Case Based Pediatrics For Medical Students and Residents
Department of Pediatrics, University of Hawaii John A. Burns School of Medicine
Chapter I.11. Medical Insurance Basics
Richard Y. Mitsunaga, MD
February 2003

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You have just completed an examination on a two-year-old child. The child seems normal in nearly every respect, but has only ten words in her vocabulary. You refer her for a speech and hearing evaluation. A developmental expressive speech delay is diagnosed. Speech therapy is recommended. The insurer declines to pay for this service because treatment of developmental language disorders is not a covered service in the patient's health plan.


Our professional survival depends on providing quality services for the patient at a fair cost and receiving just compensation for these services. Accordingly, a basic understanding of how things are paid or not paid is essential. This is particularly true when advocating for patients and for fair reimbursement.

Numerous terms and acronyms confront the newcomer to the field. The terminology must be learned, just as the anatomical, chemical and physiological terms, which were so foreign to you a few years ago, had to be learned. Salaried physicians who do not have formal fiscal duties must still understand the insurance systems used by their patients or risk making them spend more than they should under terms of their coverage. This can cause patient dissatisfaction despite excellent health care and results. It can cause medical-legal problems if the patient's outcome is less than optimal.

A glossary of the more common terms used herein is located at the end of this chapter to assist you with this new terminology. A more complete glossary is contained in other works (1). Some of the definitions used in this chapter are taken from that reference. Every contract you sign with an insurer contains definitions of the terms used in that contract. You are advised to read these carefully so you understand what you are agreeing to do.

A third party payer is an insurer; an entity contracted to arrange payments for services rendered to a patient. The payer may be an insurance company, mutual benefit society, a self-insured large employer, or a state or federal agency.

It is important to understand that an insurer pays with the patient's money, not its own funds. Money from premiums is redistributed as payments. This helps to protect patients from unexpectedly high expenses because the risks are spread among many subscribers. At the same time, it imposes an obligation on all parties to use the money wisely, just as if the payment was coming directly from your patient's pocket.

Sixty years ago, there were few insurers dealing with health. Physician's and hospital fees were paid from the patient's personal funds. Many did not seek medical care because they couldn't afford it. Physicians wondered with every decision whether or not the patient could afford the cost of their recommendations. By the 1960s, there were more health insurance plans. Most dealt with inpatient care, but outpatient plans were rapidly developing. Hawaii pioneered mandatory employer coverage by enacting the nation's first prepaid health care act in 1974. Hawaii's law requires covering only the employee, but charges for a family plan were then low enough that many employers incorporated them into their company plans. Medical costs were inexpensive by current standards. Hospital charges for a five-day mother-baby stay (average at the time for a normal vaginal delivery) in the mid-1960s were about $350, which included the delivery room.

There are four basic components to the American health care system. First are the patients who need care. Second, there are the professionals who provide care, including physicians. Third are the various institutional providers, including hospitals, that also provide care. Finally, there are those that pay for the services rendered by the providers. This may be the individual with or without a third party that assists in payment. These include private as well as government insurers such as Medicare and Medicaid. All parts are essential. In this era of high cost treatment and technology, the system collapses if one piece is missing. The focal point must be the patient. There is no reason for the existence of the others if no one needed their services.

HOW DO PHYSICIANS GET PAID? The person who owes the funds for professional services is the patient. Today, very few patients (or their families) are wealthy enough to pay for all their medical needs. As in the past, patients who have no outside financial assistance must compromise on the visits they make and the treatments they receive. This is far from ideal.

Usually, physicians are paid via some intermediary, which can take many and varied forms. All share a basic cash-flow pattern in which a service is rendered and a charge is made. A payment is then received. A physician must pay business expenses ("overhead"), including working space, personnel including professional (e.g., office nurse), clerical and maintenance, supplies, taxes, malpractice insurance, etc. Only afterward does the physician get paid. In an average pediatric office, overhead runs between 45 and 60 per cent of the gross revenues. If the physician does not attend to the business aspects of the practice, someone must be paid to do this. This administrator adds to the overhead expenses of the practice.

Physicians may be in solo or group practice. Groups may be as few as two physicians or there may be hundreds. Groups may consist of a single specialty or be a multispecialty group.

Payments to the physicians can take varied forms as well. In its simplest form, a practitioner keeps what is left after expenses and taxes are paid. More commonly, a fixed amount is taken and the remainder saved as a reserve. Physicians in groups may organize in an office-sharing arrangement, partnership, professional corporation or partnerships of individuals and corporations. Individuals may incorporate as well, by creating a legal entity known as Dr. XYZ, Incorporated. Payments may occur by taking a fixed amount from partnership revenues (called a "draw") each month, by salary, or by various formulas used to measure productivity and other contributions to the group such as administrative duties. There are also physicians who are employed by large entities such as a university, hospital, health care groups (e.g., Straub, Kaiser Permanente), federal or state agency or department, including the Military Services and the Public Health Service.

