Review managed care contracts for different payment plans (PPO, HMO, Fee for services, etc.) and describe provider incentives and risks under each of the following reimbursement method

  1. Review managed care contracts for different payment plans (PPO, HMO, Fee for services, etc.) and describe provider incentives and risks under each of the following reimbursement methods:
    1. Cost-based
    2. Charge-base (including discounted charges)
    3. Per procedure
    4. Per diagnoses
    5. Per diem
    6. Global pricing
    7. Capitation

In two separate paragraph give your personal opinion to Lisa Wagner and  Elena Mears

Elena Mears

One of the unique features of the healthcare industry is that the patient or customer usually does not pay for their services directly.  Payment is made by a third-party payer and how and by which one often influences which services are provided and by whom (Gapenski, 2018). Third party payers include:

  • Private Insurers – Blue Cross/Blue Shield, commercial insurers such as AETNA and Humana or Self-insurers such as large state programs or self- insured providers.
  • Public Insurers – Medicare or Medicaid

Industry wide increasing costs of care drove the demand for cost controls – hence the creation of managed care.  “Most definitions characterize managed care as a system that integrates the financing and delivery to appropriate medical care by means of the following features: contracts with selected physicians and hospitals that furnish a comprehensive set of health care services to enrolled members, usually for a predetermined monthly premium; utilization and quality controls that contracting providers agree to accept; financial incentives for patients to use the providers and facilities associated with the plan, and the assumption of some financial risk by doctors, thus fundamentally altering their role from serving as agent for the patient’s welfare to balancing the patient’s needs against the need for cost control – or  as Mechanic put it succinctly, moving “from advocacy to allocation” (Iglehart, J. 1992 p. 742).

Managed care gave rise to several new types of insurance deliverables.  Health maintenance organizations (HMOs) are based on the premise that the traditional insurance-provider relationship incents treatment of illnesses, but not prevention of them (Gapenski, 2016).  “By combining financing and delivery of comprehensive healthcare services into a single system, HMOs theoretically have as strong an incentive to prevent illnesses as to treat them “(Gapenski, 2016, p. 48).   However, requiring the assignment of a primary care physician and limited providers to those within the HMO’s network make them less than desirable to many patients.     Preferred provider organizations (PPOs) are a hybrid of HMOs and traditional health insurance.   They do implement many cost cutting measures like HMO’s, but don’t restrict the patient to one physician, or only physician that are in network (Gapenski, 2016).  But regardless of the payer or payer type for a particular healthcare service, only a limited number of payment methodologies are used to reimburse providers (Gapenski, 2018, p.52).  They fall into two categories – fee-for-service and capitation.

Fee-for-service charging has been the dominant method for many years, and most patients think of their care in these terms – the more the physician does, the more it will cost.  Three fee-for-service methods include (1) cost-based reimbursement where the payer agrees to reimburse the provider for the allowable costs incurred to provide the service; (2) charge-based reimbursement, when payers pay billed charges based on a provider rate schedule called a chargemaster; or (3) prospective payment where the payer sets the rates (i.e. by procedure, by diagnosis, per day or bundled) before the service is provided  (Gapenski, 2016).

Furthermore, units of payment are defined as:

  • Per procedure – a separate payment is made for each procedure performed.  Most commonly used in the outpatient setting, the concern with this payment type is the high administrative costs with complex diagnoses (Gapenski, 2016).
  • Per diagnosis – the provider is paid a rate based on the patient’s diagnosis.  The practice was pioneered by Medicare in its diagnosis-related groups (DRGs) used to define hospital inpatient reimbursement.  The risk here is if the diagnosis is very complex.  Even if the provider requires more resources to treat the patient, they will only be reimbursed the pre-set diagnosis rate (Gapenski 2016).
  • Per day (per diem) – the provider is paid a fixed amount for each day of service provided.
  • Bundled – payers make a single payment that covers all services delivered in single episode regardless of the number of providers involved (Gapenski, 2016). An example of bundled pricing is maternity or obstetrical care.  A bundled or global rate may include the physician’s office visits, lab work, or other testing — all billed and paid together.
  • When reimbursing for care under the capitation model, the provider is paid a fixed amount per covered life period regardless of the amount of services provided.   Used primarily by managed care plans, both providers and insurers are tasked with enhancing quality while constraining costs (Gapenski, 2016).

