Valuing the Medical Claim
Wednesday, December 21, 2022
by: Charles Plunkett, BA, MBA of Washington Practice Management, Inc

Section: Fall 2022

Insurance companies, government agencies and other medical payors satisfy medical claims by two primary methods:  1. Fee for Service and 2. Prospective Payment System.  

Fee for Service: This method pays physicians and other licensed healthcare providers for each service.  Examples include: office visits, physical therapy, radiology studies and other diagnostic studies.

Prospective payment system: A Prospective Payment System (PPS) is a method of reimbursement in which Medicare (CMS) payment is made based on a predetermined, fixed amount.  The payment amount for a particular service is derived based on the classification system of that service (for example, diagnosis-related groups for inpatient hospital services).  CMS uses separate PPSs for reimbursement to acute inpatient hospitals, home health agencies, hospice, hospital outpatient, inpatient psychiatric facilities, inpatient rehabilitation facilities, long-term care hospitals, and skilled nursing facilities. (
Medicaid, commercial insurance companies and workers compensation and most all other payers use this system.

Fee for service calculation:   Payment calculation is straightforward.  Bills are submitted using the CPT (Current Procedural Terminology) five-digit coding system.   Each CPT code has an assigned numerical weight (CPT 99313 medical office visit has a weighted value of 1.3, a more extensive visit 99214 has a weight of 1.92).

Each payor (Commercial insurers, Medicare, Medicaid, worker’s comp- L&I) has a “conversion factor” which is multiplied by the CPT code weighted value to calculate their individual allowable payment.

For example:  

Calculating payment for CPT 99213 (routine doctor office visit)
   CPT Weight   Conversion factor   Allowable payment
Medicare 99213 2.73   $34.89   $95.25
Commercial 99213 2.73   $52.00   $141.96
L&I 99213 2.73   $59.46   $162.33
The value range for CPT 99213 is from $95.25 to $162.33  
Value range represents the amounts contracted for and accepted as payment in full in the healthcare industry.  Using this range avoids considering what was actually paid on any one case thus avoiding collateral source rule objections.
The following payment example is an actual emergency room visit for a fall and head laceration.
            Total charges:                                      $27,326.19
            Total adjustments:                            -   $26,029.92
            Another discount:                                       - 42.20
            Amount from patient:                                   -10.55     
Amount paid (Medicare)                                  $  1,243.52
The question is: Why such disparity?  Why does a hospital bill so much knowing that payment will be a small fraction of charged amounts?  Good question but beyond the scope of this article.
The hospital in this example billed $6,248.73 for the physician’s fee, then another $5,646.00 for the same doctor during the visit.  Payors reimburse once for the physician's services.  The fair market value for just the first charge was $243.44.  The hospital bill included $11,315.58 for a head and upper spine CT.  The maximum value for these scans was $805.28.
The difference between billed charges and accepted contractual payments continues expanding.  One Washington hospital charges $455.00 for a 40 mg pill of propranolol.  Walmart sells a bottle of 60 pills of this medication for $20.47 or 34 cents per pill.  Upon closer examination in this case, the hospital billed the patient for two pills on several days, three pills on two more days and for four pills on one occasion.  On the four pill day the hospital charged $1,820.00 for propranolol.
Accurately valuing a hospital claim requires close attention to the individual charges. Other than pharmacy additional areas of excessive billing include laboratory services, imaging studies, procedures, operating room charges and monitoring costs.  
Prospective Payment Service (PPS) calculation: The billing system changes upon hospital admission.  Bills are submitted to payors based on the admitting diagnosis.   Payment for hospital service is made based on a predetermined, fixed amount (stated above).  Confusion occurs when the hospital bill also includes an itemized list of services.  Each services shows a “list price” for the service.  These prices come from the hospital “charge master”.  These prices are exaggerated beyond economic reality and serve no useful purpose.  However, these itemized charges are presented as the medical bill.
These prices can be used to calculate the reasonable or fair market value applying the same methodology used in fee for service calculation. This results in a value closer to earth.
How we serve the defense counsel community: Attorneys have engaged our firm to determine the “fair market value” for medical claims since 2004.
The process starts with identifying which specific charges to dispute. Disputed charges are then repriced to a range of “reasonable value” to “maximum fair market value.” Internally developed proprietary software calculates a report displaying each disputed charge and a value range for the total claim. Services include a summary or a rebuttal report, attorney conferences and testimony.
Economic reasoning is predicated on the definition of fair market value as stated in economic textbooks, U.S. Treasury Regulation 26 C.F.R. sec 20,2031-1(b)), and the decision logic in United States v. Cartwright (1973) and Higgs v. Costa Crociere, S.P.A. (2020).