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An International Perspective on Healthcare Cost Containment Strategies

Healthcare Reimbursement Methods

Today’s post is a summary of Chapter 17 of Understanding healthcare financial management, 6th ed, by Gapenski and Pink. That chapter is entitled “Capitation, Risk-sharing, Pay for Performance and Consumer-Directed Health Plans.”

Capitation “is a flat periodic payment per enrollee to a healthcare provider; it is the sole reimbursement for services provided to a defined population… Often, capitation payments are expressed as some dollar amount per member per month (PMPM).” They are adjusted for age and gender, and can also be adjusted for risk. Risk adjustment is “an actuarial process that incorporates health status into the PMPM amount.”

The authors discuss the financial incentives under capitation and compare the revenue and cost structures under fee-for-service and capitation (Exhibit 17.1 p.623 is particularly instructive.) While capitation leaves providers exposed to losses when the cost exceeds the flat fee, it also provides more predictable revenues.

Risk sharing is implemented “to encourage providers to act in the best interest of the system rather than self-interest”, in particular to mitigate misaligned incentives between primary care physicians, who “benefit financially from referring care to a specialist rather than providing that care” while “specialists, who also receive capitated payments, may not welcome the added volume.”

An example of risk-sharing arrangement is a risk pool (or withhold), “pools of money that are initially withheld [usually about 10-20% of reimbursement money] and then distributed to panel members [at the end of the year] if they meet certain pre-established goals.”

The book provides two examples, one of a single risk pool, which places only the primary care providers at risk, and one of two risk pools (“a professional services risk pool for the physicians only” and “an inpatient services risk pool shared equally by the HMO, physicians and hospital”).

Pay for performance (P4P) “refers to any reimbursement scheme that makes meeting performance standards a prerequisite for some or all of a provider’s payment.” (Risk pools are a type of P4P payment.)

Performance is usually evaluated according to outcomes, process, patient satisfaction and structure and rewards may be obtained for three types of performance:

  • relative performance (compared to other providers),
  • benchmark performance (based on attaining a pre-identified benchmark),
  • improvement performance (compared to the provider’s past history).

Gapenski and Pink illustrate the concept of P4P on an example involving Pay for Quality and Pay for Productivity.

Consumer-directed health plans “use financial incentives to influence patient behavior” in contrast with P4P schemes, which “seek to influence provider behavior.” They have two components:

  1. a high-deductible health plan, typically with an annual deductible of at least $1,000 (but usually paying for a range of preventive services before the deductible is reached),
  2. a personal health financing account: either a health savings account (HSA, owned by the employee, and to which both employee and employer can make tax-exempt contributions) or a health reimbursement arrangement (HRA, owned by the employer, who is the sole contributor to the account).


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