Healthcare Payment Systems and Revenue Control Methods

Introduction to Healthcare Payment Systems

The healthcare payment system describes the method by which healthcare organizations—such as Medicaid, Medicare, and commercial health plans—determine the amount to be paid for a given health service or program. Understanding how these systems operate is essential for healthcare providers and administrators seeking to manage finances effectively. The three primary payment-determination bases are: cost-payment basis, fee schedule payment basis, and price-related basis (Cleverley, Cleverley, & Song, 2010).

Three Payment-Determination Bases

A cost-payment basis means that the provider's cost is the underlying method of payment, and the rules for determining those costs are established by the contract between the healthcare provider and the payer. For example, a cost-payment basis may be calculated as the provider's cost ratio multiplied by total charges for a specific healthcare claim. If a claim reaches $1,000 in charges and the cost ratio is 50%, the payment would be $500—equivalent to 50% of $1,000.

A fee schedule payment basis is an actual payment amount that is predetermined and unrelated to either the provider's actual price or actual costs. For example, Medicare payment for a hospital patient undergoing Reattachment of Lower Extremity or Major Joint Replacement may carry a predetermined payment of $14,500. Once a DRG (Diagnosis-Related Group) assignment has been made, the actual charge or cost is no longer relevant. Physician payments for services are similarly governed by fee schedules, which are negotiated and accepted by providers participating in Medicaid and Medicare.

A price-related basis is a payment system in which providers are paid for services delivered based on the total charge for those services. A payer may negotiate, for instance, a 75% billed-charge rate with a healthcare provider. If total charges amount to $10,000, the resulting payment would be $7,500—representing 75% of the billed charge.

Bundled Services vs. Specific Services

In addition to the three payment-determination bases, healthcare payment structures can also be categorized as either bundled services or specific services. The table below summarizes key differences across payment units:

Payment Basis Comparison: Specific Services vs. Bundled Services

Cost basis: Specific services may involve high costs for drugs and devices; bundled services may include government-assisted clinic payments on an annual budget.
Fee schedule basis: Specific services use resource-based relative value scales and ambulatory payment classifications; bundled services use DRGs, per diem rates, outpatient surgery groups, and outlier provisions.
Price-related basis: Specific services involve no contract or self-pay outpatient arrangements; bundled services involve per diem outpatient arrangements.

Bundled services represent the aggregate of services delivered to a patient, covered by a single payment to the healthcare system. For example, some healthcare contracts provide for a fixed payment for inpatient services on a DRG or per-day basis. In bundled payment arrangements, payments for services are fixed in advance and based on an agreed set of services to be delivered. A payment of $1,000 per day, for instance, would cover all services delivered on that day—bundled into a single unit of payment—regardless of the level of ancillary medical services actually provided.

Specific services payment, by contrast, involves individual services delivered to patients within a single encounter of care, assessed separately rather than in aggregate. For example, a contract for outpatient services may be based on a discounted billed charge—such as 75% of the amount billed. This type of outpatient payment is tied to the provider's prices for each specific service delivered, including lab tests, radiology procedures, and other individual clinical procedures.

Specific services differ from bundled services in that the health plan may not have a negotiated contract with the provider. In such cases, payment is based on billed charges related to each specific service. The apportionment of payment responsibility between the health plan and the patient must be resolved separately, particularly when the patient is out of network and the hospital requires payment based on full billed charges. Unlike specific services, bundled service arrangements implement health contract plans that pay hospitals on a DRG basis with specific provisions for outliers.

Additionally, specific services are typically associated with higher drug costs, while bundled services are associated with lower drug costs because some government-assisted clinics receive government support for drug provision, which is incorporated into their annual budget.

The American Medical Association (2013) defines bundled payments as a single payment covering services delivered by two or more healthcare providers over a specified period. For example, a patient undergoing cardiac bypass surgery would make one bundled payment rather than separate payments to the surgeon, the hospital, and the anesthesiologist. Common examples include global surgery periods and global payments for obstetrical care.

Provider Revenue Control Strategies

Healthcare providers use three primary strategies to control their revenue in the contemporary economic environment:

1. Price setting
2. Payer contract negotiation
3. Billing and coding management

Price setting is the process by which healthcare providers establish specific prices for services delivered. A provider may set a relatively high price, and pricing is a critical revenue element for many healthcare firms. However, in some organizations, pricing may not significantly affect revenue. For example, a nursing home that derives 80% of its revenue from Medicare and Medicaid on a fee schedule basis finds that only the remaining 20%—generated from other payers whose payments are price-sensitive—is meaningfully affected by the prices it sets, and thus only that portion directly influences profit and loss.

Payer contract negotiation is another key strategy for controlling revenue. Many healthcare providers derive a substantial portion of their revenue from commercial insurers through contract negotiation. Any provider is able to negotiate a payment schedule that helps lower the costs of operations (Gesme & Wiseman, 2010).

Conclusion

Understanding payment-determination bases and the distinction between bundled and specific services is essential for effective healthcare financial management. The three bases—cost-payment, fee schedule, and price-related—each structure reimbursement differently, and providers must navigate these frameworks alongside their revenue control strategies. Price setting, payer contract negotiation, and accurate billing and coding management—supported by HIPAA-mandated systems such as ICD-9-CM and HCPCS—are the primary tools available to healthcare organizations seeking to optimize and protect their revenue streams.

References

AMA (2013). Bundled Payments. American Medical Association. USA.

Carver, J. (2010). Healthcare Common Procedure Coding System (HCPCS) Level II Coding Procedures. Centers for Medicare & Medicaid Services.

Cleverley, W. O., Cleverley, J. O., & Song, P. H. (2010). Essentials of Health Care Finance. Jones & Bartlett Publishers.

Gesme, D. H., & Wiseman, M. (2010). How to negotiate with health care plans. Journal of Oncology Practice, 6(4), 220–222.

Wilson, J. (2006). Health Insurance Portability and Accountability Act (HIPAA) privacy rule causes ongoing concerns among clinicians and researchers. Annals of Internal Medicine, 145(4), 313–316.