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Health Care Cost Accounting

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Essay title: Health Care Cost Accounting

Health Care Cost Accounting

A capitation payment arrangement can be an effective means to control healthcare costs because it allows both the insurer and the employer to predict costs for healthcare services more accurately. When a capitation payment method is used, the financial risk of caring for the patient is transferred to the medical delivery system. If the healthcare delivery system does not have a cost accounting system or the ability to develop cost information on each payer and service line, then it will become necessary to find a way to develop such information prior to entering into a capitation contract. A six step method is recommended for developing a capitation payment rate. Cost accounting information is used as well as data from a market study. The steps are:

1. Determine the delivery system cost base

2. Develop use rates

3. Calculate capitation rates

4. Adjust rates for impact of incremental volume

5. Negotiate the contract

6. Monitor contract performance

Using the capitation payment method, the health care provider assumes that for a given insured population, the provider will cover all health care services for a fixed payment per member per month (PMPM). This capitation payment could cover the full continuum of services, including acute hospital stays, non-acute hospital stays, outpatient visits, home health visits, primary care physician visits, specialty physician visits, and tertiary physician visits.

An acceptable payment must be fair both from the insurer's point of view and from that of the delivery system or provider. The insurer will be limited by what the consumer can afford to pay for health insurance. Managers of the health care delivery system must know the per capita cost of providing care to the insured population and compare that cost to what the insurer is being paid per capita per month.


• Determine Delivery System Cost Base for Targeted Population

o The first step in determining the capitation rate is to predict the costs of providing care to the insurer's population, based on assumptions about the population and on the cost structure of the delivery system. Information from a cost accounting system is necessary for this step. Accurate cost data should be figured by service and should be broken out into the components of fixed and variable costs. Using this method, inpatient service lines are defined by grouping diagnosis-related groups (DRGs) into 16 categories. Although decision support systems allow products or service lines to be defined using any of a number of variables, a classification of services on the basis of DRGs is preferable because details about DRGs are generally available in comparative data bases.

• Develop Use Rates by Major Service for the Insured Population

o Because the delivery system will be responsible for managing the utilization of health care resources for the covered population, it is important to understand the health care utilization patterns of that population. A market study should be used to calculate use rates for the population to be covered. In many states, inpatient case-mix data, at the patient level, is publicly available and can be used for this purpose. In fact, to facilitate access to this data, such comparative data bases may be loaded into the provider's decision support system. It is important that such a comparative data base include, minimally, the following elements; DRG, age, zip code, and payer category (e.g., Medicare, Medicaid, commercial, self-pay).

• Calculate Capitation Rate

o The information from the cost accounting system and the market study is then combined to determine the expected costs of covering the insured population. The rate is predicated on the assumption that the cost per unit for the services provided by the delivery system would not change if the entire insurer’s population was provided services by the hospital through its Affiliated Health Plan.

• Adjust Capitation Rate by the Incremental

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