Reimbursement of the providers of health services


Material Information

Reimbursement of the providers of health services staff study for the Subcommittee on Health and the Environment of the Committee on Interstate and Foreign Commerce, House of Representatives, February 23, 1976
Physical Description:
v, 23 p. : ; 24 cm.
United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce. -- Subcommittee on Health and the Environment
U.S. Govt. Print. Off.
Place of Publication:
Publication Date:


Subjects / Keywords:
Hospitals -- Fees -- United States   ( lcsh )
Medical fees -- United States   ( lcsh )
Insurance, Health -- Costs -- United States   ( lcsh )
Nursing homes -- Fees -- United States   ( lcsh )
federal government publication   ( marcgt )
non-fiction   ( marcgt )


General Note:
At head of title: Subcommittee print.

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 025741035
oclc - 02077952
lccn - 76601503
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Table of Contents
    Front Cover
        Page i
        Page ii
        Page iii
        Page iv
    Table of Contents
        Page v
        Page vi
    Part I. Hospital reimbursement
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
    Part II. Physician reimbursement
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
    Part III. Reimbursement of skilled nursing facilities
        Page 15
        Page 16
    Part IV. Summary of features of pending proposals
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
    Back Cover
        Page 25
        Page 26
Full Text











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*MA 1916.

FEBRUARY 23, 1976 -//






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JOHllN E MOS'.(C.ilqt i.t
J1JIN I). D)INI;FIL. .NMiliig.II
PA. I. (;. ROO;ER-s. Fihrni.i
I.|fiNr I, V .k\ IIE I". R I.IN ('.lif, 11.a
FRED II. RfO'NEY, PI'.iiiilIv.i1Li.i
J DAVII) E. S.AIT'HFIEI.F ) I1l,\iigiii i
B R0 W'K A I DAM. W.L'lihIiit:ii
W. BILL) .I' (C K FY. Ju.. i;.,rgi.i
1001B EI'KllARDT,'I',.\,iS
il(l .II R i ).() N PREYEIt. Nor Ii C .irolina
JAM .S \. SYMIN Ni' N, Mi.--,.m1i
( !IA1 :1K J. CA KN EY, ItIio
iAI.\ lII tl..M ET('AI.FE. illini,;.
{i{}DL{}E F. BYRO,.\ Mar.l.,ll
J.A.M ES 11. S(C I E VK R, N,.w York
ICI('IARI) IL 01'TINGER. Nt w Yink
lIENRY A.WAXMAN, C:,ifniiii.i
ROBEiRT i, HI ) KRI E(ER. T'.i\s
T'I MTi TH Y E. WI RTI. Colorado
PI I I.IP R. SHARP, Indiana
\\ I III.I AM M. BROI)II F.AI), .Xliliig.iu
\\. i. .1IILL) II EFNER. North (.Taro1ii.iA
AN D R E \V M A G UI R E, Nt w Jersey

SAMI'EL I. DE\ INF. olim
J.. %I ES T. BRHCYIIILL. Nirth ('airliiin
'IM I.E CAR TER, Kinimu1ky
(LA RItN E J. i Ht o\\ N, (iluio
JOE SK I' IT/.. K.iiI:a.-
JA .\ M S NM. C(() 1 l.I N S. I'#.\.s
L) f I.S FREY, J i F-'lml Ida
JOHN Y. XlM COI.I.I.ITER, N.lira;ka
NORMA.XN F. I.EN'r, N.w York
II. JOHN HEINZ III, l'.i]m.-\ylvaiia
EI\\ARD I). I.MADiIi.AN, liiih11s
C .A R I.O S J..Me (>o R 1 IAD\ California
MATT'I I E\\ J. t I NA Li) ), Nrw Jc.r-vy
\V. ii FNSON M( RE, Louisiana

W IE.W I. I I[ S N. ClTrk

s r ". .,, Professional S.itff
-" *'i p.4. .'< Rrj, WILLIAM P. ADAMS
*LEE S.HYIue. H..- RI'ElT R. NoHiRIH.A
-: r JEFFREY I!.S( lW, REt'. t WILLIAM -. I']IiI.I.IPr
* ".' ,' (3<^ IM\RC1T D[I\N L\


""<> -* PA'L G0. ROGERS. Floril.i. Chairman

DAN\ 1 : S.ATTERIFIEl'I) I 11,Vi,1iii.i, TIM LE E C.A 1Tl: Kentucky
iICl.'{'IA m{N PR1:YE-R. Niith C .umlina JAMES T. BROYJI I LL, Nuith (
JA.MES W. SYMIN'I'TON,N I-,,iii II.J011N IIEINZ 111, P',iis\'lv;i
JA XI :- 11. SCHE('lIE VR. New York E IDWARD R. MA DIG.AN, Ilhlio
IHIN'RY A.WAXMANT'i'ltifriiia SA..MUEL L. DEVINE. hi,, (Ex
W. G. (BILL) lll-"FN l-R, North (t Iihil.
JAM EF. J. FLO RIO, Niw Jersey
.A N i) K EW MA' i U I k F. New Jersey
hA I LEY 0. <'I'STAG(;ERS, West \ riiciiia
"\ llim i()
STFI'i l \F LAW\TO., Counsel
Jo ANNE I ;T.iS- (I\,Sofnl Assistant
STr [I F: J. ( 'I)\o ..Y, /itiff Assistant
l)I> %.I K. DALRYMPI.1:, Assistant Cwoi i. i


"Ill (dlll:lI


Staff wishes to acknowledge the generous assistance of members of
the Congre'.ional Research Service in preparing this document.
Particular thanks are due to Mr. Glenn Markus and IMr. Robert

Digitized by the Internet Archive
in 2013


Introduction 1
Part I-Hospital reimbursement------------------------------------ 1
A. General background ------------------------------------------ 1
B. Current reimbursement practices -------------------------- 3
C. Reimbursement limitations and controls ___----------------------- 6
Part II-Physician reimbur-4-1tent_----------------------------------- S 8
A. General background----------------------------------------- 8
B. Current reimbursement practices----------------------------- 10
Part III-Reimbursement of skilled nursing facilities------ ------------- ;15
A. General background---------------------------------------- 15
B. Current reimbursement practices------------------------------ 15
Part IV-Summary of features of pending proposals -------------------- 17


I trodulction
At the heart of third-party health insurance contracts and programs
are the provisions which determine the amounts and(l methods by which
providers of health services-namely, institutions and practitioners-
are paid for the rend(lering of care to patients. In addition to establisllh-
ing ultimate payment levels, reimbursement provisions also contain
important features that can affect both the cost an(I price structures
of the services p)rovide(d to insured persons.
Each of the major p1rol)osals before the Congress to establish a
program of National health insurance contains reimbiursement
provisions, some in exl)licit form, others imipl)ie(d. Proponents of some
of these measures have indicated that the specific set of reimbursement
features incorporated into their proposals are intended to accoin)plish
one or more public policy goals-e.g., the control of health care costs,
changes in the organization of health resources, etc. Others have made
no explicit statements reg-odin' the inclusion of a spl)ecific set of reim-
bursement principles in their N\ational health insurance measures.
It is the purpose of this print to examine the ways, in which providers
of health services are now being reimbursed, or might be under each of
the health insurance schemes, and to discuss some of the intended
(as well as unintended) consequences of adopting one or another
reimbursement option.

A. General background
Before the advent of private health insurance and other third-party
health service programs, hospitals obtained much of their revenues
directly from self-paying patients. Around the turn of the 20th
Century, hospitals operated on what today would be called an "all-
inclusive rate" basis--i.e., hospitals charged each patient a flat daily
rate designed to cover all of the services rendered to the individual,
including room and board, general nursing care, routine laboratory
services, and the like.
But changes in both the character and the kinds of services provided
by hospitals soon produced change, in the ways in which the institu-
tions billed patients for certain services:*
The development of aseptic techniques in surgery and the
increased use of anesthesia resulted in departure from the all-
inclusive daily rate system and the establishment of special
*Mannix, John R., "Blue Cross Reinlmbursement of Hospitals-Current Methods and 'li,'i-
Evolution." from a paper presented at the University of Michigan-Ann Arbor Center for
Continuing Education : July 14. I"1!''.

(1.",Lr.l- for thle 11ii-e (of ihe opelratiig riooi and anetlhei-'i. The
Ofi-c.vIry of li( RloeilltgeIn rIy in 1S95 r'e.-'iitedIi in :imotler special
c(ir..e' for N-rIaly -vlN ice. Special ch(llarge- for laboratory werv'ices,
,elect roICa,' ldio.ra1i1-. I)llV-i'cal tlleral y, ll'(r-, anld IIlImanv other
s-ervti,'- followed, miutil by the 1920's it Wva- ot 1 n-iil for tlhe
1ifi1l amounlit of -peciall charges to exceed tilt regldar Inily service
Di--aifctiolln with tli(, variety Vauld 'i.1iOIht o(f tlie-e new -.j)pcial
cli:trL_,', led' in:iiy lio-pital-, to reconsider I-e of, l1the all-inclus'ive rate
-v-tcl I for liCe priiniC of tleir :Wervices. SojIe ilititl tiiti established
.i1 ;ill-iiu-t1-ivt' ri.t, for the speciall service-, thei'rebv vtragingi suclh
4,1:rLl,2'1- : ii iij all pittieit (of tlie rctp e ,ctive fa cilitiv',. Otliers estab-
li-lied ,an all -ii(h 1-iv rate for all services, ro)uti ni ld ..-i c'i1al, varying
tlimi only 1.v lenltll of -tay ind by type of 1loji ,)ital :coinnmiodatioi.
l'ro' ; lii-toric;l standpoint, rceiiieoe i.e of ;ll-ili(il1-iv\ ( rates was
imp'm liit. Thie ()-of (II ch- a systeili i-prv-eited 111 a iiely attempt to
i-ti ibtite and equllize tlhe impact of cerlitin expenive -'erv\ICes
;iiion110 tll d f tdl I pf 1 1itts of ani inl4t iiliion. 1lie all-I!I-iillive rates
heli to ret-li,,v, -'ote of the leavy financial burden tlwt aiiitlit ()otlier-
\\i-i I li m fp' t ()CI i-iona1 .l patieni' t, \%1() Io c'uivd "jrg' ilim illit- of
-pe iiU/.-d ;1re-. Th'e ;ill-ilchl-sivet ra;te 8d,() 11vcw!c Illie p'-incipall
)a-is upon vAl iichl e:irly third-plirty payers 'eillmbur-'ed lio-pital-
tjlu ulwi,- ln'..oti;ited PilY I ..ntl,.
Thle ild,, of spr';idii', the impact of ho-pital cliirges aii0,1 1il of
I tIe i 4- Ilf individual ho-pit;,ls \\a- 'riiied a -tep further b)y tlhe
ori!i!lal Blue ( no- plans. 'h'lle-e p)i'epaliient organization-, distributed
tih' c ,Ll..e-,, of -..ver, lio-pit.:ds, lmoctled in dliffe'(,t comuiiitie'-,
over the cti;re enrolled population of the plans. In tlie begiiiing,
Blue (1.-- pl-nI -'<-(erly rillibi -,r-ed ho-lpit.l-- i;: one of tv:o \\ays-
on the i):.s of the individual facilit-'s (e-tal)i-hed chargie'- or on tile
1:);-- of n (_Ile( 'tiated uniform" i rate'. Til' litter 11ethol-,d 'eei-l- to have
)e'ni tlie more coilionpl'ace, -ince flat negotiated r;ile made it
relatively c:liv for the plans to e-timuate their' anticipated liabilities
(;Itld to est'i lish tiiti 1)premiuims).
Reinbuirsi.eiient on the basis- of es-tallishedl or 1ne'otiated charges,
however,, wva,- not the only way in which the third-party bulk pur-
c'ia-'er-. of ho-pital care paid for service. reniideretd. Reimbure mielent oin
the lb;-i-i of h11-pital co-ts, ratleier than charge-,, 1)(eglan to d(e\el)p
Smuri12 tlhe earlv 1920's. One of tlie first to utilize cost-ba-edl reimburset.
,iient for lo-p)itidl aire was the Pennsylvania Departilveit of Public
Welfare. which (iIiinbur-t-d institutions on tle ba-is of estimatedd
cost- per patient (lVy."
During the 1930', the Federal Governmient entered the loospital
rei)mbur-i,'ni'lt field \witli payments to non-governmiielital facilitie.-
providintg care to crippled children. Since not all costs incurred by
hopitfld. ne,(.e-iirlly are related to patient care (e.g., costs of running.
a h,-.pital gift -hop), reimbursement was na lde to such ili-stititions
on tlie balis of certain "reinbursable," rather than total costs. Cost
r(,iimbur',leint was slub)-equently employed in a variety of govern-
mlental programs (including medicare and medicaidd, and ia.s since
become the predominant, though not excluh-ive, basis ised by third-
party\ payers to reimburse hospitals.

