How Healthcare Payments Work From The Physician’s Perspective

Last Updated on July 8, 2019 by Christina Crisologo

The system in which physicians are paid for their services can be confusing. Unlike other professionals, physicians are not paid for hours worked or a flat fee. Instead, they get paid through a web of copayments, insurance reimbursements, direct payments, etc. The system is complex enough that a whole industry of individuals—medical billing specialists—work to make sure that payments to physicians are done correctly. There are many nuances to this whole process, but you should have a general understanding of physician reimbursement after reading this article.

Overview of How a Physician is Paid

In general, a physician’s reimbursement is determined by the sum of all of their clinical work, which is paid to them by multiple parties: insurance, patients, etc. To understand the general flow of this, Let’s go through an example:

Scenario

A patient with insurance comes to Dr. X’s clinic for an annual checkup, which reveals no history or physical exam findings concerning for underlying disease. Needing no further workup, after some brief counseling, Dr. X sends the patient on their way. Dr. X then tells his billing specialist all that he did with the patient, which the specialist turns into a bill that is sent to the patient’s insurance company. After some time, the insurance company sends a payment to Dr. X, which concludes the ‘revenue cycle’ for this clinical encounter.

This revenue cycle happens for any clinical visit or procedure a physician performs. However, the above example is very basic and does not take into account many of the complexities involved in this process. Below is the same encounter but with many complexities added in to illustrate just how confusing this is.

Scenario with Complexities Added In

A patient with insurance comes to Dr. X’s clinic for an annual checkup, which reveals no history or physical exam findings concerning for underlying disease. Needing no further workup, after some brief counseling, Dr. X sends the patient on their way. Before leaving, the patient pays his insurance’s contracted copay to Dr. X. Dr. X then tells his billing specialist all that he did with the patient, which the specialist turns into a bill and is sent to the patient’s insurance company. After some time, the insurance company sends a statement to Dr. X, stating he will not be paid because the birth date on the submitted paperwork was incorrect. After resubmitting, the insurance company responds again saying that Dr. X will not be paid because he did not do enough in his physical exam to bill for the amount that he did. After adjusting the bill and resubmitting, the insurance company finally sends a check, but it is only for half of what Dr. X billed. The insurance company states that his contract with them indicates he will only receive 3/4 of the amount he billed. Additionally, half of the 3/4 payment needs to be paid by the patient, since this is part of their deductible. Dr. X then sends a bill to the patient months after their visit in order to be paid the other half of what is due. After some period of time, Dr. X is finally paid 3/4 of what he initially billed for.

There is a lot going on here, but it highlights just how complex this process can be, as well as why patients can become confused by the bills they receive. Let’s take a step back now and delve into the various parts of this process to help make sense of it. To begin with, let’s look at what role health insurance plays in physician payments.

What Does Insurance Do?

For billing purposes, an insurance company acts as an intermediary between the physician and the patient, determining how much of a bill they will pay and how much the patient will pay.

The bill gets divvied up because they usually do not pay for every medical expense or service. They control costs by the types of coverage they provide, which the patient selects when they sign up for health insurance. For example, a plan may cover all office visits but only 50% of Emergency Department visits. Or, they may cover three office visits a year but only 20% of those thereafter. From a physician’s perspective, this is important because understanding what a patient is responsible for increases their ability to collect on what they are owed, as well as to bill a patient properly and let them know ahead of time what something will cost.

For physicians, insurance is their main source of payment. A commonly thrown around term is whether a physician is “in-network” or “out-of-network.” This is referring to whether the physician has a contract with the insurance company. Generally, being “in-network” means that a physician agrees to receive a pre-determined amount for what they bill. Depending on the contract, this can be a good or a bad thing. Being “out-of-network” means the physician can bill the insurance company for whatever they want, but there is no guarantee of getting paid, leaving the patient to foot the bill.

Now that a physician knows about a patient’s insurance, what can they actually bill to the insurance company?

What Can a Physician Bill For?

All activities a physician performs, as well as all the diseases they see, are assigned a specific code. That way, communication between physicians, billers, insurance companies, and the federal government are standardized. Clinical activities—office visits, procedures, surgeries—are indexed by Current Procedural Terminology (CPT) codes. For diagnoses, a system known as the International Statistical Classification of Diseases and Related Health Problems (ICD) is used, which is in its 10th revision, so they are collectively referred to as ICD-10 codes. For example, a medium-complexity office-visit about ‘Type 2 diabetes mellitus without complication,’ would be billed as the CPT code 99213 with the ICD-10 code E11.9.

