HA520 Unit 1 Hospital Payment Flow Analysis Example

One Bill, Five Payments: A Payment Flow Analysis Following a Single Composite Three-Day Surgical Stay, Billed at Forty-Six Thousand Eight Hundred Dollars, Through Traditional Medicare, Medicare Advantage, a Commercial PPO, Medicaid Managed Care and Financial Assistance

[Student Name]

Purdue University Global

HA520: Health Care Financial Management

Unit 1 Payment Flow Analysis

[Instructor Name]

[Date]

The hospital, the stay and every payment are composite and bracketed; actual rates vary by contract, year and location.

The Premise

Every hospital keeps a chargemaster, a list price for each service. The [$46,800] on this claim is the sum of those list prices for a three-day stay after a laparoscopic colon resection. Almost no payer pays it. The amount that reaches the hospital's bank account is set by the payer, its rules and the deductions it applies. Analysts of hospital pricing have long described list prices as largely disconnected from what payers pay or from costs (Reinhardt, 2006).

The Diagram: Two Loops

The first loop carries money into payers: employers and households pay premiums to insurers; workers and employers pay payroll taxes, and households pay income taxes, into Medicare and Medicaid; Medicare beneficiaries pay Part B premiums. The second loop carries money from payers to the hospital: claims go out, remittances come back. Each arrow is labeled with who sets the amount: Congress and the Centers for Medicare & Medicaid Services for traditional Medicare; contracts for Medicare Advantage and commercial plans; the state and its managed care plans for Medicaid; the hospital's own policy for financial assistance.

The Claim, Payer by Payer

1. Traditional Medicare: a fixed case rate for the diagnosis-related group, [$14,100], regardless of charges.

2. Medicare Advantage: the plan's contract pays [100] percent of the Medicare rate, [$14,100], but only after an authorization review clears, about [38] days after discharge.

3. Commercial PPO: the contract pays [61] percent of charges, [$28,548], of which [$3,100] is collected from the patient under a high-deductible plan.

4. Medicaid managed care: a per diem of [$2,150], [$6,450] for three days.

5. Uninsured patient approved for full financial assistance: [$0].

The same stay brings in anywhere from nothing to more than twice the Medicare payment, and none of the five payments resembles the charge.

Why the Payments Differ

Medicare sets prices administratively for all hospitals. Medicare Advantage plans usually pay hospitals rates tied to traditional Medicare but add their own reviews. Commercial insurers negotiate, and hospitals with stronger market positions often obtain higher prices; research on privately insured patients found wide variation in hospital prices, much of it linked to market structure (Cooper et al., 2019). Medicaid rates are set by states and are generally the lowest of the public programs. Financial assistance is the hospital's own charitable choice.

What the Claim Means for the Hospital

Suppose the stay costs the hospital about [$17,500] to deliver. Against that cost, traditional Medicare and Medicare Advantage pay less than cost, commercial pays well above it, Medicaid pays far below it and financial assistance pays nothing. The hospital's margin depends on its mix of payers, not on its charges. A hospital with more commercial patients can absorb losses on public programs; one with fewer cannot.

Timing and Risk

Payment timing also differs. Traditional Medicare pays within about [14] days of a clean claim. The Medicare Advantage plan pays later and may deny part of the stay after review. The commercial plan pays its share within [30] days, but the patient's [$3,100] may take months or never arrive. Each delay shows up in the hospital's receivables.

A Note on Charges

Charges still matter in three ways: commercial contracts like this one pay a percentage of them, outlier payments in Medicare depend on them, and they form the starting point for financial assistance discounts. That is why hospitals keep chargemasters even though few payers pay list price.

The Same Claim, Seen by the Patient

The patients' experiences differ as much as the hospital's. The traditional Medicare patient owes the inpatient deductible for the benefit period, roughly [$1,700]. The Medicare Advantage patient owes the plan's hospital copay, perhaps [$300] a day. The commercial patient owes [$3,100] toward a high deductible. The Medicaid patient owes little or nothing. The uninsured patient, once approved for assistance, owes nothing, but only if someone helped her apply.

Implications for Managers

Managers who budget or price services should work from expected payment by payer, not from charges, a point standard health care finance texts make when they distinguish gross charges from net patient revenue (Cleverley & Cleverley, 2018). A service line's profitability depends on its payer mix, and a shift of patients from commercial plans to Medicare Advantage, as populations age, can lower revenue even when volume holds.

Limits

The rates are composite and simplified; real contracts include carve-outs, outlier payments and quality adjustments. The cost estimate is illustrative.

Conclusion

Following one claim shows that a hospital's revenue is set by many payers under different rules. The bill is a starting point; the payer decides what the hospital is paid, when and with what risk.

References

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Cooper, Z., Craig, S. V., Gaynor, M., & Van Reenen, J. (2019). The price ain't right? Hospital prices and health spending on the privately insured. The Quarterly Journal of Economics, 134(1), 51-107. https://doi.org/10.1093/qje/qjy020

Reinhardt, U. E. (2006). The pricing of U.S. hospital services: Chaos behind a veil of secrecy. Health Affairs, 25(1), 57-69. https://doi.org/10.1377/hlthaff.25.1.57