HOW DO INSURERS GET PAID? Insurance plans are basically capitated, which means that they receive a fixed amount per patient with which care must be provided for the contractual period, e.g., one year. This is true of private payers as well as government sponsored plans. Military services have congressional appropriations. How they distribute the funds to individual providers, hospitals, pharmacies, etc., is determined by each plan. This accounts for the multitude of payment billing and reimbursement methods encountered by physicians.

The funds received by an insurer represent the amount a purchaser (individual, employer, government agency, etc.) is willing to pay for the total services. The insurer must negotiate for a payment rate within which it can function and remain solvent. The insurer cannot create more money, so it is responsible to distribute the monies it receives fairly but wisely. Bankruptcy of a health plan is catastrophic, as its patients are left without health insurance and money owed to providers cannot be paid. Sufficient reserves must be maintained to provide for unforeseen variations in usage as well as emergencies so that patients and providers are protected.

Repeated withdrawals from reserves can rapidly deplete them, so insurers must operate within their budgets. This is limited to the amounts employers or individuals who buy the policies are willing to pay for premiums minus the operating expenses of the insuring company.

In the days when health insurance was scant or non-existent, physicians sent their patients a bill "for services rendered" and expected to be paid. It is more complicated now, but the fundamentals are the same. Currently, most patients have a large part of their medical expenses paid by a third party payer, who expects a more detailed statement of what services were rendered. How do patients and insurers know what services were delivered and what must be paid for? Most insurers use a standard claim form, called the HCFA 1500 form, to receive reports from providers on the services rendered, diagnoses and the fee requested. Knowledge of what goes on this form is essential even for salaried physicians, since large employers of doctors frequently use these forms as a measure of a physician's productivity and the complexity of the patients who are seen.

Most providers use a computerized billing program. This saves time with the collection of standardized information on a HCFA 1500 such as the patient's name, insurance number, etc. Additionally, computer billing permits better record keeping than is conveniently possible with a manual system, particularly when data retrieval or summaries must be prepared.

From your medical notes, ICD codes (see glossary) convey the diagnoses the patient has and CPT codes tell what level of service(s) was done, along with your charge for those services. Basically, these systems are intended to provide a quick way of informing the insurer about what was done.

Unfortunately, there is opportunity for exaggeration or gamesmanship by provider or insurer. Providers may exaggerate the level of the services provided or they might "unbundle" charges, which refers to charging separately for services that are normally provided as a package. Insurers may be arbitrary in "downcoding" claims, which refers to adjusting a provider's claim to a lower paying level or by refusing to recognize "modifiers" which are codes reflecting unusual complexity of the services rendered.

Both sides may retain coding experts, whose job is to extract the most benefit for their side, often using whatever technicalities they can muster. The codes are supposed to be a method of communication, but this often gets lost in the exchange. Codes were neither intended to give providers an opportunity to game insurers nor to provide insurers with a method to cheat providers. Until mutual trust and meaningful communication is established, part of the monies that could be spent for paying claims will be diverted to review activities. State law and provider contracts with insurers provide for appeals and one should be filed if it is felt that a patient's claim or your bill was unfairly denied. Appeals without merit, however, also cost the insurer money to review and process, and this is money that might be better spent paying claims.

It is critical to know that insurers including the government require adequate documentation of a service. For review purposes, a service not documented is considered to have never been performed (and will not be paid for). In short, documentation of the services rendered and a thorough knowledge of coding rules and procedures are essential to receiving the best compensation for your services. Coding is best done by the physician. It is a mistake to assign this duty to less experienced helpers.

Provider contracts with third party payers include provisions for fee schedules to be established. You may charge whatever you wish for a given service, but the insurer will pay no more than the "maximum allowable charge" (the amount for a service listed on the fee schedule) for the service. The difference between your charge and the lesser amount allowed is called a "provider adjustment," which is a discount off your fee that you have contractually agreed to with the insurer. Patients receive a report of this "provider adjustment" and all insurers stipulate you cannot "balance bill" (i.e., charge the patient for the difference between your charge and the maximum allowable charge). If your fee is less than the maximum allowable charge, you will be paid only what you charged.

For a given claim, an insurance company pays a contractually agreed percentage of the allowable charge. For example, it may pay 80% of an office visit (the actual percentage varies with different plans). The patient must pay the "co-payment" which is the balance owed between the allowable charge and the amount paid by the insurance company. In this case, the patient will owe 20% of the bill plus applicable state tax. You bill the patient for this "co-pay". This is the typical fee for service (FFS) arrangement. One could consider "capitation" to be the opposite of FFS. Physicians who are capitated will receive a monthly payment for each patient registered to them by that insurer regardless of the number of visits that month.

