Reimbursement Methodologies


Reimbursement Methodologies

1) Focus on Payment Methodologies and discuss the various payment systems. Demonstrate understanding of fee for service, cost based, and prospective payment systems. Just like coding systems are different, payment methodologies for inpatient hospital, outpatient hospital, and professional claims are also different. Many commercial payers follow the lead of Medicare once it has implemented a specific payment system(Aalseth, P. 2015). 

Fee For Service- This is the most traditional, simple payment system. For this payment system, a service is billed using a CPT or ICD procedure code. The payer has a fee schedule with a set reimbursement amount for each service it covers. The provider gets the fee schedule amount less any deductible or coinsurance owed by the patient. Most physician services are paid according to a fee schedule. Clinical laboratory services are paid based on a laboratory fee schedule, and ambulance services are paid on an ambulance fee schedule.

Cost Based or Reasonable Cost- Under this payment system, providers or facilities submit an annual cost report that details the expenses of running their businesses. There are extensive rules for completing this cost report. Examples are: data on bed utilization, salaries by cost center, expenses by cost center, indirect costs related to items such as medical education, cost-to-charge ratios, capital expenditures, and other items. In most cases the facility has been receiving periodic interim payments from the payer throughout the year, and the cost report is then used to “settle” or reconcile the costs to the payments already received. For Medicare, the cost reports are submitted to the Fiscal Intermediary (FI), which reviews and/or audits the cost report and then submits it to the CMS for reporting. PIP (periodic interim payments) are available to inpatient hospitals, skilled nursing facility services, hospice services, and critical access hospitals. These facilities are supposed to self-monitor their PIP payments to make sure they are not receiving overpayments or they can be penalized if overpayment exceeds 2% of the total in two consecutive fiscal reporting periods.

Prospective Payment System- In order to change hospital behavior to encourage more efficient management of medical care, Medicare introduced hospital inpatient prospective payment in 1983. Using a system that was developed in the 1970s by Yale University, reimbursement to hospitals was based on diagnosis-related groups (DRGs). Data already appearing on the claim form are used to assign each patient discharge into a DRG: Examples are Principal diagnosis, Complications and comorbidities (CCs), Surgical procedures, Age, Gender, and Discharge disposition (died, transferred, went home). Once a DRG has been assigned, the determination of the reimbursement amount can start. Each DRG has a relative weight assigned to it. Patients in a given DRG are assumed to have similar conditions, receive similar services, and use similar amounts of hospital resources. The prospective payment system is based on paying the average cost to treat patients in that DRG. The DRG weights are adjusted annually. The more complex the DRG, the higher the weight.

2) Explain medical necessity and how it impacts payment- To determine medical necessity, it involves comparing the procedure being billed to the diagnosis submitted. If you receive a denial notice from the payer that the procedure was “not medically necessary”, it means that your payer does not think the procedure or test was justified for the diagnosis given. Medicare carriers publish what are known as “Local Coverage Determinations” (LCDs) that contain lists of diagnosis codes that validate procedures. If your diagnosis is not on the list, your claim will be rejected. If the provider of the service knows in advance that a service is likely to be deemed not medically necessary, he or she can ask the patient to sign an Advance Beneficiary Notice (ABN) in which the patient acknowledges the possibility the claim will not be paid and agrees to be financially liable for the charge. 

3) What has been the effect of payment methods on coding? Medical billing procedures have been much more effective since the advent of the CPT medical coding system. Developed by the AMA, the CPT system was designed to help facilitate and standardize medical billing practices. The coding system consists of alpha-numerical codes which are designated to describe the various services and treatments a doctor or medical facility performs on their patients. These codes are entered into a database system which is used for billing insurance companies, Medicare and Medicaid. Through the use of this billing system, medical professionals are better able to keep track of their financial records and receipt of their medical payments( 

Aalseth, P. (2015). Medical Coding. What It Is and How It Works. Second Edition. Burlington, MA. Jones & Bartlett Learning

Post 2

 Richard Matos Week 4 – Payment MethodologiesCOLLAPSE

Fee for service is a method in which doctors and providers receive payment for services provided and the most traditional payment mechanism.  Services are billed using a CPT or ICD code, The provider gets the fee schedule amount less any deductible or coinsurance owed by the patient. Laboratory and ambulance services are paid on a laboratory and ambulance fee schedule. (Aalseth P.T., 2015).

Under Reasonable Cost or Cost Based providers and facilities present a detail report of the expenses of running their hospitals or clinics.  The reports include bed utilization data, salaries, expenses by cost center, medical education, cost to charge ratio, capital expenses, and other items. (Aalseth P.T, 2015). 

In order to control the cost of Medicare, Medicaid, and other insurance programs, Medicare introduced Hospital inpatient prospective system in 1983.  Reimbursement will be based on Diagnosis-Related Group (DRG’S).  Data already appearing on the claim form are used to assign each patient discharge into a DRG; Principal diagnosis, Complication, and comorbidities, surgical procedures, age, gender, and discharge disposition.  Once a DRG has been assigned, the determination of the reimbursement amount can start. (Aaselth P.T., 2015).

Medical necessity involves comparing the procedure billed to the diagnosis submitted. Local  Coverage Determinations are a list of diagnosis codes that validates procedures such as X-rays, EKG’s and others. If the procedure billed was not on the list the claim will be rejected.  

Since the implementation of DRG’s coding made a difference in reimbursement.  Coders were elevated out of the dark and into the financial limelight. Medical records departments were turned into health information management departments.  The potential dollars to be made was an incentive to coders to use the right codes. (Aaselth P.T., 2015) 


Aalseth, P.T. (2015). Medical Coding, what is it and how it works, (2nd ed.) Sudbury, MA: Jones & Bartlett Learning

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