As I researched and prepared to write and communicate the vast scope and complexity surrounding how hospitals and providers are paid within our healthcare system, I simply asked Google why healthcare is considered a business and its AI generated response is outlined below. This rather provocative list of why healthcare is considered a business, whether one is proponent or critic of our current fee-for-service model, is certainly relevant in highlighting the imperfections that exist within our healthcare system.
“Healthcare is considered a business for a multitude of reasons, including:
- Financial incentives – the utilization of the fee-for-service (FFS) model by the healthcare system incentivizes providers to perform more procedures and services as they are reimbursed for each one. Ultimately this can lead to overutilization of healthcare resources, as providers may be motivated to perform unnecessary procedures to increase their revenue.
- Marketing – healthcare organizations are marketing to attract new patients, gain market share, increase revenue and improve ROI.
- Profit motive – the profit motive encourages companies to invest in research and development to innovate new treatments and therapies.
- Cost – the cost of healthcare depends on who’s purchasing it, whether they have insurance and what kind of insurance they have.
- Complex system – healthcare in the U.S. is a complex system of patients, payors and providers.
- Big business – in 2019, there were 22 million healthcare workers in the U.S which accounted for 14% of the U.S. workforce.
- Technological disruption – healthcare is embracing telehealth platforms, artificial intelligence and other technologies to provide on-demand care.”
The information provided within this document is targeted at providing a foundation to enhance understanding for nurse leaders regarding our FFS model, value-based care, healthcare payors, the federal Centers for Medicare & Medicaid requirements surrounding CMS participation as it relates to payment for services rendered to Medicare beneficiaries and raise key points regarding commercial and private health insurance. Secondly, to illustrate the complexity, intensity and the significant utilization of resources consumed within organization’s finance/revenue cycle departments to optimize payment/revenue. Thirdly, to emphasize to nurse leaders the fact that hospitals and providers are reimbursed at predetermined, fixed rates for the services and procedures rendered; reimbursement dollars are finite in optimizing an organization’s financial margins.
Fee-for-Service Payment Model and Value-Based Care
To understand the basics of how hospitals and physicians bill for services and receive payment from payors, nurse leaders need to have an awareness and understanding of the fee-for-service (FFS) payment model, as well as alternative payment models. Medicare is an example of an FFS program.
Fee-for-service is a traditional payment model in which healthcare providers submit claims and are reimbursed by a payor(s) for each procedure or service rendered to a patient. The reimbursement is based on the fee schedule set by the provider and the payor, which is typically an insurance company or government program. The Medicare Physician Fee Schedule (MPFS) is the fee schedule created by Congress and the Centers for Medicare and Medicaid (CMS) from which providers bill for services rendered to Medicare beneficiaries and are reimbursed by a fixed fee allowed by Medicare. Commercial payors negotiate fee schedules with providers to determine how much they will pay for services. These fee schedules can have significant variation by state, region, provider and payor. CMS and commercial payors review the MPFS on an annual basis.
The FFS model has been the dominant healthcare model in the United States for decades, however it has been criticized for its lack of focus on patient outcomes and quality of care. Hence, the increasing focus on further integrating value-based care (VBC) as an adjunct to FFS. VBC incentivizes providers to focus on quality outcomes and the patient’s overall health and well-being versus the quantity of services rendered. VBC is becoming increasingly popular within the healthcare industry with CMS. CMS has a goal to have 100% of all Medicare beneficiaries tied to quality or value by 2030. However, 40% of CMS payments are still tied to FFS as of 2020. CMS has been the main driver in transitioning from traditional FFS to the alternative VBC payment models. Accountable Care Organizations (ACOs) are one example of VBC. ACOs are groups of healthcare providers who work together to improve care coordination to deliver high-quality care and achieve positive patient outcomes. ACOs are typically reimbursed under the VBC payment model, which incentivizes providers to work collaboratively in managing chronic conditions and preventing high-cost hospitalizations.
