A Guide for Medicaid Programs

Provider payment methods may be divided into eight basic methods, depending on the unit of payment.* Each method is characterized by a different division of risk between the payer and the provider (see chart below.) In increasing order of payer risk, the eight basic methods are: 1. Per dollar of charges. The provider is paid a percentage of its charges, usually less than 100 percent. This method was previously common, but now most states typically reserve it for uncommon services. 2. Per dollar of cost. (Also called cost reimbursement.) The provider is reimbursed for the cost of the care it provides. The percentage is usually, but not always, 100 percent. Cost usually is determined only after the fact, so the provider receives an interim payment at a percentage of its charges. During a cost settlement process, provider cost reports are audited, and adjustments are made to payments as necessary. This method is often used by Medicare and Medicaid to pay critical access hospitals. 3. Per service. (Also called fee-for-service.) This method commonly involves fee schedules for drugs, physician services, durable medical equipment and dental care. The payer bears the financial risk for the number of services provided. The provider is at risk for the cost per service. 4. Per day. (Also called per diem payment.) Payment is per day of care; this method is commonly used by states to pay for nursing facility care. The payer is at risk for the number of days of care. The provider is at risk for the number and cost of services per day. 5. Per episode. (Also known as case rates.) The payer makes one payment for all care during a single episode of illness. Examples are paying hospitals using DRGs and paying surgeons for all care provided within a global period of 10 or 90 days. 6. Per recipient. (Also known as contact capitation.) The payer pays the provider a fixed amount per person once an eligible person has begun to use services. This method is uncommon, but it is sometimes used to pay specialist physicians. 7. Per eligible person. (Also known as capitation.) The payer pays the provider a per-person amount for each person eligible for services, regardless of whether the eligible person uses services. This method is commonly used by states to pay managed care plans. 8. Per time period. (Also known as budget.) The payer allocates a fixed dollar amount to a provider for a given time period. This method, simply an annual budget, is often used by states to pay the state psychiatric hospital. In the example, total charges for inpatient hospital care for 1,000 people equals $324,000. That amount can be divided into eight financial risk factors. The time period is one year. While 1,000 people are eligible for care, only 100 of them actually receive care. On average, those 100 people have two inpatient stays (episodes of care) per year, with an average length of stay of three days. On average, six services are received per day at an average cost of $60 per service. The average hospital sets its charges at 1.5 times cost.