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Hospital spending accounts for a disproportionate portion of health care expenditures in the United States and hospitals will continue to be under constant pressure to improve efficiency with increasingly limited resources. Understanding the flow of money in health care has become an integral part of medicine. As health care reform reshapes a competitive environment, hospitals, hospitalist leaders, and practitioners need a common language and framework as they navigate hospital operations, set budgets for their employees, and achieve financial success. Hospitalists and hospitalist medical directors must be fiscally savvy in order to survive the challenging world of health care. Although a hospital administrator carries out much of the detailed analysis, the hospitalist medical director is responsible for the operation of the practice, which includes managing the Hospital Medicine's group budget. Beyond billing, the director should be informed of the status of all other revenue resources, including capitated payments, stipends, and other monies.

This chapter will introduce readers to commonly used hospital financial terminology and theory so that they may more effectively communicate with hospital administrators and develop a strategic plan for their practices. This chapter will present the topic of finance in health care in three sections: (1) health care payment schedules, (2) health insurance models, and (3) health care finance. Although the technical aspects of finance can be daunting, this chapter will provide a general overview for understanding reimbursement methods, insurance company models, and revenue maximization techniques.

How Medicare, Medicaid, and insurance companies reimburse hospitals influence cash flow, income statements, and budgeting. Below are some of the generally accepted payment methods in the health care industry.


Under this type of payment system a health care provider is paid a fixed payment per member covered for a fixed period of time regardless of service utilization. For example, insurance company X will pay Dr. A $200 per member enrolled in insurance company X per month regardless of whether Dr. A sees the patient or not. In this payment method, the doctor must cover all costs associated with delivering health care in his office or health care setting including laboratory tests, imaging, and office visits. This payer schedule effectively shifts financial risk to the provider. The downside of this system is that risk is shifted to the provider. If the patient mix provided by the insurance company happens to require extensive medical resources during a specific period, all costs that supersede the lump-sum cash provided by the insurer must be paid out-of-pocket by the provider. The upside is the potential for profiting if a provider can make cost effective medical decisions to optimize medical care because all leftover cash from the lump sum payment is retained as profit.


Under this type of payment system, insurers reimburse a set fee for each service rendered. Typically, the reimbursement is a set percentage of the actual cost, which is ...

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