dr. solomon's dilemma

financial incentives

glossary of selected health care terms

solomon profile
financial incentives
cost v. care

Copyright 2000 Alliance for Health Reform. Reprinted with permission.

Method of payment for health services in which a physician or hospital is paid a fixed amount for each person served in a given time period, regardless of the actual number or nature of services provided to each person.


The portion of the bill for a medical service, within allowable payment limits, that is not covered by the patient's health insurance policy and therefore must be paid out of pocket by the patient. (Coinsurance refers to a percentage, e.g., 10 percent of the total charge; copayments are stated as flat amounts, e.g., $5 per office visit.)


Any out-of-pocket payment the patient makes for a portion of the costs of covered services. Deductibles, coinsurance, copayments, and balanced bills are types of cost sharing.


The practice by which a seller of a health service, such as a hospital, increases charges for some payers to offset losses due to uncompensated or indigent care or lower payments from other payers.


A fixed amount, usually expressed in dollars, that the beneficiary must pay directly to the provider before a health insurance plan begins to pay for any costs of the insured medical services.


A system for determining payments to hospitals, used under Medicare's prospective payment system (PPS) and by some other public and private payers. The DRG system classifies patients into groups based on the principal diagnosis, treatments, and other relevant criteria. Hospitals are paid the same for each case classified in the same DRG, regardless of the actual cost of treatment.


A method of paying health care providers a fee for each medical service rendered, as opposed to paying them salaries or capitated payments.


A list of selected pharmaceuticals and their appropriate dosages felt to be the most useful and cost-effective for patient care. Physicians are often required to prescribe from the formulary developed by the insurance plan or HMO with which they are affiliated.


Laws that make it illegal to include "gag" clauses in doctor contracts that limit a doctor's ability to give information to their patients about all treatment choices for a health problem, including information about treatments not covered by the health plan.


A health care professional, usually a primary care physician, who coordinates, manages, and authorizes all health care services provided to a covered beneficiary. Unless an emergency exists, the gatekeeper usually must pre-authorize referrals to specialists, hospitalizations, and lab and radiology tests.


An HMO that contracts with a single multi-specialty medical group to provide care for HMO members. The HMO compensates the group for contracted services at a negotiated rate, and that group is responsible for compensating its physicians and contracting with hospitals for care of their patients. Kaiser Permanente is the foremost example of this kind of organization. Also see Staff-model HMO; Network-model HMO.


A managed care plan that combines the function of insurer and provider to give members comprehensive health care from a network of affiliated providers. Enrollees pay limited copayments and are usually required to select a primary care physician through which all care must be coordinated. HMOs generally will not pay for services obtained from a non-network provider or without a primary care physician's referral. HMOs often place an emphasis on prevention and careful assessment of medical necessity.


A set of standardized measures of health plan performance allowing comparisons on quality, access, patient satisfaction, membership, utilization, finance, and health plan management. HEDIS was developed by employers, HMOs, and the National Committee on Quality Assurance (NCQA).


A traditional health insurance plan which pays providers on a fee-for-service basis. Consumers face few restrictions on provider selection, but may have financial liability, including a deductible and coinsurance, greater than in many managed care plans.


A physician organization which typically contracts with an HMO to provide services to the HMO's enrollees. The HMO usually makes capitated payments to the IPA; however, the IPA may reimburse its physicians on a fee-for-service basis. Physicians are in solo practice and can contract with other HMOs and see other fee-for-service patients.


Any health care delivery system that attempts to control or coordinate use of health services by its enrolled members in order to contain spending, improve quality, or both. Arrangements often involve patient education and disease prevention; formal programs for quality assurance and utilization review; a network of providers with some form of contract with the health plan to furnish a comprehensive set of services to enrollees; and financial incentives for providers and patients to use cost-effective treatments. HMOs and indemnity insurance plans with utilization review are both examples of managed care systems.


A way of organizing health care delivery and financing that attempts to combine the best elements of government regulation and free-market competition. Those paying for care are organized into large groups, and health plans then compete for members based on premiums, covered procedures, access to services, and perceived quality of care.


Public health insurance program that provides coverage for some low-income persons and families for acute and long-term care. It is financed by state and federal funds (the federal government pays at least 50 percent of the total cost in each state), and is administered by states within broad federal guidelines.


A health insurance option consisting of a high-deductible insurance policy and a tax-advantaged savings account. Individuals pay for their own health care up to the annual deductible by withdrawing from the savings account or paying out of pocket. The insurance policy pays for most or all costs of covered services once the deductible is met. Laws allowing limited demonstrations of MSAs were enacted in 1996 for the general population, and in 1997 for Medicare beneficiaries.


Federal health insurance program for virtually all persons age 65 and older, and some severely disabled persons under age 65. It consists of Part A, hospital insurance (HI) and Part B, supplementary medical insurance (SMI).


