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Healthcare History

Healthcare History The historic payment system for reimbursing hospitals both by insurers and by Medicare has been Retrospective Cost Based Reimbursement(RCBR). This system of reimbursement encourages hospitals to over charge in order to cover the costs of the uninsured who utilize the hospital. Charges have continued to rise year after year eventually putting the employers at a point where they could no longer afford the payments. For physician reimbursements, both insurers and Medicare employed the Usual and Customary(U+C) approach to reimbursement. This practice, which averaged the charges for a procedure in a region, also encourages doctors to over-charge in order to raise the average amount paid to them for a procedure.

These two systems, RCBR and U+C eventually started to suck too much money out of the insurers, employers, and the Medicare/Social Security trust fund so that interventions were deemed necessary. Perhaps the biggest intervention adopted by the private sector to reduce medical service costs was the trend toward businesses self-insuring. By doing so, they avoided state-mandated benefits that were required if they hired a third-party insurer. In addition, the money was now paid to claims as they arose rather than prospectively so income could be earned on this capital as it sat in the bank. Other intervention to reduce medical service costs mainly involved private insurers as it was difficult for small businesses to self-insure because of low-capitol. Underwriting was a typical practice of insurance companies; that is, excluding some employees from coverage if they have preexisting conditions or if they are employed in high-risk areas.

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Payment caps are were also employed by insurers as a way to save medical costs. This practice meant setting limits for the total amount paid for selected diagnoses. These interventions ultimately led to segmentation in the insurance market. A shift occurred in the way that insurers calculated premium charges. Community rating used to be the norm. It involves placing all beneficiaries into a large group and projecting their claims.

Premiums were then spread across the entire group as were risks. However, as a result of the historical hospital and physician payments schemes, insurers shifted to experience rating. That is, a rating that bases a groups premiums on its experienced cost. Therefore, by only including low-risk, low- cost individuals under coverage, premiums for those individuals may be minimized. This effect leaves small groups behind, paying much more in premiums.

These interventions mentioned as well as increased experience-rating adopted by insurers and the subsequent phenomena of market segmentation have had effects on many levels of the health care system: Premiums for small employers have skyrocketed for two reasons. First, administrative costs for small employers are proportionally higher than those for larger firms(Congressional Research Service) and secondly, larger firms have more market clout and are so able to seal the contracts that provide lower premiums to their employees. Larger firms are also able to spread the risks of their insured employees across a larger beneficiary base with lots of capitol to absorb any abnormality in claims from one year to the next. Small firms dont have this luxury and as a result their premiums have increased. As health care costs grew, many larger businesses opted to self-insure and take the risks of their employees rather than paying an insurance company to perform this role.

These employers also avoided the state mandated benefits and could use capital not prospectively paid to earn interest. It was in the 1980’s, when employers were becoming increasingly concerned about soaring health care costs, commercial insurers were concerned about the future of traditional health insurance, and physicians were increasingly joining health plans to guarantee a steady flow of customers, that managed care really expand dramatically. As diagram 1 shows(see attachments), the number of people enrolled in HMO’s in 1976 was 6 million and by 1991 had reached 38.6 million. The higher costs of medical care forced different groups into HMO’s for different reasons. Doctors enrolled in HMO’s gave up some autonomy but were guaranteed a steady flow of patients.

The patients enrolled were guaranteed care for a fixed monthly premium at the expense of visiting only providers covered in their plan. The draining of the Social Security trust fund by traditional hospital RCBR method and physicians by U+C for Medicare was tackled by alternative payment mechanisms. The traditional U+C payment to doctors was replaced with the Resource Based Relative Value Scale(RBRVS) 1n 1992. This system of payment assigned a numerical value to every procedure performed in order to attempt to objectify what goes into a physician’s service. In this way, the payments to physicians could be regulated and controlled.

Hospitals, which were traditionally reimbursed under RCBR were paid by the Prospective Payment System(PPS) starting in 1983. Under this system, each episode of illness was associated with a fixed payment regardless of resources consumed, time spent, or expenses incurred. All illnesses were grouped into Diagnostic Related Groups(DRG) effectively cataloguing hospitalized patients according to fee payment. The ever-increasing costs associated with health care brought along many cost-saving interventions which have been mentioned. These interventions had effects at all levels of the health care industry but especially so in hospitals as they represent 38% of our nation’s health expenditure.

Hospital admissions declined sharply as the new payment schemes for hospitals were introduced in 1983. Since hospitals were being paid by a PPS system, the incentive was to get the patients out as soon as possible. Admitting patients is associated with high costs and hospitals opted for more outpatient care rather than admissions. This PPS payment structure also influenced the average length of stay. Hospitals were now encouraged financially to release patients as soon as possible since they were reimbursed the same amount regardless of the duration of the stay. Efficiency was now of paramount concern as a person sitting in a bed represented a cost that could be contained if the patient was released sooner than later. It is no surprise then that occupancy rates for hospitals have also decli …

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