This document discusses various aspects of revenue management in healthcare, including the revenue cycle, payment methodologies like Medicare and commercial insurance, and strategies for contract negotiation. It describes the front-end, middle, and back-end of the revenue cycle. It explains payment systems like MS-DRGs, APCs, and fee schedules used by Medicare and common commercial insurers. It also covers topics like contractual allowances, prospective versus retrospective payment, and value-based purchasing.

1. © 2018 American Health Information Management Association© 2018 American Health Information Management Association
Principles of Finance for
Health Information and
Informatics Professionals
Second Edition
Chapter 5
Revenue Management

2. © 2018 American Health Information Management Association
Learning Objectives
• Understand the components of the
healthcare revenue cycle
• Explain Medicare payment
methodologies
• Analyze the risk level of various contract
models
• Describe contract negotiation strategies

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Revenue Cycle
• Front end – scheduling to admission
• Middle – care delivery
• Back end – billing and collections
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Revenue Cycle – Front End
• Scheduling
– Determine coverage
– Verify orders and service to be provided
• Registration
– Determine guarantor
– Inform patient of financial responsibility
• Admission
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Revenue Cycle – Middle
• Services provided
• Requires accurate documentation
• Capture of charges for services
– Bar coding
– Order verification
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Revenue Cycle – Back End
• Focused on collection of payment
• Claim submitted
– May be subject to a bill hold to ensure
all charges are captured
• Monitoring of discharged and not final
billed accounts (DNFB)
• Validation of receipt of proper
payment
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Third-party Contract
• Majority of payments for healthcare services come
from third-party payers and not the patient
• Financial performance of an organization is driven
by the payment terms negotiated
• Providers may not negotiate payment terms with
government payers
• Net AR = Gross AR (charges) – Contractual
Allowances
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Contractual Allowances
• Estimated based on historical contract
performance and payer mix
• Accurate estimation key to accurate financial
performance measurement
• Non-contracted payers
– Legally obligated to pay full charges
– May set a contractual allowance based on historical
experience
– Practice varies by provider
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Prospective Payment Systems (PPS)
• Payment determined prior to providing care
• Payment is fixed and not based on the actual cost of the
care provided to a particular patient
• May include an outlier term for resource intense cases
• Provides an incentive for providers to use resources
efficiently
• Examples
– MS-DRG (Medicare severity diagnosis-related groups)
– APC (ambulatory payment categories)
– Fee schedules
– Per diem or per day rates
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Retrospective Payment Systems
• Payment determined after the care is
provided
• Example:
– Percent of charge
– Cost-based payment
• PPS system may include a
retrospective component for high cost
items (drugs/devices)
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Value-Based Purchasing
• 2010 ACA set parameters for VBP
• Additional payment (up to 2%) for high performing
hospitals based on four aspects of value:
– Patient experience/care coordination domain (25%)
– Clinical care domain (25%)
– Safety domain (25%)
– Efficiency domain (25%)
• Accountable care organizations (ACO)
– Clinically and financially accountable for the
healthcare delivery in their communities
• Alternative payment models
– Episodes of care
– Bundled payments
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Value-Based Purchasing
• CMS response to legislation
– Value driven payments
– Started with pay for reporting
– Transitioning to pay for performance
• CMS “Roadmap for Implementing Value Driven Healthcare in the
Traditional Medicare Fee-for-Service Program”
– To help address these concerns, CMS during the current Administration
and with direction from Congress (such as through enactment of
provisions in the Medicare Modernization Act, Deficit Reduction Act,
and other provisions) has begun to transform itself from a passive
payer of services into an active purchaser of higher quality, affordable
care. (CMS 2009)
http://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-
Instruments/QualityInitiativesGenInfo/Downloads/VBPRoadmap_OEA_1-16_508.pdf
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Types of Insurance Plans
• Preferred provider organizations
(PPO)
• Health maintenance organizations
(HMO)
• Indemnity plans
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Preferred Provider Organizations (PPO)
• Fewer restrictions on subscriber than
HMO
• Encourage using providers in network
with lower copayment/coinsurance
• Relies on financial incentives to drive
subscriber behavior
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Health Maintenance Organizations (HMO)
• Most restrictive of subscriber behavior
• Must choose provider that is a “member”
• Primary care physician (PCP) manages
the patient care
• Typically must obtain referrals to
specialists from PCP
• Contains cost by controlling subscriber
behavior
• Low or no copayments/coinsurance
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Indemnity Plans
• Most flexibility offered to subscriber
• Highest premium cost to allow
freedom of provider choice
• Also called fee-for-service plans
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Medicare Payment
• Many commercial payers base their payment terms on a
variation of Medicare’s methodologies
• Important to have a good overall understanding of the
Medicare payment methodologies
• Part A – Inpatient hospital and rehabilitation, skilled nursing
facility, home health and hospice coverage
• Part B – Outpatient hospital facility, free standing
ambulatory surgery center and physician office coverage
• Part C – Managed Advantage
• Part D – Prescription drug coverage
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Medicare Conditions of Participation
• Providers may not “balance bill” the
patient
• Must accept Medicare payment plus
Medicare-defined copayment as
payment in full
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Medicare Part A
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Medicare Hospital Inpatient Payment
• MS-DRG is assigned to each inpatient admission based on diagnosis and
procedure codes assigned to visit
• Facility base rate
– Capital and operating component
– Adjusted for cost of living via wage index
• 68.8% of base rate adjusted for WI if WI > 1.0
• 62% of base rate adjusted for WI if WI ≤ 1.0
• Statutory adjustments include
– Outlier payments
– Transfer reductions
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Medicare Inpatient Payment Example –
Impact of MS-DRG Weight on Payment
• Assume a facility’s adjusted base rate is $5,000
• MS-DRG 088 payment = 1.4045 x $5,000 = $7,022.50
• MS-DRG 089 payment = 1.0068 x $5,000 = $5034.00
• MS-DRG 090 payment = 0.7907 x $5,000 = $3,953.50
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Medicare Inpatient Payment Example –
Impact of Facility Wage Index on
Payment
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Location
2018
Wage
Index
2018 Base
Rate
2018 WI
Percent
WI
Adjusted
Based Rate
Albany 0.8688 5,574.11$ 62.0% 5,120.69$
New York City 1.3122 5,164.11$ 68.8% 6,273.33$
$7,192
$5,156
$4,049
$9,640
$6,910
$5,427
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
MS-DRG 088 MS-DRG 089 MS-DRG 090
Albany Pmt
NYC Pmt

