Today these differences between HMOs and CMPs no longer exist.

Requirements to Obtain a TEFRA Contract
A nonrural plan must have a minimum of 5,000 prepaid members, and rural plans a minimum of 1,500 members. At all times during the contract, membership cannot exceed 50% combined Medicare and Medicaid.
     
The entity must be able to render (or contract for) all Medicare services available in the service area. In addition, it must use certified Medicare providers and be able to provide 24-hour emergency services. Other requirements include provisions for emergency claims both within and out of network. All services must be accessible within reasonable promptness.
     
The HMO must provide all of the Medicare Part A and Part B services that a recipient would receive as available in his or her area. The HMO may provide additional services not traditionally covered under Medicare as additional and covered services or as optional supplemental services that the patient may choose to subscribe to (Case Manager's Tip 1-7). In some instances, additional benefits must be purchased as a condition of enrollment. For example, preventive care, not traditionally covered under Medicare but covered by HMOs, would be financed by mandatory premiums. Some HMOs opt to provide additional services beyond the traditional scope of Medicare at no cost to the patient.

Benefits to Enrollees
Medicare beneficiary enrollment in HMOs has been slow. Portions of the country see greater enrollment than others. Correlations can be found between highly managed care penetrated areas and the percent of Medicare enrollees who have opted for HMO plans. It should also be noted that not all areas offer HMO products to Medicare recipients. Some of the attractions of enrolling include lower out-of-pocket expenses. Some waive the plan premium, which includes the Medicare coinsurance and deductible payments. Most provide additional non-Medicare benefits such as prescription drugs (to a capped amount per year), eyeglasses, and hearing aids.
     
Resistance to enrollment often has to do with an older person's longstanding relationship with his or her physician. In general, managed care concepts are not familiar to the senior population and therefore some may not realize that the HMO may offer higher coverage at a lower cost.

Medicaid
The Medicaid program is referred to as Title XIX of the Social Security Act and finances healthcare for the indigent. Started in 1966, the program is jointly financed by the federal and state governments (Case Manager's Tip 1-8). The federal government provides matching funds to the states based on the per-capita income in each state. Federal matching, known as the Federal Medical Assistance Percentage (FMAP), cannot be less than 50% or greater than 83% of total state Medicaid costs. Wealthier states have a smaller share of their costs reimbursed by the federal government, and federal outlays have no set limit. The federal government must match whatever the individual state provides.
     
The federal government also shares in the state's expenditures for administration of the program. Most administrative costs are matched at 50%. Each state administers its own Medicaid program. Eligibility criteria, covered services, and payments to providers vary from state to state.
     
Federal law mandates that every state provide some specific healthcare services. The mandated services include the following:

In addition to the mandated services, each state has the option of providing the following additional services:

States may impose nominal deductibles and copayments on some Medicaid recipients for certain services. Some services are exempt from copayment. These include emergency services, family planning services and supplies, and hospice care.

Eligibility Criteria
Eligibility criteria are based on income and assets. These criteria vary from state to state. Certain individuals are automatically covered if they are already receiving SSI, which includes many of the elderly, the blind and disabled, and families with children receiving support under an "aid to families with dependent children" program.
     
From the inception of the Medicaid program, there have been problems. The population of Medicaid recipients is composed of mainly women and children under age 18. This population of individuals requires a narrow range of healthcare services, mainly including obstetrical, prenatal, and well-child care. Members of this population have specific problems unique to their social situation, such as transportation issues, and they are more likely to be vulnerable to impoverished lifestyles, especially in urban areas. This type of lifestyle exposes them to violence, inferior living conditions, substance abuse, and other social problems related to poverty and inadequate living situations.
     
In addition, many healthcare providers have been reticent to care for the Medicaid population because of the low payment rates. This results in additional access issues. Many Medicaid recipients continue to use emergency rooms as their major source of primary care. This is referred to as the Medicaid syndrome and further results in additional expenditures in the ambulatory and inpatient settings (Hurley, Freund, and Paul, 1993).

Managed Medicaid
Traditionally, managed care organizations (MCOs) have not embraced Medicaid. HMOs that moved into this arena in the 1980s tended to provide services to select and small populations to have some greater amount of assurance that they might not experience excessive financial losses. Nevertheless, in recent years many states have turned their attention to managed care for their Medicaid populations (Case Manager's Tip 1-9). For example, Arizona enacted legislation that would provide healthcare to the poor using what were described as alternative healthcare systems that used strategies such as cost containment, improved patient access, and quality care in managed care settings. Arizona was the first state to implement such a statewide program. Other states, such as New York and Virginia, used an incremental approach to enrolling Medicaid beneficiaries.
    
