How does provider reimbursement work?

There are two common methods of reimbursing physicians: Fee-for- service (FFS) and capitation. There are also two major code categories in use by most primary care physicians: ICD-9-CM codes and CPT-4 & HCPCS codes.

  • ICD-9-CM codes (soon to be replaced by ICD-10-CM codes) are assigned to each possible diagnosis (e.g., diabetes, hypertension, etc.) and symptom (e.g., pain, swelling, etc.).
  • CPT-4 & HCPCS codes are assigned to each procedure (e.g., office visit, venipuncture, surgeries, etc.).

Fee-for Service (FFS) Reimbursement

Under FFS reimbursement, a physician’s revenue is based on CPT-4 coding, with each CPT-4 code assigned a specific reimbursement amount by the Centers for Medicare and Medicaid Services (CMS).  Some managed care plans will discount their physicians’ reimbursement by paying a percentage of what CMS (Medicare) reimburses for a particular CPT-4 code (e.g., 80% of Medicare allowable).  In FFS reimbursement, the more procedures the physician performs and bills, the higher the revenue to the practice.  Typically, each CPT-4 code requires only one ICD-9 code for payment and the payment is not largely determined by the ICD-9 code.  The ICD-9 code’s impact in FFS reimbursement is clinical justification of medical necessity for the particular CPT-4 code.  Whether a physician bills one or four ICD-9 codes will not affect his/her reimbursement; payment is strictly driven by procedure (CPT-4) codes.

Capitation

The simplest definition of capitation is a per-member, per month (PMPM) payment based on a defined population of enrolled members; the payment has nothing to do with the level or amount of care given to the patient.  In fact, when a provider is paid via capitation, he or she receives a payment for each enrolled member in the “panel” regardless of the services provided.  In many cases, no service has been given to the member, yet the provider has still received a capitation payment.

The size of the capitation payment depends on many factors (e.g., demographic characteristics, geographic location, provider’s contractual agreement with the health plan, etc.).  In the “old days” before MRA, the provider’s capitation payment was determined largely by demographics and geography, and completely unaffected by the patient’s health status.  So, if two patients with the exact same demographic profile differed greatly in their health status, the provider received the same funding for both patients.  As expected, the healthier patient’s cost of medical claims was much lower than the sicker patient’s claims, so in a sense, healthier patients subsidized the sicker ones. If the practice had more sick patients than healthy ones, the cost of claims often exceeded the capitation received and the provider could become “overdrawn”  and unable to continue funding the cost of its patients’ care.

Risk adjustment attempts to fund providers for the anticipated costs of patient care based on patients’ health status.  Under this payment methodology, it stands to reason that sicker patients generate a higher capitation payment to the provider because the costs of their care will be higher.  Technically, then, MRA is a more equitable and accurate method of capitating providers of MedicareAdvantage patients.

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