Healthcare 101: How Healthcare Reimbursement Works?

Healthcare 101: How Healthcare Reimbursement Works?

In most industries, paying for a service or item is straightforward. You see the price, make the payment, and receive the item or service. The entire transaction takes a matter of seconds. Healthcare reimbursement is far more convoluted. The biggest difference between healthcare and other industries is that providers are paid after services are rendered. Healthcare reimbursement is often a month’s long process that requires multiple steps, each of which can go wrong at any moment, further delaying payment to the provider and potentially saddling patients with bills they don’t understand and therefore don’t pay. Ultimately, healthcare reimbursement in full isn’t even a guarantee.

How Providers are Paid

Some providers—mostly independent physicians—avoid the complex maze of healthcare reimbursement altogether by simply choosing not to accept insurance. Instead, they bill patients directly and avoid the administrative burden of submitting claims and appealing denials. Still, many providers can’t afford to do this. Participating on multiple insurance panels means providers have access to a wider pool of potential patients, many of whom benefit from low-cost healthcare coverage under the Affordable Care Act. More potential patients = more potential healthcare reimbursement.

When billing insurance, consider the following five steps that providers must take to receive and retain healthcare reimbursement:

Step 1. Document the details necessary for payment. Providers log into the electronic health record (EHR) and document important details regarding a patient’s history and presenting problem. They also document information about the exam and their thought process in terms of establishing a diagnosis and treatment plan. All of this information goes directly into the patient’s medical record where it’s stored securely and becomes the foundation for medical necessity of the services provided.

Step 2. Assign medical codes. Providers or certified medical coders assign medical codes in the electronic health record (EHR), or the EHR may suggest codes through automation. These codes translate narrative documentation into concise terms that payers use to understand what services physicians or other healthcare professionals perform and why. This includes International Classification of Diseases (ICD)-10 codes that capture diagnoses as well as Current Procedural Terminology (CPT) codes that denote procedures and services. The provider will enter these codes into the software followed by a claim submission either electronically or on paper. Subsequently, payers will review these claims before rendering healthcare reimbursement.  

The amount physicians are paid differs depending on the specific payer contract and/or fee schedule. However, regardless of payer, healthcare reimbursement works basically the same way. Each service or procedure has an associated payment rate based on the work that’s required to perform the job. The rate also takes practice and malpractice expenses into consideration. In this example of a fee-for-service model, the more services physicians perform, the more they’re paid. Physicians can negotiate their healthcare reimbursement rates under commercial contracts; however, they’re locked into geographically-adjusted payments from Medicare.

Hospitals are paid based on diagnosis-related groups (DRG) that represent fixed amounts for each hospital stay. When a hospital treats a patient and spends less than the DRG payment, it makes a profit. When the hospital spends more than the DRG payment treating the patient, it loses money.

Increasingly, healthcare reimbursement is shifting toward value-based models in which physicians and hospitals are paid based on the quality—not volume—of services rendered. Payers assess quality based on patient outcomes as well as a provider’s ability to contain costs. Providers earn more healthcare reimbursement when they’re able to provide high-quality, low-cost care as compared with peers and their own benchmark data.

Step 3. Submit the claim electronically. Providers may submit claims directly to payers, or they may choose to submit electronically and use a clearinghouse that serves as an intermediary, reviewing claims to identify potential errors. In many instances, when errors occur, the clearinghouse rejects the claim allowing providers to make corrections and submit a ‘clean claim’ to the payer. These clearinghouses also translate claims into a standard format so they’re compatible with a payer’s software to enable healthcare reimbursement.

Step 4. Interpret the payer’s response. After a claim passes successfully through the clearinghouse, a payer reviews the claim and either adjudicates fully towards the allowable amount or rejects all or a portion of the claim. Payers communicate healthcare reimbursement rejections to providers using remittance advice codes that include brief explanations. Providers must review these codes to determine whether and how they can correct and resubmit the claim or bill the patient. For example, sometimes payers reject services that shouldn’t be billed together during a single visit. Other times, they reject services due to a lack of medical necessity or because those services take place during a specified timeframe after a related procedure. Rejections could also be due to non-coverage or a whole host of other reasons.

Healthcare reimbursement is also often a shared responsibility between payers and patients. Many patients ultimately end up owing a copayment, coinsurance and/or deductible amount that they pay directly to the provider. This amount varies depending on the patient’s insurance plan. For example, with 80/20 insurance, the provider accepts 80% of the allowable amount, and the patient pays the remaining 20%.

Step 5. Prepare for post-payment audits. Although providers can take steps to identify and prevent errors on the front end, they still need to contend with post-payment audits during which payers request documentation to ensure they’ve paid claims correctly. If documentation doesn’t support the services billed, providers may need to repay the healthcare reimbursement they received.  

Each of these steps takes time and resources, two of the most limited commodities in today’s provider settings. As the industry continues to pivot toward value-based payments, health information technology will play a critical role in streamlining processes and increasing efficiencies related to healthcare reimbursement.

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