The New Health Care: How Different is it, Really?

Chapter One: Health Care Reimbursement System
By Sylvain “Syl” Trepanier, DNP, RN, CENP

To say that our health care industry is changing is probably perceived as an understatement by many of you. Would you agree? But why is it so different, you may ask? Why all the changes recently? Why do these changes have to affect my job, what I do every day? In this article, I give you, our bedside leaders, a perspective on the reason for all the changes. It’s impossible for me to address all the changes within this article; therefore you can expect ongoing information on this topic. Hence the title: Chapter One.

In order to better understand the current climatic conditions within our industry, it’s crucial to understand the payment structure, which is at the core of it all. First, I would be remiss not to mention the fact that changes within the health care payment structure have occurred many times. If I was a gambler, I would most likely bet on the fact that this won’t be the final changes for our system.

Health care is a business (I think it’s important to call it like it is.) Like you, I entered the nursing profession with the intent to help and care for others, and to make a difference in their lives. I also recognize that, like anything else in life, if there is a cost associated with providing a service, there has to be a revenue source, in order to offset the cost--we all know that. If, for example, your expenses at home are greater than your revenue, you’ll be in serious trouble; it’s a simple fact of life. Furthermore, you’ll be accountable for the outcome (no matter what). This is why, it its simplest form, health care is a business (in my opinion). Think about the cost associated with providing the services we offer in our hospitals, clinics, free- standing emergency departments, home health agencies, etc. We have to account for payroll (wages and benefits); equipment and supplies; housekeeping; maintenance and utilities; administrative fees; bad debt, etc. I’m sure that you can appreciate the total expenses here. In fact, the payroll (wages and benefits) alone accounts for approximately 54 percent of our total operating expenses (Ernst & Young, 2013). Since we talked about the expenses, what about the revenue to offset those expenses? This is when it gets very complicated. The services that we offer are paid for under a set of ever- changing rules by a diverse group of payers (government, individuals, employers, and insurance companies). By far the largest payer groups for health care services are Medicare, Medicaid, and other government programs. As it stands right now, we, as an overall industry, have reached a milestone, where the cost of care is too great for anyone to bear, which is a very bad situation for our industry.

Medicare and Medicaid were implemented in 1966, and because the cost of care escalated drastically, the government (Center for Medicare and Medicaid Services, or “CMS”), known then as the Health Care Financing Administration (HCFA), applied its first reform in 1983 to pay hospitals on the basis of the inpatient prospective payment system (IPPS), also known as “diagnosis-related groups” (DRGs) payment. This new payment system allocated certain weight (dollars) based on an average amount of resources to care for patients, regardless of the actual resources used to provide the services. Similarly, another reform was offered in 1997 for outpatient services (outpatient prospective payment system, or “OPPS”). In other words, with the prospective payment approach, we were paid, using a predetermined price, regardless of the actual cost incurred. Fast forward to 2005, and, as a result of the Deficit Reduction Act (DRA), Medicare implemented an updated DRG payment system to better account for the patient’s severity of illness, as well as resource consumption, based on three levels of severity. In addition, as part of the same DRA of 2005, CMS stopped paying hospitals for care provided to patients who experienced one of the 10 hospital-acquired conditions (e.g., retained foreign objects, pressure ulcers, and falls). This was the introduction of “pay-for performance” (P4P), which eventually was transformed into what we now know as “value-based purchasing” (VBP). Providing the service itself it simply no longer sufficient, as payers are now looking for the value-added that is expected with the service. To that end, CMS established a value-based purchasing program, which has been revisited many times. The latest update was offered in 2013 (CMS, 2013). In the last iteration of the program, hospital performance is based on clinical process measures; patient experience; outcomes mortality measures; patient safety indicators; health care-associated infections; and efficiency measures, such as Medicare spending per beneficiary, or MSPB” (CMS, 2013).

In review, I provided a perspective on the health care reimbursement system since the 1966 inception of Medicare and Medicaid. Hopefully, this first article offered you basic knowledge on the manner in which hospitals have been reimbursed over time, as well the evolution of that reimbursement. This transformation absolutely requires us to revisit everything we do. It is merely impossible to keep the same infrastructure, or to keep doing things the way we have always done, in this new era of VBP. I contend that organizations that do not adapt to new reimbursement expectations will simply no longer be in business. The good news is that we have excellent leaders who understand this fact, and Premier Health is well-positioned to appropriately respond to the much-needed change. The more difficult news is that it will never be the same. Yesterday is yesterday, and we have to look to the future. The time to innovate is now.

Department of Health and Human Services. Center for Medicare & Medicaid Services (2013). Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long Term Care; Hospital Prospective Payment System and Fiscal Year 2014 Rates; Quality Reporting Requirements for Specific Providers; Hospital Conditions of Participation; Payment Policies Related to Patient Status; Final Rule. Accessed on May 8, 2014, via:

Ernst & Young (2013). Combined Financial Statements and Supplementary Information. Premier Health Partners: Years ended December 31, 2012, and 2011. Accessed on May 8, 2014, via: +statements&sourceid=ie7&

Finkler, S.A., jones, C.B., & Kovner, C.T. (2013). Financial Management for Nurse Managers and Executives (4th ed.). Elsevier. St. Louis, Missouri.

<< Back to the May 2014 Issue

Source: Syl Trepanier, System Vice President and Chief Nursing Officer - cited articles from Department of Health and Human Services, Ernst & Young and Finkler, S.A., Jones, C.B., & Kovner, C.T.

Content Updated: May 15, 2014

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