B. Current Reimbursement Practices
1. Payment on the Basit8 of Charges.-Like other businesses, hospitals
assign various prices, or charges, for different units of service they
supply to their patients. For example, specific charges minay be etab-
lished( for room and board, by type of accommodation. Additional,
separate charges miay be made for specific ancillary services, such as
the use of an operating room. Taken together, the sum of these
charges constitute the bill that is presented to the patient upon the
latter's discharge. For the self-paiying patient, such charg"- are also
the basis for reimbursement.
Charges may also be the basis for reimbursement in instances where
the patient is insured through a third-party mechanism. The third-
party may reimburse the insured directly, who, in turn, settles with
the hospital. Or, the third-party may be authorized to pay the hospital
directly on behalf of the insured. Charge-based reimbui -ement is still
a common method of payment among a number of the Blue Cross
organizations in the United States. Some of these plans reimbl)urse on
the basis of "billed charges" (or "uncontrolled charge,"). Others pay
on the basis of charges, if such charges can be shown to be "cost-
related." In the latter case, the plans are notified of tentative changes
in a hospital's charge schedule. The hospital supplies the plan with a
budget and other materials showing cost justifications for each of the
proposed changes. Still other plans pay on the basis of "negotiated
charges." Prior to the implementation of any changes in an institu-
tion's schedule of charges, the plan examines a budget not only to
det(ermilne that the proposed changes are cost-related but also that
the hospital has exercised reasonable levels of management efficiency
and effectiveness.
Most of the commercial health insurers in the United States rely
upon charges as the basis for reimbursement for hospital care. Certain
services, such as room and board, may be reimbursed on a "full
charge" basis. Usually, however, various ceilings are placed on the
overall amount of the charges for which the insurer will assume
liability. The insurer will "indemnify" the insured up to these specified
ceilings (usually expressed as some dollar amount). Charges in excess
of the indemnified amounts are either borne by the patient entirely,
or are reimbursed according to some sort of cost-sharing schedule
(e.g., a percentage of billed charges in excess of the dollar ceilings).
2. Reimbursement on the Basis of Costs.-Reimbursement on the basis
of hospital costs is today the predominant method used by third-
parties to pay for hospital care. Basically, cost reimbursement involves
determinations, usually in accordance with certain established cost
principles, of the actual costs by a facility in the rendering of patient
care. The actual charges incurred by a specific patient do not directly
affect the basis of payment, except (1) where patient charges are used
as measures of relative hospital use in the proce-s of apportioning the
liabilities of different third-parties (see below) or (2) where the
reimbursement contract provides that payment to an institution will
be on the bass of charges, if charges are less than costs.
There are several ways of reimbursing hospitals on a cost-basis. For
many years, third-party payers, such as Blue Cross, paid on the basis
of "average per diem costs." Under this arrangement, the total costs

611-315-76- 2

4f 1OI)Iltill, iii il illP):tlieIvlt -ervice's (f ( 1 facility are -tillne(] ail
hadl' lvill c ic il reI
,*er1-in ll ,)\vdow .d ,.,-l,. (e.g .., 1);i!(l debt-, col)lec'tionl agnc(, fee-:,
et,.) ;1*1, de ,dull ed fro l tlle4 total. Tllv adju-lvd to al i- thell divided
by It}l' total ai HLnu 'er o'f inpl:ie'nit I1(-,pitll (li to arrive ;it anI "av era,,.Ie
1)1.. die l v(-t.1 Ili, "Pl. diel, r.ate i- llOwn multiplied by tl(e num-
I:T I'r dlvs ac tally n-ed 1iyI i)N' ov(T.-Me Id-(r thI tird1l-p)t fv
plan1 F rom',,II the (,-,tiII1 t,,1 1 (:-il liMil)ility ;ni'c vd(.(i e t-du lcted vnli(il-, alllm lllt-
I', I' virl i a Ii-;iIlow,.d -v(.eV i\ '<. n ,ii-,,nl ';iet (,liiair1,-, 2nH ,ll the like. 'The
1l);1i,1ic0 tl111i (m(iI itiili'v t1e tIliird-pia tY's liability to the iistitiuitio
iln CIir-tiohi.
(Ao-t rie'iilnirii-n"it di, ; pm" (i'n' l1;i-i,. however, fails to takc
i1114) :irCM11int d Itf ii ccVI ^V ill till, litili/iition [ll p tfrnis alioigo p thec N-211ioii^
t-<'r-- of h,)-1lit0 l -('vxr i'-:'-, l;irtici, ]i ly l,,kv<,,,.n ; ,,ilw d 'itI I( i i-,. redl pi-
li ixts'. It is the iAtiir' of ll(o-piital <,e th leat ithe .ri( '-t I ,(-c o(f 11,cill'arv
-,,vic.,-'. ;in1d t1,!-' the lti.,,li,-t < .1 i iill:< ,,,' r-. dur ing' (lt e fir.-.t I'm
(hI'- (1of the confinlwllent. Silce the .tn'(Id rn.'iIi61i io-1)jitiliz(,l lon.rer t al:t
other 11t1i.uts, l I, N!r0 ave ;:Z(1 p,( vi (dil V,-.ts for icillia s ,'vice aUre
sp 1c:, i (,ve ;I lenI t I ier lime frim'ie ; d, t i i s, th it re low.'r tlIua tlio-I ( foir
110 1i-.i 1 ^'l pa| Ii its. It ;a lliiI rdt-p)Irtv |)i()gI.Ii II is cmI Ip1)-Pd lIIr~ely of
older ,'- ,,I- (or ,,tI ler-s who have lIiL(r. thi:ti avPI ,'I' le ,,tlio, of .stv\),
it may find itself sl)b-idlizing a'. portion of thle co,.t- of thle younIger lI)-
tients in a facility, if reimburlr.ement is l:i(de on the ba-.i.> of the "aver-
; i"!'e j)Ir dieIm cost" for thie totnl pAtie'it population.
I I4IIIn 1 encinII T med i(-fa (Which rcimburit-es oi co-'t hn-i,), Coiigrv-4s
soIiht to eventvet .iaY co',---- iii-idization between tle he medicare aid(1
n0on-medi'are 1)(p)Ilations. Tlhii is accompli-lied by m*Iea.s of tlhe
I(CCAC( c-)-t ap)io)rtiollinent system. RCCAC is short inud for tlie
i"r!io of bvleficiaryiv chrge,.'- to total patient charge'.,, a. applied to)
('- 4s'. Under R(CCAC, the charge(, for covered service attributl)lIe( to
Imiedicare pa!iet'ts are divided by the total charges -made for covered
M-OIWiceC' to all hosl)ital )patients. The re-ultin. p)(,'erintage is theii in tilti-
1)plied by total allowable cos-(, to arrive at mlied'icare's reimlibii rsemi'einit
liability to an institutional. (Ini actul 1pra ctice(, a iiumber o()f different
RCCAC ppl)(11r iolel In it riiie..- a al)l)lid(1 in making, such calactlatio-e.)
Note that th" individual clihar.'e-; to Ined ia,'e l)atients affect reimibure-
ment only to the extent that they determine the percentage of allow-
able ()-ts for which pa 3ienits will be made.
Be.a-e cha e-,i. Vare I-. ed to a )pporti( i n cots under th e v1ario-
RCCAC mlietho(-, I-ireful ex;aiat*111 ion must be madIe of the ('l1r0e
structurt- of individual hospitals. If cliha'ee- are r('-onl),]v related to()
cot)-ts, a lhir'd-p-)arty paying on the 1),-is of RCCAC will reimbur. (l().e
t,) its f;i r -.1 iar' of the co-ts of providing -ervice-, to its enrolle.s. If i'ch
c(h'iae- ar' not c(i-t-r(-lat(d, however, the thirld-i)rtY imny end up11 l) pay-
ing mo1 or vle--. 1 1ita its proper share of hosl)itzal ,.-)-. Care 1must a11-o
1Ie ;i'ken to a--ure that f.'ilitie-, do not mal)ipulate their t'chiaige
structu (- in such a mil iter a-; to favor one o 0)I other gr)Up) -.,(le1y fowr
the purpw -"of ohi aniii unfairorinequitable reimbi ir-,eent outcomi'es.
"I,' ,'," Sl.'h //,." of Rt ;1h1tr-.( l,, lfl.-TIe -(,CI d anld draniatic
i'r:'a';-,-. in both the charges. for anl costs of lho'-pital care live
pImlpte'd anmiunb)erof third-p)arty )ayers toe(:,.\)erilleuitwith alternative
waVVS of 1.(imb Iursingi institutions. In some instance-., hol-)ital.-s inave
eite.d, into Isuch ;Ilternative aanHeme'n,,.lts voluntarily. In other c.e-(,.
new ,reiulib' r-eu'emnt po(,'lure'-, have been ma;d(lated by ]egi.-atioii.

