Refresher on Health Insurance

The following glossary of health insurance terms will help healthcare entrepreneurs understand and use those terms correctly.

Allowed Amount

An allowed amount is the maximum amount the insurance company or other payer will pay for a given item or service. The maximum amount may be determined by regulations, by fiat, or by negotiations between the healthcare entrepreneur and the payer. Actual free market forces have little influence in determining allowed amounts. The terms of your agreement with the payer determine whether you can collect from the patient the difference between the allowed amount and your actual fee.

Appeals

The rejection or underpayment of an insurance claim does not have to be the end of the story. You can file written appeals with payers to request a more thorough consideration of a claim that you believe was misprocessed. Appeals should cite the reasons that reconsideration is warranted and what the expected outcome should be. The appeal must make it clear that all the insurance company’s medical necessity criteria are met, or that a specific criterion is particularly unreasonable in a given patient’s case. Typically, the insurance company dictates procedures that must be followed before the appeal will be considered.

Assignment

Insurance policies involve contracts between patients and insurance companies. Accordingly, benefit payments from the insurer should go to the insured. However, patients can “assign” the benefits due to them from a third-party payer to the healthcare entrepreneur who renders services. Assignment allows the insurer to pay the healthcare entrepreneur directly. Accepting the assignment of benefits often is contingent on terms with which the healthcare entrepreneur may not be comfortable. For example, accepting assignment often means that the healthcare entrepreneur agrees to be paid no more than the insurance company’s allowed amount. There is no option to bill the patient for the remainder of the fee. The unpaid portion of the bill, if any, must be written off.

Balance Billing

When the allowed amount paid for a claim is less than the amount billed, the resulting balance due, in some circumstances, can be billed to the patient. This is known as balance billing or back-billing. Many contracts between professionals and payers prohibit or restrict balance billing. It is important to know which patients can and cannot be held responsible for the portion of a bill that is not covered by insurance.

Burden of Enrollment

Like any business, insurance companies can improve their profit margins by trimming minor costs. As a result, there is a trend in the industry to shift responsibilities for functions that serve only the insurance companies’ interests. Time-consuming tasks such as applying for and renewing credentials on the insurance companies’ panels of approved professionals are prime examples of expensive functions performed by professional practices that benefit only the insurance company. Collectively, these costs are referred to as the burden of enrollment.

Capitation

Capitation is one of the payment models used to tie service usage to healthcare entrepreneur income. In its basic form, the capitation model calls for healthcare entrepreneurs to be paid a predetermined amount of money to care for a specified number of patients in a specified time frame. If the cost of patient care exceeds the amount of money to be paid, the healthcare entrepreneur will sustain a genuine financial loss. On the other hand, if the healthcare entrepreneur limits the expenses associated with caring for the patients in the group, the healthcare entrepreneur can profit.

This model appeals to healthcare entrepreneurs who want to have more control of any cap on their income. In exchange, the healthcare entrepreneur accepts more financial risk. Capitated contracts should be carefully thought through in consultation with practice consultants, actuarial professionals, and attorneys.

Coinsurance

Insurance policies often require patients to pay some portion of each bill they receive; this can be accomplished through several mechanisms. One mechanism is coinsurance. Often expressed as percentage of the bill, coinsurance is one of the amounts the patient must pay for services received.

For example, if an insurance policy calls for 20% coinsurance, the patient must pay $20 to cover the proportion of a $100 charge that the insurance company will not pay. Related terms include deductible, copayment, and copay.

Coordination of Benefits

Sometimes more than one third-party payer is responsible for paying a patient’s medical bill, and there must be a coordination of benefits (COB). A typical example occurs when the patient has purchased secondary insurance to cover the deductibles, copayments, and coinsurance that the terms of their primary insurance call for the patient to pay. Other common examples include cases in which worker’s compensation or automobile insurance policies are used to pay for some portion of a bill. In such cases, the payment of the insurance “benefits” must be coordinated. Sometimes, but not always, the payers coordinate the payment of benefits.

Typically, there is little for the healthcare entrepreneur to do other than to track the payments or submit billings to secondary payers. However, it is important to know whether insurers other than the patient’s primary insurer will be involved in paying you. Use new-patient intake forms to inquire whether the patient has a secondary insurance policy, has been injured on the job, or is seeking your services as a result of an automobile accident.

Copayment

Commonly referred to as copay, this is the fee the patient pays to the professional for services rendered or goods sold. Typically, the copay is expressed as a specific dollar amount rather than as a percentage of a bill. In fact, many copay amounts are unrelated to the amount of the bill; rather, they are associated with a cost per visit. So, for example, one policy may have a $20 copay for an outpatient office visit; another may have the same copay unless the visit is to a specialist, in which case the copay is likely to be higher.