It was expected that organized services using modalities such as managed care would serve to address some of the inherent problems associated with the Medicaid program, such as overutilization of emergency rooms and issues of access. Focus was placed on primary care as a mechanism for managing cost and resource utilization. Inherent problems occurred as a result of the population itself. Medicaid participants can be transitory, entering and leaving the program as their income eligibility changes over time. The population generally cannot afford the traditional copayments and penalties for using out-of-network services associated with participation in managed care, thus raising the overall cost for the MCO. An inability to control resource utilization through economic incentives provided unusual challenges to MCOs.
     
It is unknown whether provider satisfaction is improved through participation in managed care. In addition, it has appeared that overall reductions in ED use have not been achieved. On a positive note, there tends to be more use of primary care physicians as opposed to specialists. This comes more as a result of changes in physicians' practice patterns and less as a result of changes in the behavior of the patients themselves.
     
In the future, HMOs will need to adjust their administration of these plans to the Medicaid population, who presents with challenges unique and different from the commercial populations. These individuals, with complex medical and social needs, require different approaches to those traditionally employed from healthy populations in commercial products.

Balanced Budget Act of 1997
The Balanced Budget Act of 1997 (BBA) was signed into law in August of 1997 by President Clinton. Titled Public Law 105-33, it enacted the most extensive changes to the Medicare and Medicaid programs since their inception in the 1960s. These changes will do the following: In addition to the significant changes the Act made to the government healthcare programs, it also enacted changes to the Child Health Insurance Program (CHIP) (Title XXI). CHIP expands block grants to states, increasing their Medicaid eligibility for low-income and uninsured children. Through CHIP, states are given the autonomy to set up their own programs. States must match the federal grant monies for each 3-year period that they are awarded. The success of CHIP will depend to a great extent on the ability of the states to identify and enroll eligible children. Therefore primary care and outreach become critical to its success. It is predicted that states that do not provide for adequate outreach and therefore do not enroll adequate numbers of children into CHIP may be at risk for some of the grant funding to be rescinded.

The BBA and the Case Manager
Case managers should stay current in all issues related to not only the BBA but all changes in healthcare legislation. In this chapter many of the most important changes in the Act have been reviewed as they relate to the new reimbursement structures implemented in the new prospective payment systems. Additional information on the BBA, as well as any of the payment structures discussed in this chapter, can be obtained through the Centers for Medicare and Medicaid Services Web site: http://cms.hhs.gov. The most current information available can always be found at this and similar sites (Case Manager's Tip 1-10).

CPT Codes and ICD-9-CM Codes
Case managers need to be familiar with both the ICD-9-CM and the CPT code systems. ICD-9-CM (American Medical Association, 1996), is used for coding inpatient medical records. In addition, CPT is also used. CPT is a listing of descriptive terms and identifying codes for reporting medical services and procedures performed by physicians. The terminology provides a uniform language that accurately describes medical, surgical, and diagnostic services. By using this coding system, there is a reliable nationwide communication system among physicians, patients, and third-party payers. CPT codes define medical, surgical, and diagnostic procedures. ICD-9-CM codes are used for medical interventions.

THIRD-PARTY PAYERS/MANAGED CARE ORGANIZATIONS

Like it or not, the healthcare system has taken on a brand new shape. Most healthcare institutions are scurrying to learn how to reduce their costs without reducing their quality.
     
Managed care has taken on many meanings over the past several years. It has grown to mean different things to different people. Business executives, financial controllers, healthcare providers, and payers are viewing managed care as a means of reducing skyrocketing healthcare costs (Case Manager's Tip 1-11). Healthcare institutions may view it as the mechanism for negotiating better discounted rates for the care of their patients, but only if they can attract a larger volume of patients to their institution. To the physician base it probably seems like an external control over their previously unstandardized methods and treatment modalities. It is probably the patient who views managed care as a protective mechanism that helps keep healthcare costs down while maintaining quality services. However, this may not be as such, considering consumers' concerns about the occurring denials of services by MCOs.
     
Before a discussion can take place about managed care, it is important to understand and be well versed in health insurance in general (Case Manager's Tip 1-12). Health insurance is the protection one seeks to provide benefits for an illness or injury. A person, group, or employer pays a price (called a premium in managed care terminology) for protection from the potential expenses that could be incurred during an illness or injury. Lack of insurance coverage can mean going without needed healthcare, having to settle for lowerquality healthcare, or having to pay out of pocket-your own pocket—for healthcare. The insurance company gambles that it will take in much more in the way of premiums than it will pay out to the insured as a result of illnesses. The contract a person negotiates states the nature of the benefits or the coverage that is available. It also lists the conditions under which the insurer will cover expenses, either in part or, less commonly, in full. Deductibles and copayments are those expenses the insured will be responsible for before and after the insurance carrier pays its portion of any medical bills.
     
