Fee-for-Service (FFS) Reimbursement
In this hospital reimbursement model, services are unbundled and each is paid for separate from the rest. This model is founded in order to motivate and provide incentive for physicians to provide as many treatments as possible.
Therefore this reimbursement model or basis will increase the number of admissions since physicians are compensated depending on the quantity of treatments. The average length of stay and volume of services per day will also be affected in the same way. This is attributed to the fact that quantity is favoured over quality.
This basis however raises the unit cost of services (cost per service). This is because patients have been incentivized to accept and medical service that is of good to them.
- Per Diem reimbursement
The Per Diem basis is founded on allowances or expenses being set on a standard and fixed daily rate. This basis has a profound effect on the health services. The amount available for hospital and healthcare expenses is fixed this will therefore limit the amount of services received by the customer. The single daily charge is paid for by the managed care plan. This charge is fixed and is irrespective of the actual cost of services rendered to the patient.
This will reduce the number of admissions, average length of service per day. This will also reduce the unit cost of services since services will be limited to the essential and vital services only.
- Fixed fee per admission
Also known as the Flat-rate. It is a fixed single charge for each admission that is paid for by the managed care plan. This is irrespective of how much the actual services given to the patient cost.
This will reduce the number of admissions and the average length of service per day. This will also reduce the unit cost of services since services will be limited to the essential and vital services only.
At equilibrium conditions, the prevailing price of a given commodity or service is the price that both the customers are willing to purchase the commodity or service at and the suppliers willing to provide the service or commodity to the market at. In this case the equilibrium price is at $30.
Should the legislative proposal be enacted, the price will be raised to $40. This increase in price will disturb the equilibrium. At $40, the physiotherapy industry will be willing to increase the supply of the service to the industry. The supply would increase from 150 to 200. However, the quantity demanded will drop since less customers would be willing to purchase the services at the increased price. At the $40 market price, customers will only demand 100 units of the service.
This increase in price will in effect cause a shift in the demand curve. Therefore the quantity utilized will be 100 visits.
Part A
If each of the physicians is a profit maximizing provider, they would seek to provide the quantity of services that has the highest difference between cost and revenue generated. To generate this difference, i.e. profit:
The profit maximizing physician will set the price to $6 per session, this will mean they provide 2 visits to the public and private patients. At this price, the physician can make the most profit since at all the other prices, the physician either breaks even or makes a loss.
Part B
If the Medicaid Agency lowers its rate to $3 per visit, the number of visits provided will drop irrespective of the demand shifting or not. This is because at a reduced price, the physician’s income is reduced. Therefore fewer physicians will be willing to provide services at the $3 price. By the demand remaining the same, this will create a deficit or shortage in physician services in the market.
References
Hickson, G. B., Altemeier, W. A., & Perrin, J. M. (1987). Physician reimbursement by salary or fee-for-service: effect on physician practice behavior in a randomized prospective study. Pediatrics, 80(2), 344-350.
Jacobs, P., & Rapoport, J. (2004). The Economics of Health and Medical Care. Sundbury: Jones and Barlett.
Monrad Aas, I. H. (1995). Incentives and financing methods. Health Policy, 34(3), 205-220.