The principal purpI)iose of the-e experiments has been to iintrod ice
some degree of constraint on charge and cost increases by setting limits
on the amounts that will be lnpaid hospitals during some future perio(I.
Hospitals are given incentives for improved( efficiency an(d nanageiement
and are rewarded( in one way or another, if they can 1erformii at or below
thbp lp.vol of the "targeted"l payments.
Variations of cost-badse( reimbursement mechanisms have beeln
explored. One of these is known as the ''average grolup cost" "meho(I
of payment. Under this system, all of thle institutions reimbursed by a
third-party are grouped according to shared(l characteristics-e.g.,
size, services, geographic location, type of ownership, etc. In theory,
similarly groupedl hospitals should be subject to similar economic
conditions and( pressures. An "average cost" is established( for each
of the groups and indlivi(dual hospitals within a group are reimbursed
on the basis of this "average" cost. ltospitals with higher than average
costs are penalized, while those with lower than average costs may be
rewarded. In some instances, hospitals with lower than average costs
retain some or 'all of the difference between their actual costs and the
average for the grouping. IHlospitals with "'excessive" costs are paid
no more than the "average" payment or are otherwise penalized
with respect to costs incurred above the group "average."
Another incentive reimbursement scheme is often referred( to as
"prospective budgeting." Under this approach, thle need(ls of each
hospital department are assessed for some future period of time (e.g-
a year). Areas of possible saving or economy are noted and an overall
target budget is prepared. The target budget takes into account the
areas for cost reduction developed during the survey process. At the
end of the time period, incentive payments may be made to those
hospitals which achieved or performed below their targeted budget
or rates. Hospitals that have exceeded their targets are penalized
with respect to excess costs.
Cost per case reimbursement is yet another experimental reimblirse-
ment system. Average lengths of stay by1 diagnosis and age gro iutpings
are established. Lump-sum payments are made to each hospital by
multiplying the expected average length of stay by some daily reni-
bursement rate. Thus, the institution receives fixed payment amounts
for each patient regardless of the actual stay. Thle incentive for the
hospital is to keep lengths of stay down, in order to hold costs at or
below the costs established for the "average" case.
These are but just some of the prototype "incentive reiinburse-
ment" systems that have been or can be devised. Some focus on
process by rewarding or penalizing institutions for initiatingl or not
initiating improved mai nagemnent processes; others focus on perforli-
ance by linking rewards and penalties to reimbursement outcomes.
4. Utility-Type Regulation.-Hospitals posse--s some of the charac-
teristics that liken them to public utilities. The services they provide
in most communities are '"essential" services. No acceptable substitutes
can be found for many of the types of care they render. HIospitals are
confronted with high fixed costs and nay be in a position to engage
in certain monopoly pricing practices. In order to assure that the
prices charged by hospitals are reasonable, and not excessive, some
attempts have been made to establish rates through one or another
rate-setting authority. Third-party payers, in turn, reimburse the
institutions according to such "regulated" rates.

A.,_'liv.- .--i- ,,ni'. r.'t t --.,I t *lng rc'-.l)<, -ililit .- I. Nay p)evfIto'rII a
;t vanietlv of tutk-.., dependilifi llng upon tilt- (Iegri.E nld a of aiiitlorit
l':i Illt('l til'iin. For e'Xaiiplel', ;t nl(i'- lI (I" o may o )t' i e poIV('w ) e's
to ont'o l tit, di-t+riblitio n lt l a id p)I TilutiolI of ho-piital 'l('il('", as
V.ell ;i- j)I -. Uibin!. tI'tt'-.. ()t her( dIltie.. of such ag, '" 'cie-. mita itcl'Ile:
fcr'tif\it," fl int 1t(ttl ho,-pi cot[ 't- 'nr Ica'o ably relIted' to total
-c- ''irc- ol erc.q, ilikit agLgt'L' i i it('-, ]>t r ;] )'Ill.a 1 F -.n ( relationship
-I, i r,'. I( te_, i Ii tIt. Iit r a;ti i1e (q'tlilitil)lc(' to precludle dis-
(crihi ilttoryv l)i'iiiLg. A rq.\g ci ic 11111 il.- n-o g iveii tile l)ower.' to coiml) lpel
fii,:ii.i'il 1i-l,-,11' aiid o pto 1 'fo'1 iln aiudits of lio'p)itld Ol)Cl'itiolls for
tic 1 ( i-po f .,It v- 1'ett im .
I(. It1 ;1ihr. minf l L i {llmlta ;.t+. (11{d C( 0,n fot N
At the pr1-Ctit liIle, hol-p)it ;d-, iiiv oblt aiii tliir reveoeiine,- fronm several
or ;111 of tlie reiiiibmiJn-I cuent devic.-, de-crilbedl in tlie prece(ding .ection.
,Cliair(> att, the o ii-i, of rfoilihiisem emit fir -elf-paviying patients, for
th1l-' i-tiuredl tinider mnio-t <'oi1ierci,'cil ',itrtct-, 2i(d for mniinn Blue
( 'n,- -.)il,-.ici <. Otlier icoe i, de(rive'T(I froll co-,.t-bal-edl payminents
Midle oil 1)(4h1,If of medIica'ir beneficilifc e-, mliit lcni.( recipients, 1and
other Blue ( 'I'o-.- lel),'<. Still Otil'r reveilue'.- illmIy be generated
Sliroii2o h -pi)L'i 0 1 "in'cettive" reimibutrsemonen t ,I rra iitenients1% entered into
1,A ii-Ititutions- with idividamil third-pnartiev. Eachli of tliese generic
nietliods- of ptay ingt for lio-.pital care has d(iffereit chita'racteritics.
1. Clt(ar-bax,( 1,hbir.'.(mcnt.-One of tlie key features of ch]large-
)ab-.'d i rimbiir).-,cm (,lit arian*gemnenits-e-.pecially tlose that pay on the
la--i-. of controlled c!iiar e.--i-, the freedom and latitude granted to
ho-ipit als ererl rding t livir revenue expect nations. I ntitutions that receive
a -izeall1e proportion of their income on the bas,,is of charges are in an
excellent position to obtain whatever target revenue levels they desiree
without much concern for the rationality of tlieir pricing policies.
Chliar',e for certain -ervices may be entirely unrelated to thle costs
a-.-,.Oited with tile production of such services. Cost increases are
counterv(1d ea-ily by changes in the charge structure of an institution.
There i- little, if aniy, external pressure on facilities so reimbursed to
economize or to re-,i-t co-t increa,-es in their operations.
Somie degree of co.,t containment or control may be achieved, if a
ho'pitill is obliged to (lemlonstrate that changes in its charges for serv-
ie'- are both cost-relate(d an(id warranted(. Similatirly, payment on the
lbi-i-, of "negotiated" changes maty achieve some measure of cost con-
trl to the reimibursee('nlt proe-ss, particularly where tile third-party
stipulate- iaiximums on the charges it will pay during a prospective
contract period. Price increase, in excess of such mlifXllmuIms would not
be ielnlbur-.a)le by the thir(l-party during such time frame.
2. ('ost-ba.vd nThemb ,rs,'ment.-('ost-based reimbursement systems
live been widely criticized as- lacking in effective cost control features.
There i-, little in the way of pressure on institutions so paid to contain
their co-t<, since any -,ich increases lare simply passed along to the
third-parties-; that reimbtir-se on a cost-basis.
It lias even been suIgge-,te(d that most cos-t-l)based reilmbuIrsemIent sys-
tem-s contribute to inefficiencies and wasteful expend(litures
(and, thliereby, to hospital inflation), .ince such sv-tems virtually
guarantee payment for co(-ts that (a) are not determined in the usual
c(lmpetitive nmiarketplace, (b) are virtually unregulated by public

authority, and (c) are not effectively controlled by tile facilities. them-
selves. Cost-based reimbursement may even contain disincentives for
hospitals to seek economies or certain costs, since any reductions that
are achieved only result in reduced income to hospitals from cost-
based third-parties.
3. Inut'fi'cr Reimbiibr/, ient.-Experience with a number of the so-
called "incentive" reimbursement approaches to (late has been both
rather limited and somewhat inconclusive. Administrative feasibility
is a major factor in designing and evaluating one or another of the
alternate methods to the usual charge or cost-based systems. The costs
of administration, for instance, and the costs of whatever rewards are
paid "efficient" institutions must be less than the costs savings antic-
ipated from the incentive mechanism.
Some of the incentive methods, such as prospective budgeting, can
involve complex and extensive work, not only on the part of the hos-
pitals, but also during the process of negotiating budgets with third-
party payers. Some third-party experiments, in fact, have failed and
have been dropped due to the extensive time demands required in
developing and applying the budget-setting process.
The acceptability of an incentive reimbursement scheme to hos-
pitals-particularly where participation in such a system is not
mandated-is another important consideration. Acceptance by the
institutions probably depends more on the expected payment level, in
contract to existing reimbursement rates, than on the method used to
determine rates under the incentive scheme. Third-party payers have
found it difficult to obtain voluntary participation in some of the
incentive experiments, because the hospitals see nothing to gain by
giving up, say, cost reimbursement to risk lesser levels of payment.
Another concern of institutions under incentive payment systems is
the matter of capital needs. Reimbursement by third-parties has
become the major source of capital for hospitals today. Before the
institutions are willing to participate in experimental systems, they
must believe that the prospective rates will be high enough to assure
them of the capital they feel they need.
Hospitals are also concerned about the ways in which incentive
rates would be adjusted for uncontrollable or unforeseen events. It
may be unfair to penalize or reward institutions for cost changes
beyond their control, and it is not always clear whether certain events,
that lead to cost changes could have been controlled or anticipated.
4. Utility-type Regalation.-There has been perhaps even less
experience with rate-setting, or utility-type regulation, than there has
been with incentive reimbursement systems. Utility regulation in
general requires the development of standards against which to mea-
sure and price out various units of service. This is exceedingly difficult
to accomplish in the hospital field, where there are qualitative (lifter-
ences in the various outputs of health facilities.
In addition to the difficulties encountered in attempting to standar-
dize and value the units of service provided by hospitals, the unpre-
dictability of the composition and the nature of the demand for
hospital services also raise serious administrative problems for rate-
setting agencies. These and other problems suggest that additional
experience with hospital rate-regulation is needed before wide-scale
application of such regulation is employed.

