Four Ways Medical Insurance Pays Providers

Understanding Per Diem, Per Episode, Capitation, and Fee-for-Service

Medical insurance pays providers using four different methods. Understanding the different methods of payment is essential for the financial management of the medical office. These should be considered when developing a financial management strategy.

  • Per Diem/Visit Payments
  • Per Episode Payments
  • Capitation Payments
  • Fee-for-Service Payments

Per Diem and Per Visit Payments

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An insurance payment made to the medical office for each day or visit is a per diem or per visit payment. Per diem payments are made based on a predetermined amount regardless of the amount of time spent by the physician providing treatment or the array of services that the patient may receive during the visit.

Hospital inpatient visits and skilled nursing facilities are some examples of events that may be eligible to receive per diem payments according to the contract an insurance ​payer has with the facility. 

Per -visit payments are normally paid in a clinic, home health, physical therapy, or outpatient setting.

Per-Episode or Case Rate Payments

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Per-episode payments are made for all services rendered during one episode of care. They are also referred to as case rates. The episode of care can extend over several days or visits and be covered by a single payment.

Episode payments are usually made for emergency room visits, ambulatory surgical procedures, or hospital inpatient visits. When used in hospital inpatient visits, the payment is usually made based on DRGs (Diagnosis Related Groups).

DRGs are assigned a classification based on a combination of ICD-9 diagnosis codes, CPT and HCPCS procedure codes, complications or conditions present on admission, discharge status, age, and sex. DRG payments are also based on a certain time period, which is an average number of days necessary for adequate treatment.

Per Patient or Capitation Payments

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Per patient payments, or capitation payments, are fixed, monthly payments received by the medical office for the patient. This amount stays the same regardless of how many visits the patient has or the cost of incurred expenses and even when they don't receive care at all. 

State Medicaid programs are an example of a ​payer that makes per patient payments. Physicians are paid a set amount for each Medicaid patient they offer services to who are enrolled in their clinic or practice. This is the most effective way to cut health care costs while promoting preventative care. 

Fee-for-Service Payments

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The most common method of payment is the fee-for-service model. In a fee-for-service, the medical office is paid a set amount for each type or unit of service rendered. An office visit, lab tests, x-ray or another service is individually paid according to the fee schedule. The more care a patient receives, the more payments are made.

This payment method allows the medical office to receive the maximum reimbursement for each episode of care. 

Financial Management and Accounts Receivable

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Financial management is the effective and efficient management of the money generated by an organization which includes all components of the revenue cycle including accounts receivable.

Accounts receivables, also known as patient accounting, refers to revenues generated but not yet collected. To ensure cash flow is sufficient for effective management, the medical office has the responsibility to maximize its revenue potential.

A medical office may receive insurance payments by any or all of the different methods. Choosing which insurers to work with can determine what type of payments the office will receive.

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