July 17, 2024

The Health

Your health, your choice

Reimbursement in a Healthcare Context

Healthcare reimbursement is the payment that your hospital, healthcare provider, diagnostic lab, or other provider receives for providing you with a medical service. The most common method is fee-for-service (FFS) in which the reimbursement is made for each individual service performed.

Reimbursement is often made by a health insurer or a government payer like Medicare. The total cost may be fully covered by the insurer, or you may be responsible for a portion of the cost per the copayment or coinsurance terms of your policy.

If you pay the entire amount out of pocket, the reimbursement is known as self-pay.

This article describes the different ways that healthcare reimbursement is made in the United States, including vehicles that allow organizations to pay upfront and others that allow you to make payments or reimbursements yourself.

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How Healthcare Reimbursement Is Determined

Healthcare providers in the United States are primarily paid by health insurers or government payers through a system of reimbursement. After a medical service is rendered, the provider sends a bill to whoever is responsible for paying the costs.

The primary model is fee-for-service (FFS), in which each service is itemized and individually billed based on an agreed rate. The FFS is based on a contracted amount that the government payer or private insurer has agreed upon for each service.

Government payers include Medicare, Medicaid, TRICARE, the Children’s Health Insurance Program (CHIP), and the Veteran’s Administration (VA). Examples of private insurers include Blue Cross/Blue Shield, Aetna, and UnitedHealthcare.

Medicare and Medicaid, the largest payer of healthcare in the U.S., assign a common procedural technology (CPT) code to each service describing the agreed-upon reimbursement cost. People on Medicare and Medicaid can find these on the website maintained by the Centers for Medicare & Medicaid Services.

Government payers and private insurers also provide their customers with a document called the “Summary of Benefits and Coverage,” which offers a high-level overview of covered benefits, cost-sharing provisions, coverage limitations, and exceptions for their insurance policy.

After services are rendered, a document called the Explanation of Benefits (EOB) is sent describing the services you received, the date you received them, the amount your insurer agrees to pay, and the amount you owe, if anything.

Self-Pay

Self-pay is when you have no health coverage and have to pay out of pocket. According to the Kaiser Family Foundation, 25.6 million people in the United States (or roughly 8% of the population) were uninsured in 2022.

For individuals with no coverage, a good-faith estimate of the costs of service must be provided under the No Surprises Act, a federal law that went into effect on January 1, 2022. The estimate must be given at least three business days before the scheduled service or when requested.

Payment plans and out-of-pocket discounts may be offered by or negotiated with the provider.

Copayment and Coinsurance

Private insurers and government payers may not pay for the entire cost of a covered service. The cost is often shared with the policyholder either in the form of copayment (a set rate you pay for a medical service) or coinsurance (the percentage of costs you pay after you have met your annual deductible).

The deductible is the set amount you need to pay out of pocket each year for medical services and prescriptions before your coinsurance kicks in. Until then, you may be liable for up to 100% of the service, depending on the terms of your policy.

Health Savings Accounts (HSA)

A health savings account (HSA) is a savings account used in conjunction with a high-deductible insurance policy that allows users to save money tax-free for medical expenses.

The benefit of HSA is that it allows any money you put into the account to accrue interest. The amount also rolls over from one year to the next, and the user can decide how much or little to add at any time.

HSAs differ from flexible spending accounts (FSA) in which any unspent amount is forfeited at the end of the year (though there may be a grace period, and your employer may allow you to carry over up to $640 each year).

With an HSA, reimbursement is made directly by the patient to the provider, either with a debit card connected to the account or an online transfer of funds. The patient can also reimburse themselves for medical services paid without any tax implications.

Health Reimbursement Arrangement (HRA)

Health reimbursement arrangements (HRA) are a type of employee health benefit offered by some employers that reimburse employees for their out-of-pocket medical expenses. They are not offered as the sole benefit and must be part of a group health insurance plan.

An HRA is funded by the employer and the employer gets the tax benefit. The employee, meanwhile, is not taxed on the reimbursement as income.

An HRA can be advantageous if your individual health plan has a high deductible. It allows you to be reimbursed for your medical expenses even before you reach the annual deductible amount. In some cases, your premium may also be covered.

Capitation

Capitation is a reimbursement model used by managed care organizations, including many state Medicaid programs and health maintenance organizations (HMOs). It involves a fixed amount of money per covered individual paid in advance to a healthcare provider for an agreed set of services over an agreed period of time.

The amount is determined by the range of services provided, the number of covered individuals, and the period during which the services are rendered.

While capitation simplifies billing since payment is made upfront, it tends to provide fewer services and lower levels of healthcare.

Balance Billing

If your healthcare provider accepts your insurance, it means that the reimbursement has already been agreed upon with an in-network provider and the only cost you are obligated to pay is your copayment or coinsurance.

Billing for an additional amount, unless informed ahead of time, is called balance billing. Also known as “surprise billing,” balance billing is generally prohibited.

Balance billing involves bills from a provider that you did not know was out-of-network. This means that a reimbursement rate was not negotiated and is therefore not covered by your insurer. An example is an anesthesiologist who is out-of-network while your surgeon is in-network.

The No Surprise Act limits the amount of additional billing for emergency and non-emergency services from an out-of-network provider without prior authorization.

Choosing an Out-of-Network Provider

If you choose an out-of-network provider, you may be fully liable for payment. For some people, this is a reasonable option if there is a specialist or facility they really want.

The same may apply to concierge care, an exclusive form of care that involves 24/7 physician access, usually at a cost not covered by insurers.

Summary

Healthcare is paid by reimbursement, most often on a fee-for-service basis by an insurer, government payer, or yourself. There are other models, such as capitation in which payment is made in advance for a group of individuals, and health saving accounts (HSAs) that allow you to put money aside tax-free to pay for medical services yourself.

When reimbursements are made, you may be responsible for copayment and coinsurance costs. You may also be subject to balance billing, in which an unexpected bill arrives that your insurance company will not pay, typically from an out-of-network provider.

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