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Medicare Part A Statutory
Adjustments
• Disproportionate share (DSH)
– Adjustment for the proportion of uninsured patients treated
by the facility
– Medicaid days and discharges used as a proxy for
uninsured mix
• Transfer reduction
– Short stays that result in a transfer receive reduced
payments
– Avoid double payment to transferring and receiving facility
• Outlier payment
– High-cost cases
• New technology add-on
– Very limited payment for expensive new technology
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Case Mix Index (CMI)
• Average MS-DRG weight for all cases at a facility
• Used to drive Medicare inpatient expected net revenue (and proxy for
other payers)
• Small shifts in CMI may result in large shifts in predicted net revenue
• Example: 10,000 discharges with base rate of $5,000
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CMI Volume Base Rate
Net Revenue
Projection
1.1327 10,000 $5,000 $ 56,635,000
1.1227 10,000 $5,000 $ 56,135,000
0.0100 $ 500,000
Small CMI shifts can
result in significant
revenue shifts

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Medicare Part B – Hospital OPPS
• Outpatient Prospective Payment System (OPPS) includes
three components:
– Ambulatory Payment Categories (APCs)
• Surgical procedures
• Radiology services
• Clinic visits
• Separately paid drugs and biological
– Fee schedules
• Laboratory
• Physician (therapies: PT, OT, speech)
• Ambulance
– Cost-based payments
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Ambulatory Payment Categories (APCs)
• APCs are groups of CPT/HCPCS procedure
codes
• Like MS-DRGS, APCs have weights that drive the
payment
• Unlike MS-DRGs, a claim may have more than
one APC assigned
• The relative weight for each APC is multiplied by a
wage index adjusted base rate or conversion
factor to determine payment
• Some APCs are discounted when multiple APCs
appear on a claim; some are not—depends on
status
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APC Payment Calculation
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APC Payment Calculation - Example
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•HCPCS (CPT) code determines the APC
•HCPCS assigned to only one APC
•APCs may include multiple HCPCS codes
•Many to one relationship
APC determines the relative weight and payment rate
Location wage index determines the final payment
HCPCS Code Short Descriptor APC
Relative
Weight
Unadjusted
Payment Rate
Albany
Payment
Rate
(WI = 0.8688)
NYC
Payment
Rate
(WI = 1.3362)
99281 Emergency dept visit - level 1 5021 0.8731 68.66 55.23$ 72.04$
99282 Emergency dept visit - level 2 5022 1.5852 124.65 182.04$ 237.45$
99283 Emergency dept visit - level 3 5023 2.7863 219.1 562.42$ 733.62$
99284 Emergency dept visit - level 4 5024 4.5212 355.53 1,480.89$ 1,931.67$
99285 Emergency dept visit - level 5 5025 6.6235 520.85 3,178.28$ 4,145.75$