The prominent types of health insurance are group and individual coverage. Group insurance is usually provided by an employer or professional organization to which one belongs. Employee group coverage is usually offered to spouses and dependents in addition to the employee. These policies vary from place to place and from one insurance company to another. Commercial or for-profit insurance companies dominate the group type of coverage. Individual health insurance is sometimes referred to as personal insurance. These policies also vary from provider to provider, and their premiums are often more expensive than group policies. Individuals may purchase individual insurance to supplement their group policy in areas that they identify as gaps in benefits (Enteen, 1992).
     
Currently the fastest-growing coverage option in the healthcare industry is the prepaid health plan—commonly known as HMOs and preferred provider organizations (PPOs). In addition, government-paid coverage (i.e., Medicare, Medicaid, and veteran coverage) has recently undergone much scrutiny regarding its continued financial viability. These policies usually offer coverage for hospital expenses, surgical expenses, physician's expenses, and major medical (major illness or injury expenses). A person can also elect to pay larger premiums to supplement the basic plan for items not covered, such as home care benefits or durable medical equipment (Enteen, 1992).
    
It is important to discuss each type of insurance plan in more detail before moving on to an explanation of managed care. Each type of insurance plan has its advantages and disadvantages, and each is in such a state of flux that it is difficult to keep current and accurate on the various benefits. Definitions of each type of insurance as it is currently offered follow, but it is important to remember that managed care reform can affect these definitions at any time.

HMOs Versus PPOs
Because HMOs and PPOs are the most commonly confused managed care products, it is helpful to detail them more fully. An HMO is a state licensed entity that agrees by contract to provide medical services on a prepaid, capitated basis. It is an indemnity plan that delivers comprehensive, coordinated medical services to an enrolled membership in a defined geographical location on a prepaid basis. There are four main models of HMOs: group model, individual practice association (IPA), network model (health plan), and staff model. Different variations of these models are also available in certain locations of the country. Today there are more HMO models than the four traditional types just mentioned. Examples are open access, closed access, or mixed-type models.

Group Model HMO
A group model HMO contracts with multispecialty physicians organized in a partnership, corporation, or association. The physicians are not employed directly by the HMO but are employed directly by the group practice. The plan compensates the medical group for services they have contracted at a negotiated rate, and the group is then responsible for compensating its physicians and for contracting with healthcare providers for their patients. The HMO and the group thus share in the risk. Physicians in the group practice may be allowed to see HMO and non-HMO patients, although they are primarily available to provide services to the HMO patients.
     
There are two types of group model HMOs: captive group and independent group. The captive group exists solely to provide services to the HMO's beneficiaries. In most cases the HMO creates the group for that purpose and provides it with administrative services and oversight. An example of this HMO type is the Permanente Medical Group of the Kaiser Foundation Health Plan (Kongstvedt, 2001). In the independent group model HMO, the group is already in existence, and the HMO contracts with it to provide physician services to its members. The group is responsible for all administrative functions and the operations of the group practice. An example of this type is the Geisinger Health Plan in Danville, Pennsylvania (Kongstvedt, 2001).

Individual/Independent Practice Association
An HMO can also contract with an IPA to provide healthcare services for a negotiated fee. The IPA then contracts with physicians who practice in their individual or group practices. These physicians usually care for HMO and non-HMO patients and keep control and responsibility over the way their offices are run. The IPA compensates the physicians on a fee schedule or an FFS basis. Generally, IPAs recruit physicians of different specialties to participate in their plans. This makes their services more desirable and cost-efficient because they are able to provide a wide array of services within the IPA. In turn, this diversity in services makes the IPA more attractive to an HMO. IPA model HMOs are either exclusive or nonexclusive. They are exclusive in providing services to the HMO's beneficiaries if they were created by the HMO. If they were already in existence and contracted with the HMO, they often are not limited in their clients to the HMO's beneficiaries.

Network Model HMO
If the HMO contracts with more than one physician group practice, it is referred to as a network health plan. In this arrangement the physicians do not necessarily provide care exclusively to the HMO. The network model HMO, similar to the group practice, consists of physicians from a multitude of specialties. An example of this type is Health Insurance Plan of Greater New York. If an HMO contracts with groups of primary care providers, this forms a primary care network HMO. Other variations of the network model HMO are closed and open panels. A closed network panel is usually limited to contracts with a small group of already existing group practices, whereas in an open network panel, participation in the group practice is open to interested physicians who meet the HMO credentialing criteria (Kongstvedt, 2001).