Sometimes referred to as Medicare Part C, this portion of Medicare was established by the Balanced Budget Act of 1997. Beneficiaries can now choose from an expanded list of insurance options if they are available in their area, including health maintenance organizations, preferred provider organizations, provider-sponsored organizations, and other insurance options like private-fee-for-service plans and medical savings accounts. Beneficiaries must actively select one of these options or they will be enrolled in the traditional fee-for-service plan.


Privately purchased insurance that supplements Medicare coverage and meets specified requirements set by federal statute and the National Association of Insurance Commissioners. Benefits may include payment of Medicare deductibles, coinsurance, balance bills, and payment for services not covered by Medicare, such as outpatient prescription drugs.


An HMO that contracts with more than one independent physician group to provide health services. The providers may see patients who are not members of the HMO. Also see Group-model HMO, Staff-model HMO.


An insurance arrangement where the payment made to a health plan is a combination of a capitated premium and a payment based on actual use of services; the proportions specified for these components determine the insurance risk faced by the plan. Sometimes called "ambulatory capitation."


Any person or organization paying a health care provider for services or goods. Typically, insurance companies and government health programs like Medicare and Medicaid are the major payers. Most large employers pay for services directly, and individuals pay for some services out of their own pockets.


A legal entity formed and owned by one or more hospitals and physician groups to obtain payer contracts and to further mutual interests. Physicians maintain ownership of their practices while agreeing to accept managed care patients. The PHO serves as a negotiating, contracting, and marketing unit.


A managed care plan that combines features of both prepaid and fee-for-service insurance. Health plan enrollees decide whether to use network or non-network providers at the time care is needed, but usually are subject to reduced coverage and sizable copayments for selecting non-network providers. The increase in POS enrollment represents the area of greatest HMO growth.


A health care delivery system through which an organization of providers contracts to serve health plan enrollees on a fee-for-service basis at discounted fees in return for more patients. Patients may use any provider without a referral, in network or out, but have a financial incentive -- for example, lower coinsurance payments -- to use doctors on the preferred list.


A physician -- general practitioner, family physician, pediatrician, some internists and OB/GYNs -- who serves as the patient's first point of contact with the health care system and coordinates the patient's medical care.


The method used by Medicare to pay for inpatient hospital services and skilled nursing facility care, in which payment rates are determined before services are rendered, and not based on actual costs or charges of a specific facility. Rates are intended to cover treatment costs for a typical inpatient with a given diagnosis and are adjusted for the hospital's wages, teaching activity, indigent care, and other factors. The BBA of 1997 requires PPS payments be developed for rehabilitation hospitals, home health agencies, and, possibly, long-term care hospitals.


Any organization created through the formal affiliation of health care providers that seeks to act as insurer for an enrolled population. PSOs can be physician-based, hospital-based, or a combination of both; typically, they are local health delivery systems.


A primary care doctor's written permission for a patient to see a certain specialist or to receive certain services. Required by many managed care health plans.


An emerging tool that can be used by policymakers and health care purchasers to compare and understand the actual performance of health plans. Provides data in major areas of accountability, such as health care quality and utilization, consumer satisfaction, administrative efficiencies and financial stability, and cost control.


The probability of financial loss, based on the probability of having to provide services to a patient or patient population at a cost that exceeds the payments received. Under capitation payment systems, providers share the risk that is born by insurers. Also, an insured person may be referred to as a risk.


Increases or reductions in payment made to a health plan on behalf of a group of enrollees to compensate for health care expenditures that are expected to be higher or lower than average.


Enrollment choices made by health plans -- or by enrollees -- on the basis of perceived risk relative to the premium to be paid.


A method by which the risk of inaccurate rate adjustment is shared by plan sponsors and purchasers, typically managed care organizations and states. In contrast to traditional indemnity plans, in which insurance premiums belong solely to the insurance company that assumes all risk of providing the care paid for by these premiums.


The practice of an employer providing employees with health benefits financed entirely through the internal means of the company, as opposed to purchasing insurance coverage from commercial carriers. Claims processing is often handled through an administrative services contract with an independent organization, often an insurance company.


A proposed health plan that would designate one entity (usually the government) to function as the only purchaser of health care services. Under such a plan, consumers would pay a tax to a single trust fund to be used solely for health care expenditures. Canadian provinces operate insurance coverage for residents under this system.


An HMO that delivers health services through salaried physicians who are employed by the HMO exclusively to care for HMO enrollees. Also see Group-model HMO, Network-model HMO.


An annual limit on how much in deductibles and copayments the patient has to pay. Also called a "cap" or "out-of-pocket cap." If there is no stop-loss coverage under primary coverage, separate stop-loss insurance may be purchased to protect against an overly large single claim or excessively high aggregate claims during a given period of time. Large employers who self-insure may also purchase "reinsurance" for stop-loss purposes.


The classification of sick or injured persons according to severity in order to direct care and ensure the efficient use of medical and nursing staff and facilities.


Examination of delivered health care services -- particularly specialist referrals, emergency room use and hospitalizations -- to evaluate their appropriateness, necessity, and quality. The review can be performed before, during, or after care delivery.

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