Deductible Amount

Many insurance policies leave the responsibility for paying most, or all, of medical bills to the patient until the bills reach a certain threshold known as the deductible. Bills in excess of the deductible amount are paid, at least in part, by the insurance company. The cost of purchasing a policy with a high deductible is lower than the cost of the same policy with a higher deductible, so many patients purchase policies with very high deductibles. If the deductible is high enough, many people will fail to reach the deductible amount each year and the insurance company’s responsibility will be nil.

Because deductible amounts typically renew each year, it is essential to know how much of each patient’s deductible has been paid before each visit. The insurance company will not pay claims filed on behalf of a patient who has not yet met the deductible. If the claim is rejected, the bill can be sent to the patient; however, such bills can be difficult to collect and too frequently become converted into bad debts. Using insurance websites, the savvy healthcare entrepreneur can know in advance whether a patient has met their deductible. Knowing this allows the healthcare entrepreneur to collect accurate fees in advance, thus reducing billing costs and bad debt.

Because deductible amounts sometimes confuse even seasoned professionals, an example is in order. Consider a patient who holds a policy with a $3,000 deductible that renews at the beginning of each calendar year. Until the patient has paid $3,000 in fees out of pocket, the insurance company will not pay anything. The healthcare entrepreneur must collect all fees directly from the patient. When the same patient with the same policy has met and exceeded the deductible, the insurance company will begin to pay the bills. At that point, the practice can begin to bill the insurance company directly and expect payment. As soon as the calendar year changes, the deductible is reset and the burden to pay all new bills falls back to the patient.

Insurance policies sometimes set one deductible amount for services rendered by professionals who are in that insurance company’s network of professionals and another for “out-of-network” professionals. By setting the out-of-network deductible at a level much higher than the deductible for in-network services, the insurance company penalizes patients for choosing a healthcare professional who will not accept the company’s reduced fee schedules.

Another common variant of the deductible amount is the family deductible, as opposed to the individual deductible. A person who has met the individual deductible may have family members who have not. It behooves each practice to know in advance what each patient’s deductible amounts are and to collect fees accordingly.

Diagnosis-Related Groups

Diagnosis-related groups (DRGs), originally developed to control inpatient costs, establish a fixed cost for treating various diagnoses and clusters of diagnoses. Hospitals and healthcare entrepreneurs are paid a predetermined amount based on the DRG under which a patient is admitted. This is known as a prospective payment. When treatment costs exceed the amount paid for with the DRG, the service provider loses money. When treatment is provided for less than the DRG pays, the service provider enjoys a healthier profit margin for that case.

Predictably, the system has unearthed several problems, including the financial incentive to discharge patients prematurely. As is often the case in healthcare regulation, the “solution” comes in the form of more regulations, such as those that penalize hospitals for having to readmit patients soon after discharge.

Fee for Service

When the relationship between a patient and their treating healthcare entrepreneur is free of third-party payers, a fee-for-service relationship is created. The healthcare entrepreneur and patient are free to choose mutually agreeable treatment plans and mutually agreeable fees. The patient is solely responsible for the cost of the care.

Many professionals limit their practices to fee-for-service relationships only. Some do so to keep their focus on clinical work rather than business functions; others do so knowing that it takes relatively few patients paying the full fee for services to generate as much profit as would be generated by a larger number of insured patients paying at a discounted rate.

In-Network and Out-of-Network

To fully appreciate the meaning of the term network in the health insurance context, it is necessary to keep the laws of supply and demand in mind. Healthcare reform has provided the insurance industry with control over both the supply of patients (i.e., the demand for services) and the supply of professionals available to serve those patients. The supply of patients is controlled by simply selling insurance policies. The pool of labor is controlled by creating networks of professionals and facilities that are willing to provide services at rates that are significantly discounted. Professionals in the network are known as in-network providers. All others are considered out-of-network providers.

The term providers is used here because doing so is necessary to define a term. The term providers is a derogatory, dehumanizing term that serves to limit the professionalism and special relationship with patients that doctors and other professionals have always enjoyed. The term instead connotes interchangeable “providers” of services with whom patients have a business relationship. Healthcare entrepreneurs should avoid the term and object when it is used in their presence.

Modifiers

The codes used by most healthcare entrepreneurs to identify procedures they have performed come from the Current Procedural Terminology (CPT) manual, a copyrighted publication of the American Medical Association. These codes tend to be specific in their descriptions of what each coded procedure entails. When a specific procedure is performed in a manner that deviates from the code that best describes the procedure, modifiers can sometimes be appended to account for the deviation. For example, if a required element is intentionally omitted from a procedure, add the modifier -52 to indicate that the procedure performed involved less than the requisite array of elements.

Noncovered Services

Also known as exclusions, noncovered services are services, diagnoses, and products for which the insurance company will not pay, such as preventative services. Even common, frequently used services and often-occurring diagnoses can be listed as noncovered services in a given policy. It is essential that you know what is and is not covered by each patient’s policy. This information can be found using the insurers’ medical necessity manuals.