Staff Model HMO
The last HMO model is the staff model. In this type the physicians are employed by the HMO to provide healthcare services to its beneficiaries. The physicians are paid a salary and are offered various incentive programs based on their performance and productivity. Physicians in this model are also of different specialties so that the HMO is able to meet the needs of its beneficiaries. Administrative functions of this model are the responsibility of the HMO. For rare services or specialties, the HMO may contract with independent specialty groups available in the community. The staff model HMO is also known as a closed model because participation of physicians is limited to those employed by the HMO. An interesting feature of the staff model HMO is that the HMO exerts a great degree of control over the physicians' practice.
     
HMOs in general are a good example of the gatekeeper model, in which a primary care provider is responsible for authorizing all specialist referrals. This serves to control costs and resource consumption.

PPOs
PPOs are generally neither state licensed nor federally qualified. They function as brokers by offering discounted healthcare services either directly to employers or to third-party payers. Under a PPO agreement, a limited number of providers are contracted as part of the network. The PPO provides this limitation in the size of the panel of providers, almost similar to an incentive, in return for the agreement of participating providers/physicians to abide by its utilization and resource management practices. Typically, capitation and other risk-bearing payment arrangements with providers are not used in PPOs compared with HMOs, where such payment structures are usually the norm.
     
Members of PPOs are encouraged to use the physicians and services of the PPO; however, they are permitted to go outside the network for their healthcare if necessary. In this case, members are held responsible for a copayment or higher levels of cost sharing compared with staying within the network. Those members who do elect to use out-of-network services may be reimbursed at a lower rate than those who remain within the network. Therefore there is incentive for subscribers to remain in the network because those providers will be offering their services at a discounted rate as part of the PPO. Those cost savings are passed on to the consumer. There is a further incentive to employers to contract with a PPO as a means of reducing overall healthcare costs for their employees. PPOs have become more popular than HMOs because their enrollees are less restricted regarding their choice of providers. Table 1-4 summarizes important differences between the two types of healthcare plans: HMOs and PPOs.

MANAGED CARE AND ITS STAGES OF DEVELOPMENT/MATURATION

There had been an evolution of the healthcare market as it matured into the managed care environment. Managed care can be defined as a system of healthcare delivery aimed at managing and balancing the cost, risk, and quality of access to healthcare. It is both an industry and a process. Ultimately, managed care is nothing more than a range or spectrum of activities designed to control the means by which healthcare is delivered. It is used by HMOs and PPOs to improve the delivery of services and contain costs (Mullahy, 1998; Kongstvedt, 2001). This so-called evolution has been mapped out and studied by many economists, consulting firms, and healthcare experts and futurists. For example, the University Hospital Consortium and American Practice Management, Incorporated Management Consultants (1992) categorized the healthcare market and its evolution to managed care into four stages of development. Today, this categorization has expanded to include a fifth stage. Box 1-6 summarizes the various stages of evolution.
     
Stage I of this market refers to the "now historical" perspective of healthcare when hospitals, physicians, employers, and HMOs were operating under a more unstructured FFS payment system. At this stage, more options were available to the client and more flexibility within this framework was permissible. The penetration of the HMO market was barely noticeable during this stage—about 5% to 10%. An example of an HMO at this point of development was the Health Insurance Plan (HIP) of New York, or the oldest HMO, Kaiser Permanente, in California.
     
Characteristics of the environment of care in this stage were duplication and fragmentation of services and less pressure on hospitals to discharge their patients early or reduce length of stay. Competition was based on technology. Case managers' roles in this stage were just beginning in the acute care settings, particularly with nurses assuming the role.
     
Stage II of this market is referred to as the loose framework/alliance. Many areas of the country are currently in this stage and struggling with it. HMOs and PPOs are beginning to emerge in greater numbers (10% to 30% of the market), and enrollment has skyrocketed. They are no longer unnoticeable in the healthcare market of today. As a result of their large enrollments, they now have the leverage to negotiate pricing and the ability to contract at lower reimbursement rates. During Stage II, the motivation is to lower the cost of providing healthcare so that the value of the money received is not eroded. Several types of HMOs are developing. In the past, HMOs were organized to employ their own staff physicians and service providers and pay them a salary. Soon after, groups began to emerge in which a number of physicians and other providers established partnerships and shared their profits. These groups usually practiced out of a common facility or location. Next came the independent practitioners who formed associations and contracted to be part of a group endeavor while still practicing out of their own offices. The last type of HMO to emerge was the network, in which large areas are covered, perhaps crossing various states or regions or even the entire United States. Networks are most popular among large conglomerates who want to obtain the benefits of HMOs for their employees with the same consistency at any of their sites.
     