Variations in the system are common. A large group or an IPA (Independent Practice Association) may receive a capitated payment for the patients under their care. This intermediary may choose capitation or a fee for service method of paying the physicians who render the care. Be sure you have a good explanation of the payment mechanisms that apply to you.

Obligations to patients by providers and by third party payers overlap, but not completely. Both providers and insurers are expected to provide those medically necessary services authorized by the terms of the physician's contract and the patient's coverage.

It is important to know that an insurance policy rarely covers all possibilities, but rather only those services that are "covered services" and are "medically necessary" (a term that is defined in state law) will be paid for. If a service is not covered in the patient's plan, it won't be paid for even if it is "medically necessary". An analogy exists with auto insurance. You won't be paid to fix your wrecked car if you didn't buy collision insurance or if you wrecked the car doing something excluded by your policy such as driving without a license. The sample case at the beginning of the chapter is another example, such that developmental speech abnormalities were not a covered service in the patient's plan, even though the need for the service is appropriate. Other services must meet specific criteria and be "pre-authorized" by the insurance company (i.e., be approved for coverage in advance or risk not having it paid for at all).

Providers are obligated to provide individualized services to each patient. Some community obligations exist, such as not abusing antibiotics and causing the development of resistant organisms, but the basic obligation is to the individual patient. Third party payers must consider their total membership and the community as well as the individual member. Prices must be affordable for those paying the premium and insurers have an obligation to remain fiscally solvent through the terms of their contracts. Accordingly, covered tests and treatments must be of proven efficacy and cost-effectiveness. Adequate reserves must exist to protect against unforeseen events. The differences in these obligations can lead to occasional conflicts.

There are fewer conflicts than people on both sides think. The overwhelming majority of claims are paid promptly and automatically. Neither side pays much attention to them because they are not a problem. Providers and payers interface when a conflict occurs (e.g., a denial of a prior-authorization request or a payment). Attention is paid only to the conflicts and both sides often have a very limited view of the other's role and the fact that their obligations may differ. An insurance company's staff that works all day with denials may incorrectly feel every physician is trying to cheat. The provider, whose attention is called to denials and not to the majority of claims that are immediately paid, may feel that all the insurer does is try to cheat them. The perceived frequency of these conflicts is therefore magnified.

Reason must prevail and discussions must change from the "win-lose" mentality currently prevalent. Conflict resolution must occur with each side appreciating the other's role in the overall scheme of managing patient care. Above all, communication is essential. Even agreeing to disagree on a given point is better than not communicating at all.


Questions

1. True/False: The decision to deny speech therapy in the case at the beginning of the chapter should be appealed, since it is medically necessary.

2. True/False: A cosmetic procedure is denied because it is not a covered service. The patient elects to have the procedure anyway. The doctor is allowed to charge for the service.

3. True/False: A charge is adjusted downward because it exceeds the maximum allowed for that service. The doctor is allowed to charge the patient for the difference.

4. True/False: A mechanism to appeal managed care decisions is contained in Hawaii State Law.

5. True/False: Due to their large reserves, insurers have minimal budgetary constraints in spending.


References

1. American Academy of Pediatrics. A Pediatrician's Guide to Managed Care, 2nd edition. 2001, Elk Grove Village: American Academy of Pediatrics.


Answers to questions

1. False. The service is not covered in this patient's plan even if it is deemed medically necessary.

2. True. The patient must be informed beforehand that the service may not be covered and that he or she will be expected to pay if they wish to have the service done.

3. False. Contracts between third party payers and providers stipulate that balance billing is not allowed when fees exceed maximum allowable charge on a covered service.

4. True. See Hawaii Revised Statutes Chapter 432e.

5. False. An insurer must observe its operating budget, which is dependent on the premiums received. Insurers cannot generate new money; they can only redistribute what they collect after expending reasonable amounts for operations. Reserves are for unforeseen emergencies. Repeated withdrawals from reserves threaten the solvency of the third party payer.


Glossary (1)

Capitation: A method of payment in which reimbursement to a provider or group of providers occurs through the payment of a fixed, periodic payment (usually monthly) in exchange for delivering a defined set of services to a specific population of patients, placing most of the financial risk for utilization on the provider. This is paid whether a patient has no visits or makes multiple visits (1).

CMS (Centers for Medicare and Medicaid Services): Formerly HCFA (pronounced hik-fa for short) or Health Care Financing Administration. This is the federal agency responsible for administering the Medicare, Medicaid, SCHIP (State Children's Health Insurance), HIPPA (Health Insurance Portability and Accountability Act), CLIA (Clinical Laboratory Improvement Amendments), and several other health-related programs. Additional information regarding CMS and its programs is available at http://cms.hhs.gov/about/default.asp.