.PA II.--Pl[\' I, ,El\lV'IUItRlEMET
.1 (iflU Hi 1 Iuf ckfpr'' in'
Thlit 'g..t majoirity llhave ,lli,.,c.-li-. l pr:) ii(tic-. liill J for llieilr .elVice'. ml a f'ee-for-,,ervice
I l,,- Ii- onl. l"I,.-fir-.eri -i ply x ea -, l. it tih phy-icia11 bill, It ct.arl,11,e
f(lr ('W'-lI sel rvilce t h l eltt fIie re ldl,'-.
A phyialith 1)1: ta1V k,, of ct.esidelratioi,- iiito account il
'i .t hi- f',I .. Thel,.'-. ilu h ltil s' h fit ac tor- : ti a oe t solli- 'i ar.,ed
II ,,lier phi 'si i*i1t 1. inl titN' fi,.- ti 11. net income' lie i-lpc, of ,,*i' rate;
Illi lairflritn i tiven pr-,()1et'ire .1tid its co lplphexity.
>lVrdis p ~itio i ll, tiu&lsckin Alitve I(lfcitmed their cliidi o'e( to tli( ill-
mi i1tuil P;t.itciCt's ;lility to );iy. Iowmever l, tilerowth d privt( alld
lat1ic lbe.Itlo Ixeifit p jol-, ip1,s ;tw1d the pr feeti<-l dillicultiv, ,ii-
clinteaIl in ;o--,--intl. i pati,'t's- ability to pty have 'coIll.bined toe
suqlh-t;ntia~lly reduce tile ut-c. 4 slidlim- >.,.ale~s.
lhiiy-i i teon -ft thl fc'- they ,.hir(. with'l thle help of ; "relative
value sc-C.:1,," (R\S). l\'S's .tre '-tbli-lid by medical .societies, ultd
are intendeld to how the relative -value of thle v rio,6 servicee, pliy-
sicians perform, takii... ;,count ,f the time, skill, mind overliead co.'ts.,
ithat -'\c('' reuslire,. As.. ;i praclica.l matter, however, RVtS'1 atire
l.,,.,,ly l -., l on ti e rel.liotn-lhip- between liet, fees-. actu, all" bein2o-
chalr.Ld for the various -,r\ic,- bv the Medical Society members.
While ba-,,,d on fee da!;., R\VS's are ..tated inl tms';, of abstract
n11mtll rs-e. Y., a roliitne, fllow-up oflice visit might lbe valued las 2
units anld a copn~lrchensive 1 physical e.x\;tmiination at 12 unit-. The
phy-icia converts th-e abst'ct values into fcc-. by mutilltiplying
them by a dollar amount, C.tled, a 'ConVersion factor," thllat will
pIroduce lthe level of ft.,- hle wish-., to cllat'ge. For example, a-sumthlil
tit, above rel;ative valuI-. th0, u-0 of a conv<,r-<.n factor of S.; would
'e-lilt in fee- of SO for tlhe routine visit and s:;6 for the com prclhen.ive
(xaiimiationl. A .4 conversion factor would produce fee- of .S and
-4.S re-pectively. Once an a)pprol)priate conver.-ion factor i, selecteld,
it can be applied to the large number of procedure-. a phy.,icia1n per-
forms so as- to achieve a rantionial schedule of fee-.
The R"V'%s are not bindlidig on phY-iciall. but their c -e i widespread
1)ecaI i-C they provide a coni venient ;Ilt systematic method of pricing
tlie thou-anlds of dliflerent medical .-er\ ices phy-iciaml, ful-iri-h.
RSV's also simplify fee tgo()tiations that take place between piiy-
siicals ;adt m((dic;il care pu'rchasers-. In recommle lliigll tihe u-.e of
relative value scales in 19159, the A.MA Comllmitte('. on 'ldi;ll Practice
s1, ited :
Ulte-- 1 [rel:,tive value] studi.- of timi- tyl'1, are liable'
il thIe very er future i d, ai(do)pted by the medlica.l pJiof'e,-,ionl,
ed,,liine iruns tlhe risk of atliilltinll_. public opilliolln and lo.ilg.
its blwa,- .i 'i;i pil-iti<.i withi other d agen'c.lwit-, private 1and!
g>ove',-1rtn(ental, \il Iicli ;:re emga2te in fiiaicimg thlie c1-t of
('i ic le t, if 1i eied ilcne d1,'- not ill,.rlIsild ke lfii-; activity, it i1a1Y
IW l(I)o e oti. ) lers whi, ,re ii0 m cliu le-- (j uI ified.

Although fee-for-service is by far the most coninimon imetliod of
paying for patient care services in thle United States, a -ignificant
number of physicians are paid( onl other bases.
Salary is the customary method of payment in government liospitals.
Salary payments are also often made to department heads and other
key physician staff in university-affiliated liospitals that car'v out
major programs for the training of interns and r',-i(ents. The.-'
salaries, which can cover teaching, administrative or resIearch activities(
as well as patient care, are sometimes supplemeniited l)vby fees that tlie
salaried physicians receive from paying patients. Re-idei(nts- and
interns, who themselves- are usually license(] physic('ians tl ho provide a
o',.',t deal of patient care as part 4f their raining experience, are also
paid a salary (called a "stipend").
Some physicians who work part tiie in hospital outpatient clinics
and emergency departments are paid on a sess-ion basi,-'-a flat rate
is paid for each se-ssion witliout regard to the exact number of hours-
The method of payment to pathologists, radiologists, an(l other so-
called hospital-based specialists has been quite controversiAl. A major
issue in the debate is whether both the physician and the hospital or
the hospital alone should bill the patient (or his insurance plan).
Traditionally, the hospital has billed for lab tests and x-rays and paid
the hospital-based specialists in accordance with whatever financial
arrangement the specialists andl the hospital had negotiated. Because
it is usually the hospital that supplies the department's equipment
and technical personnel, the payment made to the physician u-tuallv
is only a relatively small proportion-say 20%cc or 30%7-of the total
Over the past 10 years, hospital-based specialists have made a
vigorous effort to endl their dependence on the hospital for their
compensation. They argue, in part, that they, like other physicians,
should look to the patient for payment because it is the patient who
benefits from their services.
Salaries are a common form of payment to physicians in group
practice, especially the younger staff members. Except where the group
practice is operated in conjunction with a prepayment plan, fees-for-
-eIrvice are charged for the care that is rendered.
Psychiatrists in private practice are also paid on a time basis-
typically, a flat rate for a 50-minute session-.ince the time spent
with the patient is the only service that can be easily quantified.
Many anesthesiologists take account of the duration of the procedure'
in determining the fee they will charge. (Of cour'-,, the duration of any
doctor visit is an important consideration in setting the fee although
the time element is often implied in the d,-criptive terminology rather
than stated explicitly.)
The capitation method of p-iyment has attractedd public attenlti(-n
in recent years because of the increased interest in group practice
prepayment and health maintenance organizations-. Under this
method, phy-sician groups are paid on a flat rite by the insm-ing
organization for the cal, of each patient for whom they assuriee
responsibility Capitation is favored by group practice prepayment
plans becau-., it is believed to be more conducive to proper utilization
tanld preventive medicine tliaii fee-for-service.

T'he-e ai'e celelittent (if '.lapi t tioln" inII the i 'etainTer aZp)PloarIlh to
p:y itng 1)11y-nir' ttL-. ntil l'tIrecentlv, re'taaincr fce- were riarel.v paid to
)plIy-i i Ain-: -, ine I I llri-t-, for exaTlIple(, treit their paItielts; for a flat
rat'1l, 'r ilMonitlhi ale'dl'Ir (i'Iurter. ] however, as will ei (Iis-ilss-ed* in
Ill-l, oiln(l1thll ('itpital1(iio pay ent-s alre now provided] arnler .ed(i-
(,;ire Ivo ll '-iy'icii 1- Wii I eleV't to be paid Ion (Ii- baiti-. fo(r (e'Italin s-erviCes.
tli'y providlC illi'vr thel Reiinil Di-(o' -te lPr(vi-io i of thie 1972 medicarere
legi-lal t~in.
B. tiL''r, at 7i, Wiil .) ,. // ]'ract/C( X
1. r',,1,Ii l<(ivlt In,,i/ Ium 1e Plan.,' and f'"I' -r-,irc.-CoIlliiCer.i,6il
1h;iltth iit-tira.1itC', Blue ,licll plitiis. .edi:ii[, Medi t hini l)r'tie- pl; willow Tile niiixiliiim allowl)dle fee-t may be e-tablli-liedl in the frame-
wk (of a RV"S, witli a (on\versioii factor lde.,rined to paliy Inos.t fees in
fill ()I in p.i'rt; alilerniatively, the allowable fec may be set so Ias to
p)rovidle 1)etter covr:IUeV from, -,ome .ervice-.e llhit otiliers.
'I'r;itoitionally, tlie iln-lrer lil*a li->ted the iimaxiinu ni anmouints payable
for ili4lividlial -ervices. in a publislled( fee schedulee Fromn thie insu-tirer's
standIpl)(int, the inmajor iadvantaage of a fixed fee -'cled(llie is that, esti-
nilmate-, of p1)ayouit, and of the premiumi required, are le-;ss subject to
rl,'or due to iiunexpected fee incrl'Ceas-,. Also., published fee .cheduiles.
are (ae ,for patients and physiciantis to und(lerstandii( and ea.y for tihe
Jils ralni 'e OLrtI Iizatio1i's to liliIlinister.
On I lie other lizlnd, health in-ilraince plans with fixed fee schliedule-,
offer no a-ii'ance to purcihas.ers that the aliowalile fees will adequately
<' ov('e their Iledlical exle)ti.-(,s. And :-ome fee >lche(ldlile.-, have in fact
fallen far beliind p)revailiig fee level-.
Trzidlitionmally, Blue Shiel(l plans have protected( low-income sub-
-c('il)c i-. a il-it inzadlequate fee schedule- by requiring, participatingg
phly-iciani-," I to accept the plan's allowable fees, as pail-Ylent in full for
)patient, with incolme- that fall below the level specified in the policy.
But Blue Shield(l sub-cribl)rs with incomes above the specified level or
wiho .o to a noijpnrticipating physician, and patients with commercial
health in-ltIrance, hlave been responsible for nmakilng up any differencee
1)etween their phy-icians' cii largest and(1 the plan's allowable fees.
In re-ponl.e to the demand for better protection, insurance organ-
izations developed heallthl benefit plans beginning in thie 1960's that
pay ;a pIysiViai's billed charge in full if the charge: d(loes. not exceed
thie billing physician's u-tial fee; does. not exceed thie amount that is
cui-tomarily billed for tie -ervice by other physicians in the area; and
if it i, otlherwihe rea,,oiable. lHealth benefit plans tliat set allowable
fee'* in tii-, miailne' a are called "UCR" (i.e., usual, ci-stomnary, and
i'':i- 1)ii1i l(') plans.
Tlie UCR plans developed by Blue Shiel(ld halve usually set thie upper
limit on the fce., they 1nonalvly allow at the 90th percentile. In some
(C'a-.-, tlhe 90th peitr'.ittile is applied so as to assure tliat at least 90
p'rc(int ,of the billk beinltr sbmitted will be paid in full. In some cases
it i- applied o( that at lea-,t 90%' of the phyicians. in the area will have
thi.l" p.cia igs allowed in full. Other plans set their allowable charge
limiits ligli el(oii1li to satisfy both of the foregoiig requirements.
A "Ai;irliviiaiting; phy-i'i;in" Is one who hn, agireeil to abide by certain Blue Shield
I1,liis iiijad. in r-tirni, is. paid directly by the plan.

