The Impact of Changing Payment Models on Medical Practice Budgeting

By Aaron M Giltner

Historically, the predominant medical practice reimbursement model in The United States was fee-for-service. Physicians billed customers directly for services provided, and the responsibility for payment was the patient's. During the mid-20th century, as health care services expanded beyond traditional doctor visits to include more tests and procedures, the payment model transitioned to medical expense insurance ('third-party payers'). While this shifted much of the responsibility (and risk) away from patients, it was not a fundamental change in the way physicians and hospitals were paid. In this system, known as discounted fee-for-service, patients are still charged full price for services rendered, but the largest portions of payments are made by the insurers at discounted rates. For medical practices, fee-for-service reimbursement allows for relatively straightforward budgeting and accounting. Because of the link between productivity and revenue, historical practice data can be used for budgeting purposes. The introduction of several new payment models has made this a much more complicated process.

There is little consensus on how reimbursement models will evolve and converge, but there are several models that seem to be gaining traction. An emphasis has been placed on reimbursing for quality rather than quantity of care. This is colloquially known as pay-for-performance, or P4P. Most pay-for-performance models still utilize fee-for-service, with a catch. A predetermined percentage of revenue is withheld until the end of the fiscal year. If agreed-upon benchmarks (typically based on consensus clinical guidelines) are met, the practice receives the withheld payment. For participating practices, this means a percentage of receivables will not be collectible in the short term. Historical collection rates will not be valid, and the process of budgeting is made more complex (and potentially less accurate). In cases where payments are delayed, proportions of receivables may not even be current; if benchmarks are not met, they may need to be written off.

A substantially more complicated model is bundling of payments. With this model, services that were once billed separately are paid as a single (typically reduced) reimbursement. Bundles have the net effect of decreased overall payments. This is manageable from a budgeting standpoint if practices have advanced notice, and if each of the bundled services are provided by a single entity. The accounting becomes much more complex when services provided by different entities receive a single payment, and more challenging yet when a single payment is provided for the services of multiple physicians (often representing different practices). It is likely, under this scenario, that hospitals will receive global fees and then decide how much to pay to each participating physician. In effect, physician practices will have little-to-no ability to forecast revenue from hospital services provided.

Episode of care is an additional model that combines features of fee-for-service and bundled payments. Physicians will be paid global fees to provide care to patients for extended periods. In this model, the care of complex patients will be more expensive for physicians. Where revenue is likely to be more predictable, the challenge of budgeting will be how to anticipate expenses for complicated and diverse patient populations. A criticism this model is that it provides a disincentive to care for sicker patients.

Finally, the concept of gain sharing has reemerged as an incentive offered by payers. This involves rewarding providers who reduce costs by paying them a portion of the money saved. It is similar to pay-for-performance in that a percentage of revenue is withheld until a specified future date, at which time a payment may-or-may not be received. If cost-containment benchmarks are not met, there is no gain share. This model is controversial in that it theoretically incentivizes both payers and providers to withhold care, potentially leading to cost-based rather than patient-based decisions.

While the continued evolution of payment models is intended to focus on quality over quantity, the move away from fee-for-service has added complexity to medical practice accounting and, in particular, budgeting. This results in significant risk for practices where expenses are largely fixed and minor decreases in revenue lead to large decreases in operating income.

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