Healthcare Finance a Prospective Payment Thesis

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If the area wage index is greater than 1, the labor share equals 69.7%. The law requires the labor share to equal 62% if the area wage index is less than 1.0.

2) the wage adjusted labor share is added to the non-labor share of the standardized amount.

3) the wage adjusted standardized amount is multiplied by a relative weight for the DRG. The relative weight is specific to each of 746 DRG's (for fiscal year [FY] 2009) and represents the relative average cost of a beneficiary in one DRG compared to another.

4) if applicable, additional amounts will be added to the IPPS payment for hospitals engaged in teaching medical residents, hospitals that treat a disproportionate share of low income patients, and for high cost outlier cases" (Acute Inpatient Prospective Payment System, 2009).

Physician services include office visits, surgical procedures, and other diagnostic services. These services are usually performed in physicians' offices, hospitals, ambulatory surgical centers, skilled nursing facilities, hospices, outpatient dialysis facilities, and clinical laboratories. Medicare pays for physician services based on payment rates called the physician fee schedule. In determining payment rates for each service on the fee schedule, the Centers for Medicare & Medicaid Services (CMS) considers the amount of work required to provide a service, expenses related to maintaining a practice, and liability insurance costs.

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The values given to these three types of resources are adjusted by the differences in prices in different markets, and then a total is multiplied by a standard dollar amount, called the fee schedule's conversion factor. Medicare's payment rates may be adjusted based on provider characteristics, additional geographic designations, and other factors (Prospective Payment Systems-General Information, n.d).

Under the fee schedule payment system, payment rates are based on relative weights, called relative value units (RVUs). These values account for the costs that are involved in providing services, which includes the physicians work, practice expenses, and professional liability insurance expenses. The RVUs for physician work consist of time, effort, skill, and stress associated with providing services. The RVUs for practice expenses are based on the expenses that are incurred when physicians rent office space, buy supplies and equipment, and hire non-physician staff. The PLI RVUs are based on the premiums physicians pay medical malpractice insurance (Prospective Payment Systems-General Information, n.d)......

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