Because fees at the 90th percentile can represent most of the highest
fees billed, the result may be that well over 90 percent-perhaps even
all-of the billed fees are allowed in full.
Today, the major national Blue Shield accounts and many of the
plans offered at the local level have adopted the UCR method of
setting allowable fees. Unlike the older plans with income limits, the
Blue Shield UCR plans require participating physicians to accept
Blue Shield allowable fees as full payment regardless of the patient's
income level.
Commercial insurance company UCR plans vary depencuig ,,L
company policy. Generally the commercial companies do not screen
claims against the billing physician's usual fees. An allowance is
usually made in full if the billed fee does not exceed the level prevailing
in the area.
2. Medicare Payment Policies and Fee-for-Service.-The physician
reimbursement provisions of the Medicare program were modeled
after preexisting UCR plans. Under the original 1965 legislation, al-
lowable charges (called "reasonable charges" in the statute) must take
account of the physician's customary charges as well as the level of
charges prevailing in the community and they must be otherwise
reasonable. The UCR approach was chosen in order to give the elderly
access to the same quality of care and afford them the same freedom
of choice as most younger people have.
In the early years of the Medicare program, the 47 private insurance
organizations that pay medical claims on behalf of the program gen-
erally applied the prevailing cha,'ge limitation, defined in terms of the
90th percentile, in the same way as under private UCR programs.
However, unlike previous UCR plans, the carriers were required to
keep records of the fees charged by individual physicians and enforce
the statutory requirement that no more than the physicians' own
customary charge should be allowed.
During the nine years that Medicare has been in effect, the method-
ology for calculating Medicare allowable charges has been sub-
stantially refined and modified. These changes can to a large extent
be attributed to the dramatic physician fee increases that took place
after Medicare went into effect: during the fiscal year 1966-71 period,
physicians' fees increased 60% faster than the nonmedical items in the
Consumer Price Index. As a result of a succession of administrative
rules and 1972 legislation the cutoff point for determining "prevailing
charge" was reduced from the 90th to the 75th percentile. Also, policies
were prescribed for the updating of allowable charge screens that pro-
vided for a delay of an average of 12 years before an increase in a
physician's customary charge would be recognized by the program.
Reflecting the Congress' concerns over rising physicians' fees, the
1972 legislation specified that, in updating Medicare allowable fee
screens, the prevailing charges for a locality could not be increased, in
the aggregate, in excess of levels justified by increases in physicians'
office expenses and in general earnings levels. The basic idea behind
this provision was that Medicare payments to physicians should be
kept in line with trends in real income. As a result of the Economic
Stabilization Program's price controls during fiscal years 1972, 1973,
and 1974, physicians' fees have increased at a slower rate than their
office expenses and general earnings levels. For fiscal year 1976, the

i( I.x iIr, lIn- bet -ct W ii at 17.9 1" '1 iiIeaI I that 17.9%
is I ]We ItIIxiTIIIIIII allIwal )le ilCn'lez s iii any prevailig charge tlhat will
1( 41ll owed' for fi-s.l year 197I over lti pivrevailiiig cliaZr, v.,s- e-.tablislied
fr the s:i1e -servie arid lo'lit il the baet, year of 1973.
Tl'e inref,-sll", rn-t ritiv,.le,- of the NMdli,.re, allo-v able fee iolivile(,
includim; the alplli,:,li,,n of c.,.tain special Ecooic Stabilization
Prog1'ra" ,'-i ilrol-' lilt l mnger ill effe.,ct, :,,- -s. a- neD es, arW il view of
t1n' i'ii'a-e- ii j)lisi(;iH1-' fei- that iavc take il plave -iivv tlie
(irI,.:,NIII I ..:,. Fir-t, by lilmitin,'r ;1o1( \a le f.e-., I')w'"I, i1i, r(Ost-, Ire
,.'liu e'il: this lienil-its tie 1 eMedic.ii+ b.ii fjci'iiry ;- wa \(,ll ;-, the taxpayer
-ill( t, the<.-til -'e ,,tof J tile NheliCAi-re P)t 21._rt,11 ( Pairt B) i,
fi( :li,'eI o1it 4f iweiliiii1il- Ip iiI b)y tlie aitrIl ;s-' wll a-. .lCIeral rt' vIn llel-..
Limiiits'on allow w mi1c,'- (ls() ri1 hielI) (li ilx,, ff', iiicreI-.e-; )yv
strciiLrt lietni ii l t 1)eifiri8N pl-c-liir(- on phy-.iciai to kevp tlieir fee.-
\\ithinI co--cfI', lilyits. !"''v- "re 1-14 dami0,nd to the extent th at
lplisiv i.l-iii w-. SL.Ice to aeeeipt ;i-U~iie t.Inder t~ill, pavinvllt iietliod,
tie p1ivsieid!) ;L-rn'cs to acce|)t tlie allowable char11iige a' a e ii1 full
anld in return lie i- paid dlir'etly by the program. Ulinlike Blule S'lield.
Mledlicare l)erlits tie plhy-i'i;;, to accept a--ig nents on some bills
11 no1 t others.
It shlioild l te recLX1i/.(,d tlia t l)olici(-, that re-ilt ill )aVililent of less
than tile uroiing l)rice C,!). in -omlne ,;..-,-, di-( ourle pIroper utilization
of -,'., or tend to limit thle choice of practitiolners to tli)ose with
low eItr ,-.It shifts the burden of paying medical c-,t-, from the
plogramII to the patient. This occurs becaue- e phy-.iciais- who refuse
:s-si--lg ent 111av1 chargNe pati(,nts more thain the amount- Meldicare
will allow. It should al- i be not ed that ph-yicians are le-.- inclined to
C,.(ept a--iti nlents as the allowable charge-, fall further below p)revail-
ing levels. The increainw retri-ctivee-.- of Medicare fee policies,
including the application of the special Ec()nomic Stabilization Pro-
,"ram:I controls on Med.icare fee allowance, were no doubt at least inll
1part r-p-)on-ible for the decline in the l)peire''tage of MedIlicare bill,
paid uniler the ass-i"nment method from 61.5 percent in 1969 to 51 9
p)er(n('It in 1974.
3. ledicare ReiUtb ,.s fur Renal Dialysis.-Med ica re legislation
enacted in 1972 extended ,t,)ver'ie under the program to .,ubst-tantially
all er-sons, reailrdle--, of age, who require tlhe use of a-i artificial kidney
(renal dialysis) to maintain life. R(ec.gnizing that there would be 1o
valid non-Mledicnire market to help set prevailiig charges-; for renal
dialy--i; at an alpprpri)Piate level, HEW was authorize'I to relate
plhIvsiciaIs-', pavi len-"ts filr the service,. in questionn to the iretlsonable
c ne) of the iml)ori lnt innov:ltions developed under the policy wa,
lie so-cal!e(d "o'pn)rehensl-ive reimbuill.-'ient" method. Ii-. method
pvi(ld- for a fixed l li ,llllv p)ayilenllt to be mailde fmr all
ervie',-. furniheid to I (dialysis paltient dulringr a monthlli, oItlier Ilanii
;inwaieit lJi-pital se1vid- aid -s'rvic.. not nl'ihteIl to the patient's
r'Inal pl e), Ii that [''e lire- ,ex- r:a visiits. ( ,.-,',! ble, c i'ages- for tlies(e
1Litter servi( ,- Imay be b.illcdl sel.,' tely.) '1 lie ,,Inl)l',lw'i-i've p alyilelit
iietld,,I c(ii only lhe sed ty ; ph-i,.i if if he, and( the olher plhysicians
in lany ref ll di:tlwi- eiii il hil lie winy l1v p icce, i'(' to u-- it
il 1 illill..r for all their re'i patients.