Fee-for-service has fallen out of favor.  The long-standing fee-for-service model is methodically being replaced by a value-based payment system that rewards providers based on efficiency and patient outcomes rather than volume, according to local stakeholders.    “The fee-for-service model is easier to do. You assign a payment level and pay. But it doesn’t really align incentives very well,” said Ward Sanders, president of the nonprofit New Jersey Association of Health Plans. “We want to get to a place where we’re rewarding providers not for how much care they provide but for the outcomes and how well they provide care” (Vecchione, A, 2018).

Lisa Wagner

While reviewing the managed care contracts we find two main types; the health maintenance organizations (HMO) and preferred provider organization (PPO).  The HMO only has a select few providers and individuals are assigned a primary care manager.   In the PPO plan patients are not assigned a set provider and they have a greater selection of providers to choose from. To increase productivity and cost efficiency they recently added a managed fee for service plan (Gapenski, L. C. Reiter, K. L. p. 48, 2016).

There are two main categories of reimbursement methods for managed care, the reimbursement methods are fee-for-service and capitation.  The fee-for service has three main categories cost-based, charge based, and prospective payment (covers per and bundled categories). Service fees are given to providers based on type of services provided. The incentive portion of cost based is that providers are guaranteed payment. In charge-based reimbursement individuals are billed for services that the provider sets.  Currently with charge-based, companies negotiate or discount charges if they have a large group of participants.  The prospective payment plan individuals are made aware of the rates for payment prior to the services being given.  This does not rely on allowable costs or charges unlike the cost-based and charge-based.  In the capitation reimbursement providers are given a fixed rate over a set time regardless of what service the provider gives (Gapenski, L.C., Rieter, K. L. p. 52-54, 2016).

Cost-based incentive would be for the provider to accrue more costs. A risk is providing unneeded services. For the charge-based an incentive would be to apply higher charge rates and the risk is that there may be a limit on how high providers can go.  Procedure providers would need to increase the number of procedures that have a high profit.  The risk is reimbursement can vary based on the actual cost of a procedure.  Per diagnosis, increase the profit by choosing the diagnosis code with the greater profit. However, some diagnosis cost less than others.  As for the per diem providers need to increase the amount of days patients will stay at the hospital to increase profit. On the other hand, risks would be shorter stays have less reimbursement.

Bundled providers would need to increase number of cases/episodes.  Risk is they can be “unbundled” which decreases amount of reimbursement.  Capitation would to increase health and decrease utilization to gain a profit.  The risks are only treatments that are medically needed would be done (Gapenski, L.C., Rieter, K. L. p. 55-57, 2016).

Since capitation is fixed an incentive for providers is to minimize costs to gain more revenue as well as provide services that reduce cost.  With capitation providers may only treat patients that are low risk.   In the fee-for-service reimbursement providers can increase services administered to receive a higher reimbursement.  In bundled reimbursement providers a given an amount for all services given for one case, this encourages providers to give quality care and keep the cost for each case low. (Barnum, H., Kutzin, J., Saxenian, H., p. 6-7,10-12. 2006).

Each type of pure reimbursement provides some measure of risk selection and incentives.  Global there is incentive to reduce cost, increase services and have little risk selection.  Fee-for service providers will have a strong incentive to increase service, reduce costs with some risk selection.  In capitation providers want to increase services and has a lot of risk selection.  With bundled providers will reduce cost, increases caseloads, and has a high chance of risk selection. (Barnum, H., Kutzin, J., Saxenian, H., p. 14. 2006).

Barnum, H.  Kutin, J. Saxenian, H. (2006).  Incentives and Provider Payment Methods.

Retrieved from

Gapenski, L.C., Rieter, K. L. (2016).  Healthcare Finance An Introduction to Accounting &

            Financial Management. Health Administration Press. Sixth Edition. Chicago, Illinois.

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