Cost Effective Care: Defined in Hawaii Law (Hawaii Revised Statutes Chapter 432e) as "a health intervention where the benefits and harms relative to the costs represent an economically efficient use of resources for patients with the medical condition being treated through the health intervention; provided that the characteristics of the individual patient shall be determinative when applying this criterion to an individual case." "Cost effective does not necessarily mean the lowest price."

Covered Services: Those services contractually or legally required of a third party payer. In Hawaii, the latter includes childhood preventive health services and immunizations through age five years.

CPT: Current Procedural Terminology. Developed by the American Medical Association, CPT is revised annually and is a listing of descriptive terms and identifying codes for reporting medical services and procedures performed by physicians.

Downcoding: The practice of designating a lower level or intensity of medical service provided for purposes of paying less to health care providers (physicians, hospitals, etc.). Downcoding is correct if the documentation does not reflect the service claimed. Insurer's can abuse downcoding if it is done arbitrarily or solely to pay the provider less.

EPSDT: Early Periodic Screening Detection and Treatment. A program on which the QUEST (Hawaii Medicaid Managed Care Program) Plans are rooted. All patients under age 21 years are considered to be in EPSDT, which makes them eligible for some benefits that are not available to adults.

FFS (Fee for Service): A mode of payment for health care services in which a physician charges a fee for each specific service or group of services. The patient and their insurer pay, usually in a ratio of 20% from the patient and 80% from the insurer. Plans covering FFS arrangements are typically the most expensive.

Formulary: A list of approved prescription drugs determined by a managed care plan for use by its patients and physicians (1).

HMO (Health Maintenance Organization): An entity that agrees to provide or arrange for the provision of a specified set of comprehensive health services to a defined population of patients for a prepaid, fixed sum (1).

ICD-9-CM (International Classification of Diseases, 9th Revision, Clinical Modification). A system of disease classification based on work by the World Health Organization and issued in the United States by the U.S. Department of Health and Human Services. The CM version refers to the standard method physicians use to report their diagnoses on an individual patient to insurers on their claims for payment.

IPA (Independent Practice Association): An association of physicians organized to provide various services for their members, including securing contracts with insurers, particularly for managed care contracts. IPAs may also do MSO functions (see MSO).

Managed Care: A means of providing health care services within a defined network of health care providers that is given the responsibility of managing utilization of health care services and providing quality, cost-effective health care (1).

Medicaid: A jointly funded, Federal-State health insurance program for certain low-income and needy people. It covers approximately 36 million individuals including children, the aged, blind, and/or disabled, and people who are eligible to receive federally assisted income maintenance payments (see QUEST).

Medicare: Health insurance program administered by the Centers for Medicare and Medicaid Services (CMS) for persons 65 years of age or older, some persons with disabilities, and patients with End-Stage Renal Disease. Medicare has two parts: Medicare Part A (hospital insurance) helps pay for care in hospitals, skilled nursing facilities, hospice care and some home health care. Medicare Part B is optional for beneficiaries and a premium must be paid. Part B helps pay for doctor's services, outpatient hospital care and some other medical services that Part A does not cover.

Medical necessity: To a physician, this has classically meant whatever a physician deems necessary in the care and treatment of an individual patient. Patients, of course, define the term as referring to services they feel they need. Third party payers changed this to refer to care that their payment teams deemed necessary for the management of a given patient. The term has become increasingly complex and specific criteria must be met for a service to qualify as "medically necessary". Hawaii has a definition of Medical Necessity defined in State Law.

MSO (Management Services Organization): An entity that provides management services to physicians, physician groups, hospitals or insurers. Services may include quality and utilization management and claims payment. An MSO can be owned by any of the entities for which it provides services, various combinations of the owning entities, or be completely independent (1).

PPO (Preferred Provider Organization): Groups of physicians usually assembled by an insurer or other large entity to provide services for its membership. Physicians in such a group are usually contractually required to participate with the plan, which generally includes items such as accepting payments that are reduced from the full payment usually given by that insurer. In return, the insurer guides its subscribers to utilize the preferred providers. Other contractual requirements may include mandatory participation in aspects of the plan to monitor quality or to save money, such as following a formulary.

QUEST: Medicaid Managed Care Program administered by the Hawaii State Department of Human Services.

Upcoding: The practice of designating a higher level or intensity of medical service provided for purposes of obtaining greater reimbursement from an insurer or other payer (1). Upcoding is appropriate if a higher level of service was actually rendered; inappropriate if it was not.


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