MMHA 6400 Week 1 Payment Flow Map Example

Five Payers, Four Units of Payment: A Payment Flow Map for Alder Bend Community Hospital and Its Primary Care Clinics

Student Name

Walden University

MMHA 6400: Healthcare Finance

Instructor Name

Month Day, Year

Five Payers, Four Units of Payment: A Payment Flow Map for Alder Bend Community Hospital and Its Primary Care Clinics

Purpose of the Map

Alder Bend Community Hospital, an invented nonprofit with 180 beds, owns four primary care clinics that serve the same county. Its revenue arrives from five kinds of payers, and each pays for a different unit of care. This map traces every payment arrow from payer to provider and labels it with that unit: the discharge, the day, the outpatient service, the physician service weighted by relative value units, and the member month. The point is not how much each payer pays in total but what each one is buying, because the unit of payment shapes what the hospital and its physicians are rewarded for doing (Reiter & Song, 2021). Figures are illustrative.

The Payment Flow Map

Table 1 presents the map in tabular form. Read each row as one arrow: the payer on the left sends money to the provider in the second column, for the unit named in the third column, at a rate set by the method in the fourth. The final column states the behavior that unit pays for.

Table 1

Payment Flows at Alder Bend Community Hospital and Its Clinics

The chargemaster sits beside the map rather than on it. It lists a price for every service, but almost no payer pays that price; it is the starting point for percent-of-charges contracts and self-pay bills, and the reference against which contractual allowances are measured.

Per Discharge

Traditional Medicare pays the hospital a fixed amount for each inpatient stay, determined by the stay's diagnosis-related group, with adjustments for the local labor market and a few hospital characteristics (Medicare Payment Advisory Commission, 2023). Most of Alder Bend's Medicare Advantage contracts copy this method. The amount does not change if the patient stays two days longer than expected, except in rare high-cost outlier cases. The unit therefore rewards admitting patients and discharging them efficiently. Every added day costs the hospital money that no added payment offsets, which is why case managers at Alder Bend watch Medicare lengths of stay more closely than any other number.

Per Day

Medicaid managed care and one commercial insurer pay the hospital a negotiated amount for each inpatient day. Under a per diem, a longer stay brings in more revenue, although each day's payment may not cover the cost of the first, most intensive days. The unit rewards keeping patients longer, the opposite of the DRG. The same patient, with the same diagnosis, can therefore be a financial gain on day five under one card and a loss under another, a tension that sits with the people deciding when a patient is ready to go home.

Per Service and Per Physician Service

Hospital outpatient care under traditional Medicare is paid per service through ambulatory payment classification groups, and Alder Bend's clinics are paid per physician service: each visit or procedure carries relative value units that are multiplied by a conversion factor. Commercial insurers pay the clinics a percentage of those Medicare rates. Medicaid plans pay the clinics from a fee schedule per visit. All of these units reward doing more. A clinic paid per visit earns more when a patient returns for three short visits than when one longer visit resolves the same problem, a pattern Miller (2009) describes as the central weakness of fee-for-service payment.

Percent of Charges

Commercial insurer B pays for outpatient services as a percentage of the hospital's listed charges. This is the one arrow on the map where the chargemaster price directly sets payment, so raising a listed price raises revenue from that contract. Hospital list prices bear a loose and often unexplained relationship to cost, and the gap between them and what payers actually pay has long been one of the least transparent features of American health care (Reinhardt, 2006). For Alder Bend, the practical lesson is that percent-of-charges contracts reward chargemaster increases, which is why insurers increasingly resist them.

Per Member Per Month

One Medicare Advantage plan pays the clinics a fixed amount each month for each of 3,200 members attributed to Alder Bend physicians, whether or not the member visits. Under capitation, the clinics earn the same revenue whether a member comes in once or ten times, so every visit is a cost. The unit rewards keeping members healthy and managing their care efficiently. It also carries a risk: a clinic under financial pressure could do too little. The plan's quality measures, such as screening and diabetes control rates, are meant to guard against that, and Alder Bend's clinic leaders review them alongside the monthly payment.

What the Map Means for Alder Bend

Read together, the arrows show a hospital and clinic network being paid to do opposite things at once. Under Medicare and its Advantage plans, a shorter inpatient stay is better; under the per diem contracts, a longer one brings more money. In the clinics, most arrows reward more visits while the capitated contract rewards fewer. No single operational policy can respond to all of these signals. What leaders can do is know, for any decision about staffing, length of stay or access, which arrows it moves and in which direction. That is the use of the map in the weeks that follow: every budget, variance and capital decision in this course draws on the payer mix and payment units shown here.

References

Medicare Payment Advisory Commission. (2023). Report to the Congress: Medicare and the health care delivery system. Medicare Payment Advisory Commission.

Miller, H. D. (2009). From volume to value: Better ways to pay for health care. Health Affairs, 28(5), 1418-1428. https://doi.org/10.1377/hlthaff.28.5.1418

Reinhardt, U. E. (2006). The pricing of U.S. hospital services: Chaos behind a veil of secrecy. Health Affairs, 25(1), 57-69. https://doi.org/10.1377/hlthaff.25.1.57

Reiter, K. L., & Song, P. H. (2021). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.