This stage of development witnessed increased focus on eliminating delays, duplication, and unnecessary use of resources, as well as other activities to streamline the delivery of care processes. As the interest in cost effectiveness increased, the use of case managers also arose with a focus on care coordination across the continuum of care. Healthcare executives began to integrate utilization and case management practices with a major focus on transitional planning and expediting the patient's journey across the different levels of care settings.
     
After these states of development, the market moves into Stage III, consolidation. While HMOs are forming networks, hospitals are simultaneously forming systems and networks themselves. Managed care penetration increases to 30% to 50% of the market. This now sets up the beginnings of a competitive market in which hospitals are aggressively recruiting physicians and practitioners. These groups of physicians and providers are more commonly becoming known as PPOs. The payment system is based on a per case, per diem, capitation through the PPO. A contract is developed that outlines the cost per covered life in the plan. PPOs are now outgrowing the HMO market primarily as a result of their ability to offer greater savings for employers at a time when employers are extremely concerned about the cost of their employees' health benefits.
     
Case management programs in this stage became more popular and available in the majority of healthcare organizations and in different settings. These programs were necessary to curtail the rising cost of healthcare and increased risk on the part of the provider. Case management was viewed as the most desired strategy for cost-effectiveness and efficient service delivery. However, these programs took a new and improved structure: an initial integrative approach to case management with merged utilization management, clinical management, and transitional planning functions. In addition, case managers in the payerbased system (i.e., MCOs) assumed the gatekeeper and utilization management role.
     
Many parts of the country, primarily the West Coast, have lived through Stage III and have now embarked on Stage IV, managed competition. This is the phase in which capitation prevails (50% to 80%). In this market, purchasers contract with hospital/physician networks to provide a comprehensive healthcare package to their clients. These integrated systems contract with the purchasers to accept the financial risk for managing their utilization of services (utilization management). In other words, they bear the burden of controlling their costs to deliver healthcare. The next level of this system is capitation, where a set fee is given to provide comprehensive care to a given population. This puts an even greater burden on the ability to provide quality care while controlling cost. The managed organization is no longer taking the risk with its premiums; the risk has now shifted to the provider of the healthcare services within the network or physician care group.
     
This phase of managed care is the most uncomfortable of all because this is where survival of the fittest comes into play. Competition is at its peak during this phase because MCOs are searching for membership from the most frugal yet quality-driven establishments. Report cards are now the judgment mechanism of any MCO and can be the demise of any physician or hospital not meeting the standards of cost containment as set up by the MCOs. An example of capitation is as follows: 1,000 HMO members sign up for a healthcare network as part of a full-risk contract. The network will reimburse approximately $400 per member per month to cover all of their healthcare needs regardless of how much or how little they access the healthcare system. It is the burden of the healthcare network to provide adequate resources to cover their healthcare needs at low cost.
     
The integrative approaches to case management services in this stage become the norm. Department consolidation also occurs. In Stage III it was possible for healthcare organizations, particularly hospitals, to still have either discharge planning, utilization management, or quality management as separate from case management. However, in Stage IV this lack of integration becomes no longer viable and is seen as a cost-ineffective practice. Because of the development of integrated delivery systems (IDSs), collaborative strategies in case management across the continuum of care and across different sites and settings are developed, strengthening the role of the case manager and its importance. Moreover, case management takes a new focus here to meet the demands of the managed care environment: population risk assessment, categorization, and management with special interest in disease prevention and health maintenance and promotion.
     
Stage V, integrated delivery partnerships, occurs when the market of managed care expands to include most of the population in such an arrangement of health insurance (>80%). IDSs (discussed in the next section) mature in size, focus, and method of operation. They also become more popular in almost every geographical location, even though not every market may have reached this stage of development. The environment of healthcare in this stage is characterized by full capitation as the reimbursement method; partnerships between providers, purchasers, and payers; and population health management. Another important characteristic is that the providers assume risk for the full continuum of care.
     
These characteristics and advanced developments impact the practice of case management in a way that new strategies and innovations are developed, such as telephonic or Internet-based case management services. These approaches tend to also focus on the population served and its needs rather than just the individual patient or person. Therefore proactive programs in demand management and risk reduction are more evident in this stage compared with Stage IV. Furthermore, both the provider and payer groups adopt these strategies and use them in their marketing efforts.

INTEGRATED DELIVERY SYSTEMS AS A RESPONSE TO MANAGED CARE

IDSs became more popular in the mid-1990s as a response to the mature managed care environment. Today they are present mostly in heavily penetrated managed care markets. The driving forces behind the development of IDSs are as follows:

There is little agreement in the literature and among healthcare providers on how to define IDSs. However, according to Kongstvedt, an IDS can be defined as one or more

"type of provider coming together in some type of legal structure to manage health care and, in most cases, to contract with payer organizations" (2001, p. 31).