Healthcare Payors
In healthcare a payor is an individual, organization or an entity that provides payment for the care services rendered by a provider. This term often refers to health insurance companies, which provide customers with health plans that offer cost coverage and reimbursements for medical treatment and care services. The three main different types of healthcare payors are government/public payors, commercial payors, and private payors:
- Government payors include U.S. government-funded health insurance plans such as Medicare and Medicaid and the Children’s Health Insurance Program (CHIP) – these programs help support certain populations and economic statuses.
- Commercial payors most often refer to publicly traded insurance companies like UnitedHealth, Aetna or Humana that provide individual and group health insurance plans. Individuals are often covered by these types of plans through their employers or purchased directly through an insurance marketplace.
- Private payors refer to private insurance companies such as Blue Cross Blue Shield. These plans are very similar to commercial plans that are available through an employer, insurance company or the marketplace. Private pay for insurance can also include non-insurance payment for healthcare services such as paying cash directly for services rather than going through insurance.
Understanding CMS Programs – Eligibility & Participation in Medicare and Medicaid
Medicare is federal health insurance for people 65 or older, and some people under 65 with certain disabilities and conditions (e.g. patients with end-stage renal disease (ESRD) or Amyotrophic Lateral Sclerosis (ALS) – this means they have received Social Security Disability Insurance (SSDI) benefits for at least 24 months.) Patients must qualify for SSDI benefits to be eligible for Medicare under 65.
The federal agency called the Centers for Medicare & Medicaid Services (CMS) runs Medicare. As a federal program, Medicare sets the standards for costs and coverage – this means a person’s Medicare coverage will be the same no matter what state they live in. Medicare beneficiaries pay part of the costs through monthly premiums for medical and prescription drug coverage, deductibles and co-insurance.
In contrast, Medicaid is a joint federal and state program that helps cover medical costs for special populations with limited income and resources. In all states, Medicaid gives coverage to some individuals and families, including children, parents, women who are pregnant, elderly people with certain incomes and people with disabilities. The federal government has general rules that all state Medicaid programs must follow, but each state runs its own program. Which means eligibility requirements and benefits can vary from state to state. Medicaid also offers benefits that Medicare does not normally cover, like nursing home care and personal care expenses.
Medicaid is one of the single largest expenditures for states, accounting for almost 30% in total spending (including federal funds) and 18% of state-funded spending.
CMS Conditions of Coverage and Participation
CMS develops Conditions of Participation (CoPs) and Conditions for Coverage (CfCs) that healthcare organizations must comply with to begin and continue participation in the Medicare and Medicaid programs. These health and safety standards are the foundation for improving quality and protecting the health and safety of beneficiaries. CMS also requires that the standards of accrediting organizations recognized by CMS meet or exceed the Medicare standards set forth in the CoPs/CfCs. CoPs/CfCs apply to the following healthcare organizations (the below list is not inclusive of all the mandated healthcare organizations; the full list can be found at www.cms.gov) It is important to note that the standards that apply vary by the type of organization designated by CMS:
- Hospitals
- Hospital swing beds
- Critical Access Hospitals (CAH)
- Federally Qualified Health Centers
- Rural Health Clinics
- Ambulatory Surgical Centers (ASCs)
- Home Health Agencies
- Hospices
- Long Term Care Facilities
- End-Stage Renal Disease Facilities
Healthcare organizations that continue to fail in meeting the CoP/CfC standards are at risk for suspension or revocation of their eligibility to participate in CMS. Should this occur, it may result in catastrophic financial consequences for an organization.
Healthcare Code Sets, Definitions & Payment Systems
- The International Classification of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) is a standardized system for coding medical conditions and diseases that healthcare providers use when diagnosing patients. ICD-10-CM is used in all healthcare settings for medical claim reporting. ICD-10-CM was developed by the Centers for Disease Control (CDC) National Center for Health Statistics (NCHS) with authorization from the World Health Organization (WHO). ICD-10-CM is also reviewed and revises the code system annually. The Department of Health and Human Services makes the final decisions regarding revisions.
These codes can be found on the patient problem list seen in the EMR. An example of an ICD-10-CM code is below:
I25.110 Atherosclerotic heart disease of native coronary artery with unstable angina pectoris.
