The Financial Management of Hospitals and Healthcare Organizations
Michael Nowicki
Chapter 4
Third Party Payment
Elaine Smith
June 5, 2007
Chapter Summary
Third-party payers are agents of patients who contract with providers (second parties) to pay all or part of the
patient’s (first party) bill. They have had an important affect on healthcare organizations over the last 70 years.
Third party payers include the federal government, private insurance, and state and local government. It
represents 82.4% of the total personal health expenditures in 1999.
Percent of Total Personal Healthcare Expenditures in the United States by Source of Funds in 1999
1. Private Health Insurance – 33.1%
2. Medicare – 17.6%
3. Medicaid/SCHIP – 15.7%
4. Patient Out-of-Pocket – 15.4%
5. Other Public – 12%
6. Other Private – 6.1%
History
 Started in 1920s
 Economically efficient because patients only used amount and quality they could afford
 Ethical concerns because some couldn’t’ afford
o Employers began paying
 Difficult during the Depression in the 1930s
o Bad debt concerns
 AMA’s stance
o Early opposition
o Softened in 30s and allowed voluntary insurance IF hospital and medical benefits separate
 President Truman’s 1945 Compulsary Health Insurance Plan – only passed Hospital Survey and
Construction Act because the rest was too “socialist”
Direct Services Plan: employer prepaid specific hospitals and physicians to provide care for their employees
Commercial Indemnity Plans: employers/employees prepay insurance to reimburse physician/hospital
 Group Plans
o 1945: 7.8 million subscribers
o 1949: 17.7 million subscriber
 For-profit insurance plans covered 29% of Americans
 Non-profits insurance plans covered 27% of Americans
 Premiums
o Blue Cross- Community rating: all groups the same so low-risk groups subsidize high-risk groups
o Commerical (ie. Prudential and Metropolitan)
 Experience rating: based on individual risks
 By late 1950s 66% of Americans covered
o Government tax policies for employers
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Chapter 1
Managed Care Organizations: manage cost, quality, and access to care
 Service Plans: providers cannot bill the patient an amount over an agreed fee schedule
 Preferred Provider Organizations (PPO): provide discounted provider services to insurance carriers
and employers
 Health Maintenance Organziations (HMO): integrates financing and delivery of healthcare
 Problems: aggressive review causes higher costs
HMOs
 Contain costs by
o Carefully select subscribers and providers
o Provide physician incentives
o Provide subscriber/employer incentives
 Attractive to employers
 Classified by degree of control on providers
o Point-of-service Plans (POS): minimum to no control
 Large deductibles and premiums for “out of network” providers
o Open Panel: moderate control
 Direct contract model and independent practice model
o Network: moderate to maximum
 Contract physician groups (open or closed panel)
o Closed Panel: maximum control
 Contracts or employs physicians exclusiviely
Direct
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Contracting: large employers contracting directly with integrated delivery systems
Need solution to employers’ rising costs and providers consolidating
Take back financial opportunity that is given to HMOs
Motorola did this is 1996
Many companies preparing for direct contracting
o Clinical coordination among providers
o Focus on system as a whole
o Physician integration
o Emphasis on prevention and primary care
o Geographic and service breadth
o Sophisticated information systems
o Focus on quality
Payment Methods: how providers charge third parties
1. Charges (aka. prices and rates): no financial incentive for healthcare organization to provide ONLY what
is needed
2. Charges minus dicount: return for large patient volumes; same problem as charges
3. Cost Plus a Percentage for Growth: bill charges and third party reimburses estimated cost as
percentage of the charges; third party needs to review and approve costs
4. Cost: reimburses projected cost then audits yearly and adjusts
5. Per Diem: financial risks and incentives to organizations; assumes costs are the same for each day of
the LOS; third party needs to monitor LOS to make sure accurate
6. Per Diagnosis: incentive to control costs
7. Capitation: fixed amount per person to provide care to a defined population in the future; MOST risk
and opportunity (need to accurately predict demand and contain costs); encourages prevention
Bad Debt: organization receives no or partial payment from patient or third party
 Operating expense based on charges, not costs
Charity Care: knows at time of service the patient is unable to pay
 Not reported in financial statements but must include as footnote
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Chapter 1
Cost Shifting: shift costs to some payers to offset losses from other payers
 Mostly done to offset Medicare and Medicaid or bad debt and charity
 On decline because organizations lowering prices to respond to government payment rates
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Chapter 1