The main goal of an IDS is to improve efficiency in the delivery of healthcare services. Reflecting back on the past decade, we can see that some IDSs have succeeded, but others have failed and completely vanished.
     
There are no standard rules for the size or type of an IDS. Some are large and others are small; however, larger IDSs are known to gain increased leverage in negotiating contracts with an MCO. Successful IDSs are noted to include an acute care hospital, physician group practices, long-term care facilities, a home care agency, and managed care contracts with major payers. As for the type of an IDS, there are not formal structures. IDSs can be one of the following:

Regardless of the type of integration a healthcare institution may be involved in, case management services and departments play an important role in the integration of services to meet the primary goal for the formed IDS: efficiency of service delivery.

Physician Integration
Managed care and healthcare reform resulted in increased reliance on primary care physicians as providers of healthcare services. This shift left specialty care physicians in a bind and worried about the survival of their practice because they were no longer in demand. As a result, specialists and primary care providers pursued integrated group practices that witnessed the creation of IPAs with multispecialty providers. IPAs and physician networks discussed in the previous section are examples of IDSs that are built around physician integration. Other types of physicianintegrated IDSs are primary care groups, specialist provider groups, and management service organizations (MSOs). These types of groups function similar to IPAs; however, MSOs are different. The main focus of MSOs is managed care contract negotiation for IPAs and physician networks.

Physician-Hospital Integration
Specialty hospitals experienced the same concerns as specialist physicians. They were afraid that their referral source and base would dwindle; therefore they began to establish relationships with primary care physicians and expanded their scope of services and providers. As a result, hospitals were found to develop new collaborative or partnership agreements with other physician groups, such as those listed in the Physician Integration section. Other types of integration are physician-hospital organizations (PHOs), particularly for the purpose of managed care contracting power; MSOs, in which hospitals sponsored the physician practices; and physician-hospital integration through direct employment of physicians. The MSOs were a natural development or growth of PHOs. Both PHOs and MSOs are similar in their focus on managed care contracting; however, MSOs include additional hospital administrative services.
     
Managed care contracts negotiation was the main incentive behind physician-hospital integration efforts. In these ventures, hospitals assisted physicians in the management of their practices (i.e., provided practice management services) and assumed the administrative responsibilities for billing and collections, utilization review and management, and quality assurance activities. In these structures the hospital received a fee as a compensation for the services provided. The fee had to be at market value; otherwise, the MSO could incur legal problems.

Provider-Payer Integration
Provider-payer integration is different from the other two types of integration. Physician and physician hospital modes of integration are unidimensional (i.e., provider-based). However, provider-payer integration is bidimensional because it merges the provider (physician and hospital) and payer sides of healthcare delivery. This type of integration is the most complex and challenging to manage. Picking the right partner is a leading success factor of this venture. Issues of concern in the provider-payer integration venture are as follows:

Government-Related Insurance Structures
Government provision of medical insurance is the final source when reviewing the options for the population at large. Both federal and state governments provide medical insurance benefits. The Medicare program under the federal government provides mandatory basic hospitalization benefits for most U.S. citizens over the age of 65 years and some other special classes of individuals, such as the disabled. This coverage is referred to as Medicare Part A, and it can be supplemented by Medicare Part B, which provides for payment of doctor bills. These plans are not all-inclusive enough for most senior citizens. Recently there have been growing cutbacks to Medicare; therefore it is prudent for any citizen over 65 years of age to supplement Medicare with another insurance plan. Many HMOs/PPOs are now expanding their plans to offer managed care Medicare and managed care Medicaid components.
     
At the state level, insurance benefits are also offered. These are commonly referred to as the Medicaid program of benefits for the indigent. They are no longer associated with the stigma of the term welfare because more and more citizens must apply for public assistance to cover their medical bills after they have exhausted their income and assets. Medicaid is a pool of funds used to provide insurance benefits for those who cannot afford health insurance. The amount of funds set aside for this purpose is most often a direct result of the economic status of a particular state. The amount of funding is undergoing a great deal of turmoil as many states are tightening their pocketbooks in anticipation of the full impact of managed care in a capitated environment.
     
A few examples of differing reimbursements for physician services are outlined in dollars in Figure 1-1. This is only a representative partial listing of potential physician fees and does not represent all practices or the many varieties of reimbursement schedules.

