The Business of Medicine
How Do Hospitals Get Paid?
Patients flow into and out of hospitals every day. Depending on the hospital where you work, these patients may come from all levels of income, as well as all levels of insurance coverage. It is important to know how the hospital is compensated for its time and resources, because your salary may be based on a specific payment structure. There are five overall payment structures:
1) Payment Per Procedure: Fee-for-Service
2) Payment Per Day: Per Diem
3) Payment Per Episode of Hospitalization: Diagnosis-Related Groups (DRG)
4) Payment Per Patient: Capitation
5) Payment Per Institution: Global Budget
Back before “modern” medicine took a business twist, doctors would get paid for their services with one of many different payment methods (money, goods or other services). This type of payment is known as Payment Per Procedure, or Fee-For-Service. Today, if a patient went to the hospital for a particular problem and received a series of tests, he or she would receive a bill for each of those tests, at their set price. With today’s prices, this bill could potentially cost more money than you earn in two years! Some insurance companies work on this premise. One thing they have done (and continue to do) to offset costs is to negotiate lower charges for such services rendered to their clients. For example, a CT scan, which normally costs $1,000, would be given at the reduced cost of $700 to a patient who is covered by a specific insurance company.
The next form of payment is Payment Per Day, or per diem rate. Companies using this method charge a set amount for each day the patient is in the hospital. For example, Mr. Sickly comes in with a stomachache and is admitted to the hospital for three days. His insurance company has a contract with the hospital to pay $1,200 per day (for a total of $3,600), regardless of the amount of procedures or tests performed. In these cases, the hospital has an incentive to keep Mr. Sickly a couple of extra days to help recoup its costs, since most of the testing is done early in the stay. Hence, if Mr. Sickly’s bill were $3,000, the hospital would lose money if he left on day two, but make money on day three.
A similar strategy is one that is used by Medicare, and known as a Diagnosis Related Group (DRG). With this system, a patient’s diagnosis tells the hospital how much money the insurance company will give them. Using this method gives the hospitals an incentive to try to discharge patients more efficiently, since their pay is not going to increase with length of stay, unless of course another DRG is made.
The fourth payment type, Capitation, is a form where the hospital receives a set amount from the insurance company per patient, per month. For example, say a person paid $100 per month for five years and never went to the hospital; the hospital would profit the entire $6,000. However, if this same person was admitted to the hospital and had an extended stay costing $60,000, then the hospital would bear the cost risks of their patients, since they deal with admissions, length of stays and resources utilized. Because of this, capitation is practically no longer used.
Finally, Global Budget is a system where a predetermined amount is offered per person, per year. The hospital then holds the responsibility of balancing all of the monies received with all of the monies spent. A classic example of this system is the Kaiser System in the United States, along with the Veterans Affairs (VA) system, and systems used in other countries. With Kaiser, patients pay into the global budget and are able to use the resources as needed. It is up to Kaiser to utilize these funds and resources in order to cover the healthcare needs of its patients.
Each of these types of payment plans has advantages and disadvantages. While proper care of a patient is the foremost priority for any medical professional, it is also important to understand the different strategies used by insurance companies. With this knowledge, you will be able to communicate more effectively with insurance companies and with your patients.