As of CY 2023 there are 73,639 ICD-10-CM codes. These codes also represent/report conditions and disease, related health problems, abnormal findings, signs and symptoms, external causes of injuries and diseases and social circumstances of patients.
Comprehensive and accurate documentation by providers and nurses ensures that all comorbid conditions are captured to represent a patient’s condition, complexity of care and risk of mortality/morbidity and certain social determinants of health. Depending on the capture applicable codes may result in a higher MS-DRG assignment for inpatients, as well as higher professional fees for providers. For example, identifying patient homelessness as a social circumstance may result in a shifting to a higher MS-DRG assignment than originally assigned.
ICD-10-CM codes are used for diagnosing patients, claims processing and reimbursement purposes. They are also used to compile national morbidity and mortality statistics.
- The International Classification of Diseases, 10th Revision, Procedure Coding System (ICD-10-PCS) is a classification system used to code procedures and services performed in inpatient hospital settings in the United States for claims and billing/reimbursement purposes. CMS developed, and maintains, the ICD-10-PCS. CMS reviews and revises the code system annually.
ICD-10-PCS codes are also utilized for reporting morbidity statistics. Below is an example of an ICD-10-PCS code:
- O4BOOZ, which represents an open surgical excision of the abdominal aorta
Acute inpatient providers report ICD-10-CM diagnosis codes and ICD-10-PCS codes which are used to assign the appropriate Medicare Severity-Diagnosis Related Group (MS-DRG) code used to calculate payment. The MS-DRG system is a classification system that categorizes patients, and their medical care based on clinical characteristics and the resources required for their care. Communicated within the MS-DRG is the patient’s principal diagnosis, secondary diagnosis, procedures performed, patient demographics such as gender and age, and severity of illness indicated by complications and comorbidities (CC) and major complications and comorbidities (MCC). This methodology allows for a more precise calculation of healthcare costs and reimbursement based on the patient’s complexity. MS-DRGs are updated annually by CMS to reflect changes in treatment patterns, technology and resource utilization, meaning payment weights for each MS-DRG are recalibrated every year. MS-DRG weights are calculated by CMS. The higher the weight, the higher the reimbursement by Medicare.
All inpatient hospital services and procedures are paid for under the CMS Inpatient Prospective Payment System (IPPS). The IPPS pays a prospective flat rate for each MS-DRG. A patient can only be assigned to one MS-DRG for a single inpatient stay.
It is important to understand that the hospital’s payment rate is determined by federal regulations and is updated annually to reflect inflation adjustments and budgetary constraints. There are separate calculations for large urban hospitals and other hospitals. There are also technical adjustments for local wage variations, teaching hospitals, and hospitals with a disproportionate share of financially indigent patients. In addition, variation in patient diagnosis and procedure and complexity will result in variations in Medicare reimbursement amounts for the same MS-DRG across multiple organizations. An example of this variation follows below.
“According to available data (2023), the average national payment for an MS-DRG “Acute Myocardial Infarction with MCC” (typically coded as MS-DRG 280) is around $21,500; however, this can vary significantly depending on the specific hospital location and patient factors, with some sources reporting a range between $17,000 and $30,000 for this DRG with major complications or comorbidities.”
- Healthcare Common Procedure Coding System (HCPCS). HCPCS has two levels of code sets – Level I and Level II
Level I codes refer to the Current Procedural Terminology (CPT) codes, which is a numeric coding system that is maintained by the American Medical Association (AMA) and is used to identify medical services and procedural services performed by healthcare professionals (physicians and other qualified healthcare professionals). The CPT code sets are updated and revised annually by the AMA.
Providers use the CPT code set to report medical procedures and professional services (often referred to as pro-fees) delivered in ambulatory and outpatient settings, including physician offices and inpatient visits. CPT physician professional fees are paid under the MPFS at a fixed rate, technical fees (e.g. may also be paid under the MPFS if services meet certain criteria – hospital outpatient departments are also reimbursed for technical fees). Below is a category 1 CPT code example:
- CPT – 92921 is the code for an acute myocardial infarction with percutaneous transluminal revascularization of acute total/subtotal occlusion during acute myocardial infarction and includes placement of a non-drug eluting stent. This code would be used to bill commercial payors and physician professional fees. CPT 92941 cannot be billed in Medicare patients, C9609 must be assigned to bill and receive reimbursement by Medicare.