OTHER HEALTH BENEFIT PLANS
Workers' Compensation
An additional type of government provision that can vary from state to state is the workers' compensation guidelines. Workers' compensation cases are different from group medical insurance in that the insurers and employers are mandated by legislature guidelines to reimburse for both medical costs and lost wages. It is imperative that a case manager working with workers' compensation claims be familiar with the state's laws, especially as they reflect the claimant's return to work.

Case Manager's Role in Workers' Compensation Cases
The case manager must be aware that there is a two-pronged effort in workers' compensation cases. That is, the insurance carrier is not only interested in the timely results of medical care but also wants to minimize the outlay of lost wages. Therefore getting the employee back to work as soon as possible, even with a modified work schedule and duties, becomes an additional motivational pressure on the case manager. At times the case manager may have difficulty balancing medical health and the timely return to the workforce. The case manager may be faced with the dilemma of a tight timeframe to return someone to work if the salary losses are a greater expense to the insurer than the medical care expenses.
     
Case managers specializing in the field of workers' compensation must be well versed in orthopedic injuries because these injuries dominate compensation cases. They must also be knowledgeable enough in rehabilitative medicine to recommend the resources necessary to assist a patient in increasing functionality. It is the goal of the case manager to return an employee to the previous state of well-being or the optimum level of improvement obtainable. The case manager achieves this by ensuring that the appropriate treatment plan is in effect and progressing, along with verifying compliance by the employee. It is also important for the case manager to know the employee/claimant well enough to prevent the person from engaging in any untoward activities that would hinder or sabotage the progress or ultimate recovery.

Automobile Insurance
As with workers' compensation guidelines, automobile policies and/or no-fault policies vary from state to state. Many rules depend on the location of the accident, where the person resides, or where the person's employment headquarters is located.
     
Case management usually becomes involved in motor vehicle accident cases when catastrophic injury has occurred. Case managers become very involved in the discharge planning and coordination, such as transfer from acute level of care to rehabilitative settings or decisions involving a chronic injury requiring adaptive equipment, home care, or home modifications.

Disability Insurance
Disability plans are usually referred to as short-term, long-term, or total disability. Each type of plan varies in its amounts of salary replacement and length of time covered. Disability plans will require a case management review. Usually a case manager will become involved as the length of time for disability coverage is winding down. It will be the creativity of a case manager's skills that will determine if the financial plan and the medical plan will balance to the benefit of the insured and the employer.

Long-Term Care
This is a relatively new type of insurance offered. The policy holder has a variety of possibilities for nursing care coverage. Such care as skilled nursing, subacute care, custodial nursing care, extended home care, respite care, or nursing home provisions can be covered. The insurance company usually case manages a claim to confirm the need for services and approves benefit coverage accordingly.

PROACTIVE TACTICS TO COUNTERACT THE EFFECTS OF MANAGED CARE

Most strategies are incorporating a two-pronged approach to tackle all of the major areas that the MCOs seem to be concentrating on. One approach could fall under the overall operational management. This is the area in which efforts are initiated to control costs and to become more accountable for costs. Work redesigns and changes in the work delivery systems are becoming commonplace in organizations that are taking a more proactive approach. A more active performance and reward system is becoming evident and attempts are being made to integrate physician best practice with a functional integration system so that quality standards of care can be maintained at the lowest cost possible.
     
The second approach, and the area in which case management has the most direct impact on its overall success, is clinical management. Nursing case management was the first tool used to oversee the patient's journey through the healthcare system. Without a clear system of managing the patient services and resources in the least costly way, particularly in an environment of increased capitation, funds will quickly be wiped out. Capitation clearly requires control over resources, utilization management, length-of-stay reduction, disease management, and clinical process improvement. All of these listed areas can be incorporated into the case management role (see Section 1, Chapter 3, Section 3, Chapter 1, Section 3, Chapter 2 , and Section 3, Chapter 3).
     
The emergence of the case manager using the clinical pathway was a major step toward a more cost-effective, efficient method of delivering care. By identifying variances to care, the case manager began to identify ways to continuously improve the delivery of care while not compromising quality. The use of clinical paths was the beginning initiative to control and reduce length of stay. An effective case management program can make a significant difference in managing and coordinating the clinical resources available for the patient (Case Manager's Tip 1-13) (Flarey and Blancett, 1996).
     
Integrating case management into managing a patient group or a specific disease entity is the next level of resource and clinical management. This strategy uses a multidisciplinary approach to care and requires input from the medical, clinical, ancillary, financial, and administrative teams. Many facilities have developed multidisciplinary teams to meet frequently on units and review the care of the patients to ensure that quality is being maintained while utilization of services is appropriate and cost-efficient. Similarly, length-of-stay committees have been launched to discuss problem cases, high-cost patients or certain areas of overutilization, and more efficient methods of providing services at lower cost. Future strategies must expand efforts beyond the hospital walls to include community services and community-based initiatives of case management (Case Manager's Tip 1-14).
     