The amount of the iinew cOml)rehlensive I)aymeniit for patients l)being
dialvzed outside their home is calculated with a formitla which is
designed to produce an average physician charge of $200 per month
that varies from $160 to $240 dlel)endinig on the level of fees for
similar services in the physician's area. Specifically, the monthly piay-
mient is based on the lesser of (1) the amountt dlerivedl byiv multiplying
t~mnsts l~reva llg arOges in ali localitijes
the arithmetic average of interests' )revaiing carge in all localities
(for months up to July 1, 1975, not to be less than $8 or more than :"l2)
in the carrier's service area for follo\wuip visits by a conversion factor
of 20. (With a minimum of $S times 20, or $160, and a naxim1num of
$12 times 20, or 4240, the -amiiounts of the IllolthlV, 1,)tlllellt'- wil\I
result in a national average cha-rg, of about 8200.)
The patient on home dialysis, of course typically requires le-;s in tlhe
way of physicians' services alnd the formula HEW ihas developed for
paying for these services under the comprehensive imethod yields a
charge that is about one-third less. The formula for the home dialysis
patient is the same as for the facility patient except that a conversion
factor of 14 is used rather than tlie factor of 20. A physician who does
not elect the comprehensive method inay bill reasonable charges for
any personal, identifiable services hlie may render such a patient.
In effect, the use of conversion factors and followup office visits
for home and out-of-home dialysis yields a reimbursable imontihlyv
amount which reflects an averaging out of the frequency and kinds of
services that the physician may render to stabilized patients on main-
tenance dialysis.
Similarly, the reasonable charges for renal transplants are related
to the amounts being allowed for a different service whose price has
been set in the medical marketplace.
Aledicaid Payment Policies an d Fee-for-Sercrce.-Thle original
Medicaid legislation, enacted in 1965, dlid not place aniy limit on the
physician fees that the State could pay under the new program. Of
course, the States did set limits of their own, typically less than usual,
customary and prevailing charges.
The Social Security Amendments of 1967 added a requirement that
a State Medicaid plan must provide assurance that "payi nents
(including payment for any drugs under the plan) are not in excess of
reasonable charg-e-' consistent with efficiency, economy, and quality
of care." In 1971, Federal regulations were issued that provided that
payments to physicians and other practitioners could not exceed the
"prevailing charge' recognized under M.Iedicare. This regulation was
subsequently embo(died in the law by legislation enacted in 1972.
Some State reditcaid programs pay physicians tlhe same amounts
as are allowed under e Iicare Most, however, base their payments
on fee levels that prevailed during an earlier period than the ed'icare
base period or set the limit on physicians' payments in rellation to a
lower percentile than MedicalCre. in some cases, the State makes f'urthler
reductions in the amounts payable in order to brig program costs
within budgetary restraints set by the State.
5. Jlospital-B.,/l Pyscians.- ospials retail) physicians. to) carry
out a wide variety of activities for the institution. (Comipensation io'
tea;iching and administration is generally paid in the form of a salary,
whichl is reimbu'-ed by- Blue Cross and other third parties on the same
basis as other covered hospital costs. Similarly, hos'pitnl benefit

)r,.i ii s- .,inis(-t u iversall rei rse ho,-iital for thile service of
re-i.dlit .s ;i'l ilntett-. oil tile -.1111o' )11-i- a1- other covered hlmo pital
-- cl\ li'r",.
.n i<' s'liI',id pl'yiui.w att ',(nd patient-. Wlile tllhe'-,e -ervice. are
I-Ii;illv c(o e)v',,hl il thle 'aLe)' I ),. ]a-i; a t hIo,-pit IIal service in some
:i-,- iilv\iviiL! p)rivt pa)itiets, third p)rltie- will recogIliz, separate
f I'm,- for tlir -.. t.- to )pa11,ti-t. S i1(e -.laried )hy ic.ian11 have
,t:-,ItVtW'e tt1 und,, wN lii.l, t,, h,,-spital. : p y-. the a V.i, for teac'll-
i1t'. ill tii tiil i-trl'tit ,ii .t111d f lw' -rv a, l v',c' to () 11 ilt ilil I liinitedl
private pn,'tif. and U I -(i:ili -(mile or all of tlhe f(,.-< tilev collect. 'hirlI
])Utic- L':ie'r1 tllv re,-j)(l(d to tilt ie-( aIrl' ii2 'II) ('I ts bv rcl'c() lizilng tlhe
to tlv iI\ r ec(t1 ) ,rIt. i zitlg tile'I<
f,'- ('Cli trLtiT for s1'Viv' .' to priV'tteo pI t iits and r"ei ib)irsim tlh luiw-
pit al for ti,' -alairied a;idiiniti-rativ ;t e a Idl tv'-hiiiit activities'.
-Cn complex irI lr..ielts, lave a lare(, pot'ilital for (Iplication
of py): vm,'l- by third parties. For example, without careful claims
;il1iiiiiii-tir;itioii -ild (] cloe coordiliiti(ion )etweel payo) r mneclmani-iuns. a
visit by ; varied pi-.ici;mi inlliit1)e palid for twice: )by reimilhursing the
ho-i)it I1 for its cost in compei0-9atiirj the phv'iciaiil; al(d also l)y piyin
a fee for thle meitcdi,'al service Tlliis pioblem liUa beei (iiite serious for
the Me- (licare IproI g 'n, wllere e'Ii-ii h-iciat ^ have soimetime-s
filed for medicall t.l'vices rendered byI\- re-itlents and interns even thougli
the 1)]i-yicia;.s, while re.-)pon-ible for the patients, had not been
pvr-oially involved in providing the .ervice. It is possible in such
c'-'- forl triple reimbur-ement to b)e paid for tlhe .a me service: payment
to the institution for the -.ervice.- of tlie resident; payment to the in-
-tiiution for tlie -ervices of tlie alatried (l supervising" physicians; and
a fee for th le medical service tl at was rendered. Substantial over-
1)pay cits-sl million in one hio-spital--iave resu-lted.
The pre(i-e criteria that should be applied in determining when a
.tii)erviling physician's involvement is -tufficient to warrant a chliarge
is still the subject of coii-i(lerab)le controversy. Legislation enacted in
1972 to (clarify tlhe concept of the private patient for whomin fees should
be allowed wNas amended in 1973 at thle urgi rg of the teaching hospitals
to defer its effective late so as to give the Int-itute of Mediciine time to
study IIEWV's propos-ed implementing regulation -s and report on their
impact on teaching hospitals. The report is due in March 1976; the
new effective date is July 1976.
A second major problem area concerns hospital-l)based phys:icians,
who bill on a fee-for-service basis, for services which involve a large
institutional input. For example, a clinical( laboratory test is ordinarily
carrie(l out by a 1-iospital technician Us-ig hospital equipment on
hospital pre-,nise. The teohinician works under the general sIperviio1
of a pathlolori4.t who, while not directlyy involved in the individuals
test-, is responsihle for the operation of tlie laboratory. Tlie physician
may work only part-time, depending in part on the size of the hospital
,and the availt ability of PMI.D. scientists to hare in the -lpervision of
the laboratory. In the case of a small hosp-)ital, tle pliysician mnay work
in the laboratory only a few days a montli. Since tlhe amount of
p)Ilyician-inlput cann vary so greatly from ho-pital to hospital, it is not
p)os-ib)le to judge the rea.olableniess of his charges for lab) tests by
comparIlilg tl'hem to tlie fees charged by other patholo thgi.t-. Moreover,
even if two pathlologi-ts with identical fee sche(lules were to work on
i(lelitical sche,(ltlles, one could receive a much ]igller income than the
other depending on the number of te:t-s performed.

Similarly, an anesthesiologist can maximize his income by utiiliziniog
3 or 4 nurse anesthetists at the same time and bill for his supervision
of their services on the same basis as if hlie had performed the service
Because of these different variables, third parties have not been .ible
to develop easily administered( techniques for judging the reasoniable-
ness of the bills they receive for the services of hospital-based phy-
sicians where the phy-sician serves lal'gely as a uper\ i-or of residents,
interns, or other hospital personnel.

A. General Background
Nursing homes, unlike hospitals, have no long established history of
third-party reimbursement. In fact, until the advent of medicare and
medicaid, nursing, homes wer largely reimbursed either directly by
patients and their families or by welfare agencies on behalf of the
needy aged. Payments were generally determined in advance on the
basis of charges established by each institution or on a negotiated per
diem rate basis. Private health insurance coverage for nursing home
care was almost non-existent, and even today, such coverage remains
extremely limited. Currently, public sources and private out-of-pocket
payments account for most nursing home revenues.
The Federal government became actively involved in paying for
nmirsing home care with the pas-:ae of the Social Security Act in 1935.
That legislation permitted monthly assistance payments to be used
to purchase nursing home care for the needy aged. In 1950, the Social
Security Act was amended to authorize direct "vendor" payments
to nursing homes providing care to aged welfare recipients. The 1960
amendments expanded the benefit to permit vendor payments on
behalf of the "medically indigent aged." With the enactment of
medicare and medicaid, however, prior reimbursement policies were
significantly modified.
Medicare and medicaid are now the major purchasers of nursing
home care. Their policies and procedures, developed over the last
decade to pay for such care, currently serve as the standard for reim-
bursement. For this rea-on, the discussion of current nursing home
reimbursement practices will be limited to medicare and medicaid.
B. Current Reimbursement Practices
Nursing homes participating in medicare and/or medicaid are
defined as "skilled nursing facilities," and the care which they provide
is defined as "skilled nursing care." Although both programs share a
common definition of these terms, the methods used to reimburse
skilled nursing facilities (or SNFs) are not always alike. Medicare
reimburses SNFs, like hospitals, on a reasonable cost-related basi-
which is uniformly applied to all participating institutions of equal
class and size. Costs are apportioned between medicare patients and
the rest of the patient population to determine medicare payment
and to insure that neither patient population bears the costs of the
other. Proprietary SNFs also receive an allowance related to net
capital equity. Under medicaid, however, each State is free to choose