- HCPCS Level I has a corresponding code of C9609 for drug eluting stent (DES) placement during an acute myocardial infarction (AMI) which is required for Medicare billing for the same procedure where a drug eluting was placed versus a non-drug eluting stent. There is also a separate C code for the DES itself. Medicare is reimbursing the hospital both for the procedure and the supply to capture both the increased cost incurred with a DES, as well as the complexity of services required for this procedure. There is no CPT code which allows for increased reimbursement when a DES is placed during an acute MI revascularization procedure. This is a great example of why HCPCS Level II codes were created and implemented by Medicare to simplify claims processing and payment as highlighted in the below paragraph.
Level II codes are used to primarily identify products, supplies and services that are not represented in the CPT code set. Medicare established HCPCS Level II codes because Medicare and other insurers cover a variety of services, supplies and equipment that are not identified by CPT codes, such as ambulance services, drugs, devices, preventive services and durable medical equipment. These codes allow for submitting claims for these items. The Level II code set is updated quarterly by CMS.
CMS continues to bundle CPT/HCPCS Level II codes. Bundling CPT codes is a medical billing technique that involves using a single code to describe multiple related procedures performed during a single encounter or within a set time period. Under the bundled payment approach, healthcare facilities and providers receive a single payment for all the services performed to treat a patient undergoing a specific episode of care. The goal of bundling is to streamline billing and reimbursement and avoid double-counting of CPT codes to mitigate overpayment for related services.
Unbundling occurs when multiple procedure codes are billed for a group of procedures that are covered by a single comprehensive code. Unbundling is often the root cause of claim denials. Inappropriate unbundling is considered fraud as it can result in significant overpayments. On the other hand, bundling services that should not be bundled will result in revenue loss.
- Ambulatory Payment Classification (APC) is a system used by Medicare to bill/pay hospitals and other healthcare facilities for outpatient services in contrast to MS-DRG which is used for inpatient services. APCs group together services that are similar in terms of resource use and clinical intensity. APC provides a fixed payment to a hospital for outpatient Medicare services provided to a patient.
Comprehensive APCs (C-APCs) payment covers an entire outpatient encounter with a single payment rate. This rate includes the primary service and all adjunctive services that support it, such as supplies, diagnostic procedures and visits and evaluations.
The APC payment for a procedure or visit level usually includes the cost of most drugs and supplies. This is because the cost of these items is an integral part of the procedure or visit. For example, routine supplies, anesthesia and recovery room costs are included in the APC payment for a surgical procedure with some exceptions.
Please note, state Medicaid programs and other state programs are considering adopting APCs. Some private payers use APCs to pay hospital for outpatient facility costs.
APC codes are reimbursed by CMS under the Outpatient Prospective Payment System (OPPS). OPPS is a Medicare system that determines how much hospitals and community mental health centers are paid for outpatient care. The OPPS pays for a variety of services, including imaging, ED visits and partial hospitalization services in hospital outpatient departments. Additional key points to note regarding the OPPS are:
- The OPPS reimbursement rate varies by the location of the hospital or clinic.
- Payments for procedures are adjusted for geographic wage variations.
- OPPS utilizes new technology APCs to pay for certain services until CMS gathers sufficient claims data to enable it to assign the service to an appropriate clinical APC.
- Medicare pays Hospital Outpatient Department (HOPDs) through the OPPS, which means they receive a predetermined payment based on the services provided, with the payment typically including facility fees for the hospital setting. Provider professional fees are billed separately under the Medicare Physician Fee Schedule (MPFS).