Not Medically Necessary

Do not skip this definition, even though you assume you know what the term means. As a healthcare professional, you have been taught how to assess the clinical value of the procedures and products you recommend to your patients. Interventions that are not needed to accomplish your patient’s goal of wellness are generally recognized as not medically necessary.

This is not the definition that applies, however, when the term not medically necessary is used in the context of health insurance. There, the term is used to label noncovered services, services that are not in sync with the insurance company’s clinical protocols, and services that are not in line with the insurance company’s provider manuals. Even a common diagnostic test that is routinely run to confirm a diagnosis can be declared not medically necessary if the insurance company decides that the diagnosis should be based solely on other criteria.

Patients receive notifications from insurance companies informing them how a claim has been processed. When a claim is deemed not medically necessary, this term is used in the notice, leading the patient to doubt their healthcare professionals’ conduct and judgment. Patient education is necessary to combat these misunderstandings.

Place of Service

Services that are routinely covered by an insurance policy when provided in a professional’s outpatient office may not be covered when rendered in another environment, such as the patient’s home. Sometimes, the services of a consulting healthcare entrepreneur in a hospital or skilled nursing facility (SNF) are not covered because the service is bundled into a flat fee paid to the facility. Therefore, before rendering services outside of your office, it is essential to confirm that the intended place of service will not invalidate a claim.

Preauthorization

The terms precertification and preauthorization often are used interchangeably, yet they refer to different processes. Both are expensive, time-consuming processes that, at times, can take the better part of an hour. Failure to go through these steps will result in a rejected claim. Even when an authorizing code is obtained, the claim may still be rejected if the payer subsequently determines that some aspect of the service was not considered when the procedure was preauthorized. To obtain preauthorization, you must provide the insurer with a data set supporting the need for the treatment or other procedures you are contemplating. The insurer evaluates the data to determine whether there might be a different way to accomplish the stated goals. Remember, just because an insurer declines to preauthorize your treatment plan, that does not mean you should abandon the plan. It does mean that the patient must choose between paying for the recommended course of care personally or foregoing the treatment or procedure.

Precertification

Precertification is the process insurance companies and managed care organizations use to control the utilization of services. Healthcare entrepreneurs planning to render services to an insured patient often must obtain precertification by contacting the insurance company and obtaining a code number authorizing the planned procedures. This usually can be accomplished online, by fax, or by telephone.

Relative Value Units

The CMS and others rely on an ever-changing system by which relative value units (RVUs) are assigned to procedures performed by healthcare professionals. RVUs are used to determine the value of each procedure and, ultimately, the fee that will be paid for that procedure.

Several factors go into the assignment of an RVU. First, the professional’s time, skill, and training are assigned a value, known as the work RVU. Second, the costs of operating the type of facility that would render the service in question are estimated and calculated into an expense RVU. Another factor used in determining an RVU and typically given a small weight is based on the costs of professional liability insurance. Adjustments are then made for the costs of practicing in different geographic localities and the setting (inpatient or outpatient) in which the procedure will be rendered. Finally, a conversion factor is applied to derive a dollar value for each RVU.

Although few healthcare entrepreneurs will be called upon to calculate an RVU, it is worth having at least a passing familiarity with the formula because these calculations determine fees and payments. RVUs influence even non-Medicare payments, because it is common in healthcare to negotiate private sector rates as a proportion of Medicare’s rates. The formula is:

Assigned value of the procedure (RVU) =

(work RVU + practice expense RVU + malpractice RVU) × conversion factor

Single-Case Agreements

There are times when an out-of-network professional may want to render services to a patient who is unable or unwilling to pay on a fee-for-service basis. An example is when a long-standing patient or a patient in the midst of ongoing treatment switches insurance companies. In these cases, it is sometimes possible to negotiate a one-time agreement with the patient’s insurance carrier or managed care panel. Known as single case agreements, these agreements ensure that the insurance company will pay some or all the fees accrued in the case.

Typically, the insurance company will insist that the services be rendered at its reduced fee schedule. Healthcare entrepreneurs who insist on being paid their full fee can often get the insurance company to agree to do so or, at least, find a mutually agreeable fee somewhere in the middle.

Utilization Reviews

Utilization reviews (URs) are often, but not always, requested by and performed by third-party payers. At the bottom line, a utilization review is an audit that determines how well what has been done aligns with what was supposed to have been done. For example, some insurance companies do not pay for diagnostic studies for disorders they believe can be diagnosed solely on clinical examination. A utilization review study might, for example, look at how many patients with a clinically diagnosable disorder received diagnostic studies even when the insurer’s medical necessity criteria say that such studies are unnecessary. Savvy healthcare entrepreneurs and healthcare facilities often perform their own utilization reviews in the service of quality control and regulatory or contractual compliance.