its owtl r'iiiibtlr-t'tl'itt applroch'm i wlich caIn be a-,el either oil cot
('Ir il r P ieliill o w till lItI ly rly t e- -t :1di-llel ill adl alIce.
I. .Alf,;'nare l,';Inhar.iI 1M 1 tf t .I')l/ ,/lo .\,1.; A I / I"F/C;lr.7/ ..- MIedIica re
11-0 ( WIIIo1, 64aor v.)ri: Ilou- If tI II W ( 'ACI cI 1-t apportioIIIIIeIIt Ystetvm
to detetrivneII i the in-IsI of -killed IIvI r-IIilI g u a Pie provi dedo I med I ic It re
, tfi,'iri,-, lKno\vww I tlIe, "rv,%i. ,ed (.()!II biInatio(I,1" ;t1 d tile "revi-ed
dep. 11-1 111v Iet hod- they vdteorm iine mtedi'are'" paym\'netnt by
;I ppi'll' i ,i :) veIr'Ige per die, co -Is of rIutitle -..ervi', ;t d tthe o't.s
f i, :I; itlu lry I rv'-i s Il,'Iwvt'l i edliC '.l'e I)T P tieilt-, aind tl1c rie-t of ttIe
p. hi,-lit p.,p tl:ilioiil. The c-(iibiiio;ti m t h 1,d i- a;)pli(ed to till NF-.
I'l, ,._: l 4;r l ( of -i/ It ;i 11 ill h ,-l)itit -SNF co)n Iplex,- with fewer i ll I in (10
l'I-; \\liie tlie (le)i(,t idt <4 t;i l t tift llio l i- lp)pplied to all lo,-pitadl-SN F
(omphplx,-, witli more litin 100 bedl-;. Routiitte vrvive, ill 1 S..NF
iii suplIil- iI(lI eqtipImenlt rl'III 1vd to llie tlI.y-to-idIy ;Lret' of tllI e pat ie t.
AY tcillairv -erv ice'- _elicr'lly include any other -e t r\ ice which is 1 idt ntili-
:i1 le, iedici1<;lly,--,Iry, anrd furii-ihied to a..1 indlividual patienit
;icod'.1.i!ll, to a phd ysi.tciai's The I 172 tin.icnidments to the Social >Security A't milthorized the use
of a State's nIl dica'id rate-.. whien reiiiibur1-ini a S NNF for iare, provided
t o netdie'a r'' 1t efiia rie- if St a t e compute '- such rate' on a retasona bly
c,-1-relled t l'-i, which is acceptable to tlie SecreltaryT of Healtih,
ltll1ii,'liofn, Ilnd Welfare. IHowever, this reiibimr-einent a pproalch catl
only be applied to SN l's on a total (clas, size, or other appropriate
)a-i-. not arbitrarilyv to individual institutions. Al-o, when applying"
this reibtbu1r-ement 1metlliod, l ('(ldic:lid rate-, may Ibe adlju,-ted upward
(not in excess of 10 percent) to accouint for factors relating -to medicare
\whit ]I are not included by the State when computing miedica'id rates.
2. A1< ,; ;.1 Re imb r.( ,n f of SA;l!, ,1.r.u';. .lacil/is.-Me(licaid
eimmurle'-(, SN XFs according to policies developed by eachli State.
Feder l ,regulations r'ecommiend reimbur-c'ment of inmstitution-s on tlie
ba-i, of re;i-onable costs-;. Ilowever, each State may -'.e its discretioll
to developp its own reimburseminent appr,,ach based on co)-t or on fixed
or negotiated fee,. Currently, Statie reintb)lr-l'el-ent policies are -bihject
to only one Federal requirement.. Ain upper limit must be placedI on
pay4 IIIents to SNFs for care provided to medicaid recipients. Thi-
*"upper limit" is defined as "custo-iao v charges which are reasonable,"
which is 1a7lo thle limit placed on payment-, to SNFs for care provided
to me(licare beneficiaries,.
An exai.inaition of State approaches to SNF reimbursemnent under
,medicaid clearly f-iows the variety of minethod1- developed to compute
payI NIen I Some Stat e-, comIlbine r 'eiiibiIr-eiI't uvet letIolk. For exami ple,
one SIIlt ie la- et ahli.-lhed a payment ratie for (alcl SNF individually
onl the basis of rea-on able co-st. However, that rate cannot exceed
tlie leh,--Ir of medlitdcre rTa sonal)le c()-ts, (charg('t to lite gelieral public,
or a -p)ecifie(l dollar anmotunt. Another Staite (determinfiie- payIieleit
accortii itr to a ner(otial (ed rate based o1l averaJe r medlica're co-t-rel lted
p)atyments to SNFs, minus the co-.t of providing :-ervices lhat are not
covered 1linder It edicaid. A third pay a per dlie fee b1;-.ed on rea-0li-
able cr(-I-s ais determined by the Slate's rate .ett igill comliliss;ion.
Ili cont rast, other Sitates -et maximum flat riate- or e.stabllish rate
s-chedle,-. (O)te \will reimbur-.e a SNF accumrlding to a miiaxinimi ioitlily
ritte p'r pI;itieitt. Another ,-tabli-ll(e- a maximtu i daily rate schedule


which limits payments according to the number of licensed beds in the
SNF and permits an all-inclusive rate to b)e establislied( to pay for
additional services which are covered in(ler t lie State's I)laii and are
considered medically necessary.
Effective July 1, 1976, all States will be re(tqulired to reimburse
SNFs on a reasonable cost-related(l basis for care provi(le(l to m(e(licaid
recipients. States will remain free to implement their own reilimblirse-
ment approach as long as it is reasonably cost-relatedI, andl acceptable
cost-finding techniiques are used to compute payments. Ilowever, any
such method implemiented(l must be acceptable to the Secretary (of
Health, Education, an(i Welfare. States miay also choose tlie option
of reimbursing SNFs according to medicare reiml)bursement forimilas.



(Chief Sponsor: Representative Al Ullman)
Payments to /Stanidards .for Proiders of Serrvcs.-State health (om-
missions would be responsible for d(etermniing premiiumi rates to be
used by private insurers and Health Care (Corporations for man(lated
Comprehensive Health Care Benefit packages. SI(Cs would also
approve on a prospective basis all charges for services provided by
HCC's and all other health provi(lers, whether or not affiliated with
an HCC. State Health Commissions would review the activities amn
performance of HCC's and non-affiliatedl providers to as.-ure that
providers were meeting their obligations undIer the bill. Federal
regulations would prescribe methods to be used in (leterminingl
reasonable operating costs and sufficient capital payments for HICC's
and institutions; and reasonable fees, salaries, or other compensation
for individual providers or groups of providers. The Department of
Health would also prescribe standards for providers relating to quality,
safety, personnel, etc; as a minimum, providers would be expected to
meet existing 'Medicare requirements.
A health card account would be established by an approved carrier
for each individual enrolled under the carrier's plan. These accounts
would be similar to credit card accounts and would serve as the basis
for reimbursement of providers of service. Payments would be made
from these accounts by carriers directly to providers of service for
covered items alnd services at the applicable payment rates approved
by State Health Commissions. The providers would be reimlbure(l the
full amount of the approved charge and the carrier would then bill the
enrollee for any applicable copayment amounts.


(Chief Sponsors: Representative James C. Corman/ Senator
Edward Kennedy)
PIayments toS/tandards for lProid, ,rs of I(ealth St rr;ces.-Each year,
a national health budget for the coming year would be established.
The budget could not exceed the estimated total receipts for that year
from Health Security taxes and general revenues but could be modified


if I telr e-tilliate of(f program experience ind(licated that tax receipts or
expe'il(litures dliffered ,ignlificanlty v from tlie estiimates' or if an epidemic
)rI -i Hil:ir Uve('Ht requliredi hiiger ex)pendlit tires.
Flu id- Iwmuild N)e allocated by tie Board to) each region on a per
(apita ham-i- for in--titution,, pysician- 'erXice.-, dental services,
I i. :tl)pliallice-;. andtI oloer pra fess-ioial ad liise.llaneotius services.
Re,,ioalml funlldl- wmuld )be further allociiteld ot a similar per capital
h,.'Pi-s to tlIe cal he'allth service areas. Authorization is- provided to
eli iiiint Iitl wiarrantedtI tliffe'ences in averae costs o(f health services
2ii i(ii' tlie region- by (c tailing increa-ey in funds to high expenditure
rc.(i, .1 :11iid iincrea-'iig tlie availability of services in low expenditure
'"'-I ~ ( 1II
Providl(- of health iservice- would be compen-;ated directly by the
I l 'lth Scurity Board; individuals w-ould niot be charged for covered
,Tvi,'-. I l-ial-11, n11rsi-l lj()IIic, and liome hea(Ilth agencies would be
p)aid ( II the ba-.i- of approved prospective bu, Igets de-signe(ild to pay
r'. -,nable ,co-t-. Independent practitio-ners such as physicians,
dientist-, poliat ri-ts. and optometrist- could elect to be paid by various
mnethoil-. ijicluling fee-for-,ervice, (capitation, alary, and supple-
1met tal stiipeids for a practitioners locating in retuote or medically-
deprie I area-. A me(lical or profe-ional society could administer the
fee-for--ervice reimbursement on the ba..,is of the sched(iiles or relative
value -Icalvs pre-cribed by regulation.
Grip practice organizations and individual practice associations
would be paid a basic capitation rate multiplied by the number of
eligible enrollee.,s; these organizations, could then reimburse affiliated
provider., of services, by nmetllo(Is which they, chose to arrange among
t liennselvez. A group practice organization or individual practice as-
sociation would be entitled to share in up to 75 percent of any savings
which are achieved by reduced utilization of institutional services by
its; enrollees--provided (1) that the Board find-, that the services
furni-lied have been of high quality and adequate to the needs of its
(nrollee-; and (2) that the average utilization of hospital or skilled
nursing services by the enrollees is less than the u-,e of such services
by comparable population groups, not so enrolled.
The bill includes various provisions. designed to ensure the quality
of health care provided under the program. National standards for
participation by providers of services would be established similar to
tho-e required under Medicare, but more exacting. At tlhe start of the
program, independent practitioners would be eligible to participate if
they were licensed in at least one State and met the program's require-
muents for continuing education. For practitioners licensed after the
start of the program, new national standards established by the Board
would albo apply. A State-licensed practitioner wlho met national
standards, would be considered qualified to provide services in any other
State. Nurses and other health professionals would also be required to
meet national standards- (including a requirement for licensure in at
lea-t one State). 'Iajor surgery and certain other specialist care would
be covered only when furnished by qualified specialists and generally
only iipon referral from a primary care practitioner.
lIlo-pitals and other institutions would be eligible to participate if
they, meet national standards and if they establish utilization review

and affiliation arrangements. Special conditions of participation would
apply to group practice organizations and individual practice associa-
(Chief Sponsor: Representative John Dingell)
Payments to/Standards for Providers of Services.-The national board
would allocate funds among the States for each of five classes of health
services (medical, dental, hospital, home health, and auxiliary) on the
basis of population, availability of health resources and the costs of
services, as indicated in the State plan. The allocation would be
designed to assure that adequate health benefits are provided in all
States and to improve the adequacy of services where they are below
the national average.
The State agencies would contract with providers of care for services
under the program and determine rates of payments. The payments
could be administered by the State agency or the local health-service
area. Nonprofit health-service insurance plans could be used as agents
or intenrnediaries.
Hospitals and other institutions would be reimbursed on the basis of
reasonable costs. In calculating costs, the payment for room and board
would be based on the least expensive multiple-bed accommodations.
A maximum rate for hospitalization could be established (after con-
sultation with representatives of provider organizations) and it could
vary according to locality and class of service.
Physicians and dentists could select reimbur-emient under various
methods, including fee-for-service (based on a fee schedule), capitation
(with maximum limits on the number of registered patients), full or
part-time salary, or a combination of these methods. Specialists could
choose the same methods and, in addition, payment on a per session
or per case basis.
Rates of payment would be geared to local conditions. In deriving
the rates of payment under the various methods, consideration
would be given to the annual income that would accrue to practi-
tioners. Further, reimbursement would be designed to provide incen-
tives to practitioners to advance in their professions, pursue post-
graduate studies, maintain high-quality service, allow for adequate
vacation, and practice in areas where their services are needed.
Standards of participation for providers of services under the
program would including the following:
Hospitals and institutions.-Hospitals or institutions qualified under
States standards could participate in the program. If a State has not
established standards, the national board would establish them for
the State.
Professional Practitioners.-Physicians, dentists, and podiatrists
legally authorized to practice in a State would qualify. Specialists
would be required to meet standards established by regulation.
Nurses.-Professional nurses registered in the State would qualify.
Practical nurses qualified under State standards or standards estab-
lished by regulation could provide home health service.


