Healthcare Payment Types

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Healthcare Reimbursement Models…. Is There a Better Way?

Physician Perspective

Executive Summary

The traditional methods of paying for healthcare services use to involve paying for services out of pocket. The gradual transition from fee- for- service payment to managed healthcare is not a recent phenomenon. With the increasing costs of healthcare services, there was an increased interest in moving payment from fee-for-service into a more organized payment structure. This paper discusses the three payment types in the healthcare industry used by practicing physicians: fee for service, bundled service arrangements, and capitation arrangement. It also addresses the best current method as well as future reimbursement methods. The importance and benefit of each type of payment system is examined in relation to several criteria such as utilization rates and delineation of services.

Healthcare Reimbursement Models…. Is There a Better Way?

Physician Perspective

Initially healthcare reimbursement was a term used in dealing with hospitals, but it has grown to be much bigger than that. Financing methods and organizational patterns have shifted over time and created medical groups, surgery centers, home health firms, large healthcare organizations, and many others in both the private and public sectors. Even though healthcare organizations are businesses just the same as any other business, they have one area that completely sets them apart from any other; that is the way they receive payments. There is not a single industry that has as unique and complex of a revenue system as the healthcare industry. In fact, in 1999 complexity was listed as “one of the five trends threatening the very future of medicine (Washburn 1999, 34). This paper will examine the history of reimbursement in the U.S. health system, the types of healthcare reimbursement methodologies, and also the best option of healthcare reimbursement models.

The history of health reimbursement actually goes back centuries. King Henry I actually introduced healthcare reform in England and Normandy by introducing “John of Essex” as the kingdoms’ primary physician. He was paid a staggering amount of 1 penny a day for his services. Furthermore, there is evidence of physicians being paid in the 1830’s to care for entire families for only $25 a year. Up until 1920, there was no demand for health insurance because the medical bills were not really that expensive. Instead, it was loss of time that worried most Americans. “According to a study conducted by the state of Illinois in 1919, lost wages from illness were four times larger than the expenses associated with treating the illness” (Preskitt 2008).

In 1929, the first modern group health insurance plan was formed. A group of teachers in Dallas, Texas, contracted with Baylor Hospital for room, board, and medical services in exchange for a monthly fee. These prepaid hospital plans began to grow during the Depression providing a cash flow that helped keep the hospitals afloat during these lean years. Several large life insurance companies entered the health insurance field in the 1930’s and 1940’s as the popularity of health insurance increased. In 1932, nonprofit organizations called Blue Cross or Blue Shield first offered group health plans. Blue Cross and Blue Shield Plans were successful because they involved discounted contracts negotiated with doctors and hospitals. The American Hospital Association helped design guidelines for Blue Cross to help reduce price competition among hospitals. In return for promises of increased volume and prompt payment, providers gave discounts to the Blue Cross and Shield plans (Friedman 1998).

Employee benefit plans proliferated in the 1940’s and 1950’s. Strong unions bargained for better benefit packages, including tax-free, employer-sponsored health insurance. World War II wartime wage freezes imposed by the government actually accelerated the...
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