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Fee Schedule Example
• Fee schedules are region-specific (state, county, etc.)
• Fees may or may not vary by area
• Lab fee schedule example below:
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Medicare Part C
• Medicare Advantage – Also called Medicare Managed Care
• Medicare program pays insurance company a per member per
month (PMPM) rate to provide care to a set population of
beneficiaries
• May include richer set of benefits
– Drug coverage
– No copayments
– Must stay “in network”
• Providers negotiate payment terms with insurance companies
– Only program where Medicare payment rates are negotiated
– Typically contracts are some variation on traditional Medicare rates
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Medicare Part D
• Prescription drug coverage
• Newest Medicare coverage—established by the
Medicare Modernization Act of 2003
• Beneficiaries with drug coverage through Medicare
Advantage plans not eligible for coverage
• Best plan depends on particular drugs and location
• CMS has a website to help beneficiaries find the
best plan (PDP):
https://www.medicare.gov/find-a-plan/questions/home.aspx
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Medicare Part D – Donut Hole
• Coverage gap
• Beneficiaries pay deductible ($400 for 2017)
• PDP pay for drugs up to limit ($3,700 for 2017)
• Beneficiary responsible for drug costs until they hit the
catastrophic coverage limit ($4,950 for 2017)
• Beneficiaries get 50% discount on brand name and 7%
discount on generic while in coverage gap, but 100% of that
cost counts towards hitting the coverage limit
• CMS and Congress may adjust the coverage gap as a
cost savings tool
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Medicaid
– Inpatient hospital services
– Outpatient hospital services
– Physician services
– Medical and surgical dental services
– Nursing facility services for
individuals aged 21 or older
– Home health care for persons
eligible for nursing facility services
– Family planning services and
supplies
– Rural health clinic services
– Laboratory and x-ray services
– Pediatric and family nurse
practitioner services
– Federally qualified health center
services
– Nurse-midwife services
– Early and periodic screening,
diagnosis, and treatment services
for individuals under age 21
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• Funded by state and federal—states receive matching funds from federal
government
• To receive federal funds must cover at least:*
• Payment methodology varies by state
*Source: Casto and Forrestal 2015