Differentiating between case management and managed care can be somewhat confusing at times because the terms are used interchangeably in many arenas. In general terms, managed care is the umbrella for several initiatives of cost containment that include case management. Case management is a variation of the components that comprise managed care (i.e., managing cost, quality, and effectiveness of services) (Cohen and Cesta, 1997). Case management is a process that incorporates the components of managed care when attending to the needs of patient care. It can be used in any form of patient delivery system, such as team, functional, primary, or alternative nursing care. Continuous monitoring of care rendered to a patient is maintained through interdisciplinary team meetings and analysis of variances from the outlined plan. Case management is effective because it coordinates, integrates, and evaluates the outcomes of the processes of care (Cohen and Cesta, 1997).
     
To have an effect on managed care, case managers must take an active role in watching for quality outcomes. Benchmarking research used by managed care companies will be an important tool that a case manager must incorporate into the role because it will become clear that adequacy of care will be measured by outcomes. Case managers must demonstrate that they have the flexibility to ensure that care is delivered in a high-quality and cost-effective manner. They will undoubtedly play a vital role in the future of our healthcare industry and the survival of quality healthcare provided to its people.

KEY POINTS

  1. The prospective payment system was one of the forces leading acute care settings toward the adoption of case management models.
  2. Case mix helps hospitals to determine their costs, as well as their types of patients and use of resources.
  3. In addition to acute care settings, prospective payment methodologies can now be found in ambulatory care, home care, and long-term care.
  4. Medicare and managed Medicare are government programs providing healthcare to those age 65 years and over and the disabled.
  5. Medicaid and managed Medicaid are state-run healthcare programs for the indigent.
  6. Regardless of the reimbursement system under which the patient is eligible, the length of stay will continue to need to remain short, and the use of resources will need to be monitored and controlled.
  7. Health insurance is the protection one seeks to provide benefits for an illness or injury.
  8. The insurance contract states the nature of the benefits or the coverage available to the insured.
  9. The HMO delivers comprehensive medical services to an enrolled membership on a prepaid basis.
  10. The PPO offers a more limited number of providers and encourages the use of physicians and services within the network, but patients are permitted to go outside the network for decreased reimbursement.The evolution of the healthcare market has four stages of development in the managed care environment.
  11. Work redesigns are becoming commonplace in organizations taking a proactive approach to managed care.
  12. Managing patient services and resources in the least costly way while maintaining quality will be the primary goal of case management as it relates to managed care.
  13. Managed care is the umbrella for several cost-containment initiatives that include but are not limited to case management. The crossword puzzle shown in Figure 1-2 will help you review some of the key terms related to financial reimbursement systems.
REFERENCES

American Medical Association: CPT '97, Reston, Va, 1996, St Anthony's Press.

Blancett SS, Flarey DL: Case studies in nursing case management: health care delivery in a world of managed care, Gaithersburg, Md, 1996, Aspen.

Cohen EL, Cesta TG: Nursing case management: from concept to evaluation, ed 2, St Louis, 1997, Mosby.

Commission on Professional and Hospital Activities: The international classification of diseases, rev 8, 2 vols, Ann Arbor, Mich, 1975, The Commission (adapted for use in the United States).

Enteen R: Health insurance: how to get it, keep it, or improve what you've got, New York, 1992, Paragon House.

Flarey DL, Blancett SS: Handbook of nursing case management, Gaithersburg, Md, 1996, Aspen.

Hastings DA, Luce GM, Wynstra NA: Fundamentals of health law, Washington, DC, 1995, National Health Lawyers Association.

Hurley R, Freund D, Paul J: Medicaid managed care: lessons for policy and program design, Ann Arbor, Mich, 1993, Health Administration Press.

Kongstvedt P: Essentials of managed health care, Gaithersburg, Md, 2001, Aspen.

Mullahy CM: The case management handbook, ed 2, Gaithersburg, Md, 1998, Aspen.

Richards S: A closer look at case management, J Health Qual 18(4): 8–11, 1996.

University Hospital Consortium and American Practice Management, Incorporated Management Consultants: Stages of market evolution, Chicago, 1992, University Hospital Consortium.
Glossary

Appendix A
Appendix B
Appendix C
Appendix D
Appendix E-1 Appendix E-2 Appendix E-3
Appendix F
Appendix G
Appendix H
Appendix I
Appendix J
Appendix K
Appendix L
Appendix M
Appendix N
Appendix O


Top

Revised September 13, 2007