('hlief )Sponl-or:( R:le)re-slt native R obert A. Hoe)
PI !// / S fi. .Vd,,la l.1.r.J, f, IPr,'r,' h r.1s of pr cfs.i.-No revisionn.
(Chijef Spono. l i-r: I arley St .igers. )
1/,/1/'ts to/S0 ,,ulards .for iro,,',i / *h.- of Sfrrfcf.'.-State Health
(ComIiiiissiions- would Ie re-Ipon)sible for (letevrlmining premiumii rates
to )e 1s-0d bIy l)private in-nlrers in(l l/or II.()'s for imaid1(latedl Compre-
hen-ive I leaIlthi C:ire IBewefit p;ick;i,'es,. SHC s woIu ls-()o npprovc
oil ; pr--)-pIl) cie l)ba-'i-' ;11 cli1,i, ,-', for -,'\i i1(ld all other heCilth i)rodvid.'rs. Slaite Health (C'onmiissions
would review the actliviiv, and performance of NHMO's and hiealtl
(-tire provid'r-s to I--.iire that p)rovidcr-s we're meeting tleir o)lilga-
lion- under thlie bill. Fe(leral regulatio,- would 1) methods(
to he ii-ed in determininur n-e.onable operaniting co-t and sufficient
(;tpital paypmlents for 1IN1( s and health :-'erviice iii,-.titutions; and
r I- ZI alde fee' -, la ric:, or ot ier compel ,at ion for in iv i iu al provi(lers
or g' rounps of providet-r. Ti DeI)partinvit of HIEW would also pre-
scribe standIards for pnvvid(lers I'elal i i.. to quality, a,,rety, personnel,
etc.; as a miiiinium, provider-, would be expected to meet existing
Medicare requirements.
Non-IlHMO provide,, would be reimbursed by private carriers the Comprelenm.ive Health Care Benefits- plan. L.IMO's
would be paid directly by enrollee- or by c'arriers contracting with
them on any appropriate prospective or prior-budgeted basis (includ-
ing capitation or itemized charges for specific services). After the
firnl five years of operation, an Il. OI would be required to provide
a complete prepayment option to enrollee-.


(Chief Sponisors: Repre.entative James Nfartin Senator William

IPan//i(',Is to/S1,Idr(,< for IPro ,'oicr., of s (,'.,.-No provision.

(Chief Spon or: Repri(e-(ntatire Tim Lee( Carter)
Pai.umis to/Standards for Pri,;tr,.. of 'Trr;ces.-All persons (in-
c (IhIlthlcard) which would be evidence of fimuiacial protection for all
cov(ere(d s(\ ice-. Par ticipating providers of .ervice, w.ou( l)e re(lquired(
to a,','pt the care as evidence((, of c(-ov(jrag( and would bill the inlicate(l
a a("rier for coveiei l \ i'ice-. The (rri(' w, ul( rei ibur.e the provider
;11(l would bill the enrollee for the ipplicable cg.t-sharing.


Providers would be classified as follows:
(1) Fdull-participating providers-would agree to accept reimburse-
ment through the Healthcard as payment in full for all patients
(EHIP, AHIP, and Medicare). To the providers, the IHealthlicard
would reimburse the full amount of the applicable reimbur-ement
rates (the in-uired amount as well as the patient's cost-sharing). All
institutions would be required to be full-participating providers.
(2) Associate-participat in. providers-would agree to accept reim-
bursement through the Healthcard as payment in full for all AHIP
and Medicare patients, and as payment of the insured amount of
an Employee Health Insurance Plan enrollee's bills. To collect tlhe
remainder of his fee for the EHIP patient, the physician would bill
the patient directly.
(3) Non-participating providers-would not be reimbursed from
any approved plan for services provided.
Physicians' reimbursement for covered services under the insurance
plans would be based on amounts determined after consultation with
providers and other interested parties. Physicians would be free to
bill additional charges to those persons covered under the Employee
Health Insurance Plan, provided the patient is notified beforehand
of such additional charges. Medical services would be subject to
Profese-,ional Standards Review Organization.
States would establish prospective reimbursement systems for
hospitals. All capital investment over $100,000 would have to be
approved by a State-designated planning agency in order to receive
reimbursement through the plans.
States would be responsible for certifying health care providers
as eligible for participation in thle Comprehensive Health Insurance
Plan. Providers would make available to patients information re-
garding charges for most commonly given services, hours of opera-
tion and other matters affecting access to services, and extent of
certification, accreditation, and licensure.
Carriers administering AHIP coverage on behalf of a State would
be reimbursed by the State on the basis of actual benefits paid for
covered services, less income derived from this plan, plus a negotiated
rate for administration.

(Chief Sponsors: Representative Omar Burleson and
Senator Thomas McIntyre)
Payments to Standardsfor Providers of Services-Preeint methods
tinder private insurance for reimbursement for services rendered
would prevail, except that payments would be limited to the 75th per-
centile of reasonable charges for professional services, and to rates
approved by State health care institutions cost commissions and HEW
for health care institutions. Increases in the reasonable charge for any
given health care service or article would be related to percentage in-
creases in the Consumer Price Index.
In reviewing the proposed charge-, for health care institutions in the
State, the State health care institutions cost commission would require
at least the following standards for each institution: (1) an active review


,(IM1mmittee of quallified plhlv.sicians and othiler p)er-oIlIel whllo wouIld de-
terilline whletlher llealttl care services renlIdered are of good (quality and
IeICe-'ary for treatment; (2) utilitization of' a taLndaLrd systeni of ac-
countling and costt finding establislied )y thile coinmii-on; (:) tltiliza-
tionl of thle approved chliargev for aill patient-4; and (4) a budget of its
x ) for each ti-wscal year, sinzig teli al)propved standard ,system of ac-
coutlintig 1and 'co.t finldilng, and established cliarges, for services reasoln-
a1)ly related to the co-t of efficient production of .,0ch services.

(Clief Sponsor: Represena tive Ri 'lard Fulton)
I IK'll. t. to Sial( lar.', fr Pror;d; lnq Sf ,';c.,-Physician,' serv-
ices would he reimburs;ed on the l)a-is of ''ii-ial and lclIst0mary or
reai-.(o.)Ile a" for covered service,-; p)ay'liIInt for hospital services
woulM lbe dleterlmined by an appropriate, State argeqcy, after (o-sllatio
with providler-., on a reasonable co'(t ba-i 1(1(der ".acceptal)le method(- of
rei ibur-eliclit, incln(lidig appropriate pro-p(ctiv'e rate determinatiOn
-,-t-rni-" (e.g. budget review, ne0(otinte(l a'te>, target rates, formula
ie)ztiation-, etc.). Other costs would be paid )on (citlher a rea-onable cost
or r1,.i- )l1Ibl)e (arge bl)asi-, as- appropriate.
'lhe Hlealt]h Instiirance Advi-ory Board it the Federal level would
co!n-ilt witli cirrier-, p)rovid(ler-. and 'con-1iers to panl review, an(l
developp prograi-s to maintain the quality of medical care aid tlhe ef-
fective utilization of available financial re-or'e-, health manpowVer,
and facilitie- t1irotunh utilization review, peer review, and other means-
provdlidig for the participation of carriers and the provi(lers of .ervices.

(Chief Sponsor: Representative Andrew Young of Georgia)
Paqmrnt.s to Stawlards'for Prr, ;der.s of Sr/'v;rc(.-The stantlards for
thle various payments of services under the program would resemble
those now u-se(d in the Me(licare program. State health agencies an(l/or
area health care services boards would be used to determine compliance
withl the conditions of participation for ho-pitals, skilled nursing facil-
ities, intermediate care facilities, home health agencies, health main-
tenance organizations-, neighborhood health centers and community
mental health centers. Payments- to instituttional providers of services
would be on the basis of a variety of prospective payment systems, with
incentive payments (called (Iuiality management payments) to
better performing providers; ,'s of the incentive pavymlent to a pro-
vider would have to be passed on to the provider's staff and employees.
Payments for the services of physicians and certain other pro-
fe-sional practitioners would be on the basis; of fee schedules- estab-
lished by the area health care services boards. Tlie scliedules would
have to be accepted by the Social Security Administration if actuarial
calculations showed that the resulting costs would not exceed those
actually experienced in a base year adjusted for chlianges in prices and
earnings under an index reflecting such changes.
Physicians who choose to participate in the program would receive
the full fee schedule amount (directly from tlie program for all services-
to all tlieir J)atients. In tlie cas-e of physicians, whlio do not participate,


payment at the fee sched(lule amount would be paid by the programni
directly to the patients; nonj)articipating physicians would have to
look to the patient for payment of their full charges, which could
exceed the fee schedule amount.
For all other covered items and services, payment would be made-
as under the Medicare program now-on the basis of the lowest cost
of the items or services which are widely andl consistently available
in a locality.
Conditions of payment for covered services would resemble those
now applied to the Medicaire program with the following additions:
Payments would not be made to any institutional provider for
services whose character or quantity had not received the positive
endorsement of the State and local health planning, agencies for the
year being budgeted; payment would not be made for certain physi-
cians' services unless performed by recognized specialists; surgery
could be performed only after the patient had been referred to a
surgeon by a primary physician; certain surgical and other major
procedures would be performed only after consult nation with an
additional specialist; payments for certain specialized procedures
could be reduced where there was found to be an overabundance of
specialists in the same area; and all covered services would have to be
reviewed by the professional standards review organization in that
area, effective 2 years after the program begins.


(Chief Sponsors: Representative Joe Waggoner/ Senators Russell
Long and Abraham Ribicoff)
Payments to/standards for providers of services-Providers of services
under the Catastrophic Insurance Plan and the Medical Assistance
Plan would be reimbursed on the same basis as under iMedicare.
Reimbursement controls would include the payment of audited
"reasonable costs" to participating institutions and agencies, and
"reasonable charge." to practitioners and other suppliers. Payments
to skilled nursing facilities and intermediate care facilities would be
reimbursed on a "cost-related" basis.
Payments made under the Medical Assistance Plan, along with any
required copayment from the patient, would have to be accepted by
providers and practitioners as payment in full for the services ren-
dered, and no persons accepting such payment could charge additional
amounts for these services.
Both programs would apply the same standards for providers of
services as under Medicare. Both plans would also incorporate the
quality, health and safety standards, and utilization controls which
exist in the Medicare program, including review of services by insti-
tutional utilization review committees and Professional Standards
Review Organizations (PSROs).


11 3 1262 0911111 113 8205lll illll
3 1262 09113 8205

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