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Commercial vs Government
Payment
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Commercial Payer Contracts
• Providers can negotiate with commercial payers
• Contracts fall into four broad categories:
– Prospective payment (PPS)
– Fee schedule and per diem
– Percent of charge
– Capitated rates
• Often based on a multiple of Medicare rates
– Medicare MS-DRG relative weights with a more generous base rate
– Additional terms for OB cases – not calibrated properly in Medicare
weights due to low volume
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Preparing for Contract Negotiations
• Leverage data that allows comparison of prices and cost
among provider and competitors
– CMS releases Medicare claims
– Many state hospital associations collect all payer data
• Understand the payers historical patient mix
– Use internal claims history
– Size of enrollment
– Mix of chronic diseases
– Timeliness of payment
– Propensity to deny claims or request additional documentation
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Commercial Prospective Payment
• Typically follow some variation on the Medicare
payment system (MS-DRGs, APCs, etc.)
• Case rates are prospective payment
– May be based on MS-DRG weights
– May be based on case type defined by procedure/diagnosis
codes (cardiovascular surgery, transplants, etc.)
• Typically include terms for high-dollar cases
– Outlier payments—additional payment for high cost or long
stay cases
– Limits the risk of the provider
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Fee Schedules and Per Diem
Contracts
• Fee schedules typically used for ancillary services
– Laboratory
– Radiology
– Therapies (PT, OT, speech)
• Per diem: per day or daily rate/payment
• What types of services should be paid with these
methods?
– Services that are well defined and often require the
same resources when provided to a variety of patients
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Percent of Charge Contracts
• Fairly rare in current environment
• Often included in contracts as a carve out
– High cost drugs or medical devices may be paid at 50%
of charges
• Payers avoid these contracts because there is no
incentive for the provider to use the resources
efficiently
– As long as the percent of charge is higher than the
marginal cost of providing the service, the provider is
making money with every service provided
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Capitated Rates
• Fixed payment per enrollee
– Often per member per month (PMPM)
• Provider must provide care for enrollees, but payment
is limited or capitated at the negotiated PMPM
• Rates are negotiated based on:
– Size of enrollment population
– Projected utilization (care needed) by enrollees
• Provider is incented to carefully monitor utilization and
provide screening and preventive services
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Commercial Contract Management
• Three critical activities:
1. Internal analysis – comparing the terms and results of
a contract with the other contracts at the provider; and
comparing those terms to the historical cost of care
provided to that payers enrollees
2. External analysis – comparing the contract with those
of other providers and payers in the market;
determining competitive rates for new products and
services
3. Payment performance – is the payer paying the correct
amount according to the negotiated contract
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Internal Comparison--Contract
Matrix
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Internal Analysis Example
• Which contract is the
best deal?
– Estimate expected
payment based on
each contract
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Internal Analysis—Example
• Insurance Company 1 (C1)
– C1 Payment = Total MS-DRG payment + Total high cost drug
payment
– Total MS-DRG payment = Volume × CMI × base rate
=1,695 × 1.86 × 6,500 =$20,492,550
– Total high-cost drug payment= Volume × Percentage of cases with
high-cost drugs × average charge for high-cost drugs × high-cost
drug payment rate
=1,695 × 0.05 × 25,000 × 0.50
=$1,059,375
– C1 Payment =
$20,492,550 + $1,059,375
=$21,551,925
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Internal Analysis—Example
• Insurance Company 2 (C2)
– C2 Payment = Per diem + stop-loss
– Per diem = Volume x Percentage of cases with LOS ≤ 20 × Ave
LOS for patients < 20 days ×
per diem =1,695 × 0.99 × 4.9 × 2,200 = $18,089,379
– Stop-loss = Volume × Percentage of cases with LOS > 20 ×
Average charge for cases w > 20 LOS × Rate for cases with > 20
LOS = 1,695 × 0.01 × 132,540 × 0.60
=$1,347,932
– C2 Payment = $18,089,379 + $1,347,932
=$19,437,311
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Internal Analysis—Example
• Insurance Company 3 (C3)
– C3 Payment = Volume × Average charge per case × Percent of
charge rate
– C3 Payment = 1,695 × 20,790 × 0.65 = $22,905,383
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Internal Analysis—Example
• Ratio of net to gross
revenue offers an
excellent method to
compare contracts
• Insurance Co 3
offers the best
overall rate
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External Analysis
• Very difficult to perform
• Payer contracted rates are typically
protected with non-disclosure clauses
• Can compare year-to-year updates with
Consumer Price Index (CPI) or medical CPI
• Trends in rate changes provided by other
payers
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Monitoring Payment Performance
• Requires a contract management system
– Accurate payment terms
– Real-time calculation of expected payments
– Follow-up procedures for appealing shortfalls
• Never assume the payer is paying the correct rate
• Common causes of payment variance
– Lag in updating payment rates
– Code revisions or regrouping of the MS-DRG
– Partial denial of services
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Summary
• Majority of payments for healthcare services
come from third-party payers and not the patient
• Important to have a good overall understanding
of the Medicare payment methodologies
– Part A: Inpatient hospital and rehabilitation, skilled
nursing facility, home health and hospice coverage
– Part B: Outpatient hospital facility, free standing
ambulatory surgery center and physician office
coverage
– Part C: Managed Advantage
– Part D: Prescription drug coverage
• Providers can negotiate with commercial payers
• Contracts fall into four broad categories
– Prospective payment (PPS)
– Fee scheduled and per diem
– Percentage of charge
– Capitated rates