Assignment of Code Sets for Payment Purposes
Coding professionals review provider documentation to appropriately assign code sets to Medicare and commercial payor claim forms to submit for reimbursement for services rendered by hospitals and providers. Coders also review nursing documentation to ensure capture of all services rendered, capture all appropriate diagnoses and to identify discrepancies in provider documentation. Identifying correcting discrepant documentation may allow for additional assignment of ICD-10-CM codes, as well as billable CPT/HCPCS codes which may result in higher reimbursement. For example, the nurse documents phase I recovery monitoring post conscious sedation, but there is no provider documentation of the procedure for which the administration of conscious sedation was needed. This discrepancy would warrant a coder to query the provider to determine if a billable procedure was performed.
Accurate clinical documentation in healthcare is crucial in ensuring that all services and procedures rendered are captured and appropriate codes are assigned by coders. Most organizations have a formal clinical documentation integrity (CDI) process. CDI is a process that ensures patient medical records are accurate and complete. The goal of CDI is to accurately reflect the patient’s condition, the care they received, and the resources used. CDI is a key component of healthcare revenue management (RCM). CDI helps healthcare organizations improve patient care, reduce compliance risks, optimize revenue and support data-driven decision making.
- ICD-10-CM diagnosis codes must be assigned on all inpatient and outpatient health claims to be eligible for reimbursement from CMS and commercial payors.
- Inpatient acute care providers must report ICD-10-CM diagnosis and ICD-10-PCS procedure codes on claims to assign the appropriate Medicare Severity-Diagnosis Related Group (MS-DRG) codes used to calculate payment to be eligible for reimbursement from Medicare.
- HCPCS Level I CPT and Level II procedure codes and ICDM-10-CM diagnosis codes must be applied on all outpatient claims to be eligible for OPPS hospital and provider reimbursement from Medicare.
- ICD-10-PCS codes cannot be used on ambulatory or outpatient claims.
- ICD-10-CM diagnosis codes are not required for outpatient Medicare APC payment; however, they can be used to establish medical necessity for the services or procedures billed.
- CMS and commercial payors have extensive rules, regulations and guidelines surrounding appropriate CPT and HCPCS Level II code assignment. CMS can exact penalties on organizations and providers that are non-compliant.
- Commercial payors utilize the same code sets as CMS for use on their claim forms – for context purposes; commercial payor reimbursement rates or 1.5 to 2x that of Medicare except for physician professional services.
The Department of Health and Human Services (HHS) oversees CMS which administers Medicare, Medicaid (as of November 2024, the total number of Medicare beneficiaries in the US was 67.8 million) and Children’s Health Insurance Program (nearly 87 million CHIP enrollment as of January 2022).
CMS plays a crucial role in controlling healthcare economics across the U.S. through CMS claims processing and payment models. CMS continues to champion the transition from fee-for-service to value-based care to shift to a holistic approach that promotes overall health and well-being across a patient lifespan versus episodic rendering of fee-for-service procedures and services. CMS continues to increase/decrease IPPS, OPPS hospital and provider fee rates on an annual basis to maintain a neutral budget, the Congressional Budget Office mandates that rate increases be offset by equal decreases. Commercial and private payors control costs by increasing premiums, reducing coverage and requiring providers to engage in labor-intensive prior authorization and denial processes. These activities are not sustainable within our healthcare system. Not only do they comprise patient care, access to the healthcare and coverage, they increase the financial burden of patients by increasingly shifting out-of-pocket costs to the Medicare beneficiaries and individuals and families enrolled in commercial and private insurance plans.
As nurse leaders, aligned with the organizational strategic goals, it is incumbent upon your leadership to engage your nursing teams to work collaboratively with members of the healthcare team and in partnership with providers to:
- improve clinical quality and outcomes and care delivery
- reduce RN turnover
- optimize clinical and nursing operations and resource utilization
- drive standardization and eliminate waste
- gain efficiencies in patient throughput and execute on strategies to reduce LOS
As our healthcare system continues to evolve, achieving organizational excellence through a culture of continuous performance improvement targeted at improving quality & outcomes, patient access and optimization of workforce management, operations and costs will be critical. As FFS payors continue to create instability surrounding reimbursement rates to control healthcare costs, healthcare organizations must achieve a healthy level of stability to best position them for the agility needed to best respond to the ongoing market forces within healthcare.
