Assignment: Financial Risks & Incentives
In the “cost” form of payment, healthcare organizations receive the cost for care provided to the patients of third-party payers, plus a small percentage that allows the organization to develop new services and products. Typically, the healthcare organization bills charges to the third party, which reimburses the organization for the projected cost, often expressed as a percentage of the charges. At the end of the year, the third party audits the healthcare organization to determine actual cost and adjusts accordingly what it has reimbursed to the organization. In this system, no incentive exists for the healthcare organization to contain costs. If the third party recognizes and approves the costs of the organization, the organiza- tion assumes little financial risk accepting this method of payment. However, in many cases, the third-party payers do not recognize the full costs incurred by healthcare organizations. As a result, organizations that accept the “cost” form of payment do assume some financial risk for the patient and must pass on losses to other third parties and patients who pay more than cost (usually those paying charges and discounts from charges).
In this payment system, healthcare organizations receive a per-day reimbursement for care provided to the patients of third-party payers. Because the third-party payer sets the
per diem rate prospectively, or prior to the provision of care, per diem provides financial risks and financial incentives to the healthcare organization. If the organization provides care for a cost greater than the per diem rate, the organization loses money. If it provides care for a cost less than the per diem rate, the organization makes money. However, if the healthcare organization unnecessarily extends lengths of stay, and the third-party payer does not protest, the provider can make more money than it is truly entitled to. Because per diem rates are generally the same for each day of a stay, this method of reimbursement assumes that costs are the same for each day. This assumption is true for many extended care organizations, but not for acute care organizations. In acute care organizations, the patient usually incurs a greater proportion of the costs during the early days of the admission.
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