Collectively, a physician is able to bill for all of the CPT codes they perform, and the ICD-10 diagnosis codes help inform how ‘difficult’ or ‘simple’ it was. Interestingly, there is a lot of physician work that is not given CPT codes, meaning it cannot be billed for. This encompasses almost all of the work outside of the patient’s room—communicating with other physicians, answering phone calls, writing emails, contacting insurance companies, etc. However, there is an effort to allow physicians to start billing for this sort of work.

Once a physician knows what they can bill for, it is imperative to know who should pay it.

Who Does the Physician Send the Bill To?

For any given clinical encounter, the bill can be sent to multiple entities, depending on the situation. Generally, this is dictated by the patient’s insurance status at the time of the visit. At the most basic level, an uninsured patient would be given the bill in full. For a patient with private insurance, it would go to their insurance company. For patients with Medicare, the bill would go to federal government. Importantly though, a bill does not usually get fully paid after going to one entity. Usually, it goes to multiple entities in a stepwise fashion, after each preceding group has paid their part of the bill.

Let’s say for example, a patient visited their doctor and the total cost of their care was $200. The patient initially receives the bill, saying they need to pay a $20 copay. After that, it is sent to the insurance company to get the remaining $180. The insurance company then sends a check for $90, saying the remaining amount is due from the patient since they have a deductible. The bill is then sent to the patient for a second time for $90. In total, after the bill was sent out three separate times, it was finally paid in full.

Although a physician may know what to bill for and where to send the bill, the amount they can actually be paid is a bit complicated.

How Much Should the Physician be Paid?

Before the late 1980s, physicians could charge as much or as little as they wanted, as there was no real benchmark for how much a physician should be paid. Just like a lawyer or other professional, they could bill what the marketplace supported and hopefully be paid for it. To this day, physicians can still charge whatever they want. However, a series of systems have been created to decide how much a given set of work is actually worth. So even though a physician can bill what they want, they generally get paid an amount that is already pre-determined.

To gain some control over how much was being paid, the federal government (Centers for Medicare & Medicaid Services) created a benchmark known as the relative value unit (RVU) in the late 1980s. Essentially, an RVU is worth a certain dollar amount and any clinical visit, encounter, or procedure, is worth a certain number of RVUs. Therefore, any bill submitted to federal programs (Medicare, Medicaid) has a pre-determined RVU value and total payment. Private insurance follows the same model of RVU-based payments, but they generally pay more per RVU. However, this is not an absolute. A physician could end up being paid more or less.

For example, a laparoscopic cholecystectomy (gallbladder removal) is billed by the CPT code 47562, which is worth 10 RVUS. If each RVU is worth $35, then the physician would be paid $350 for the procedure. However, this is only the maximal amount that will be paid. If a physician submits a bill for less than the maximum, they may get paid less. Therefore, physicians and hospitals routinely ‘over bill’ for what they think they will get paid because of what is known as the ‘contractual adjustment.’ Simply put, the contract between the physician and the insurance company states they will only get $35 per RVU so even if they billed for $500 for the gallbladder removal, their bill gets ‘contractually adjusted’ down to the agreed-upon amount of $350. On the other hand, If the physician submits a bill below the agreed-upon amount, let’s say for $200, it will not be adjusted upwards. They just get paid less. Therefore, to play it safe, physician’s ‘over bill’ insurance companies because they do not want to lose out on potential income simply by not asking for it. This is why hospital bills can be $50,000 but the actual paid amount is $30,000, creating a ‘loss’ of $20,000, even though it is not an actual loss.

Now that a physician knows how much they can reasonably expect to be paid for their service, now they have to actually collect it.

How Does the Physician Collect Their Payment?

Collecting a physician’s bill is probably the most difficult aspect of this process. Because of this, a whole field of specialists—medical coders/billers—focus solely on accurately coding medical encounters into bills, sending bills to the appropriate people, and making sure the bills are paid in-full. This necessitates having a good understanding of different types of medical insurance, what codes can be used in which situations, and how to navigate the multiple tiers of payments received on medical bills.

To begin, the medical biller will send the bill to who will most likely pay the bulk of it. Usually, this is a patient’s private insurance company. They may never respond, or it may get denied, so it is imperative that they be on top of managing which bills have or have not been paid. After receiving an initial payment, the biller then sends the remainder off to the next party, lest any ‘contractual adjustments.’ This continues until the bill is paid in full.

Interestingly, insurance companies and Medicare retain the right to audit past bills and recoup any money that they believe was overpaid to a physician, which can result in tens of thousands of dollars a physician has to pay back years after it was initially paid, even if it was due to a simple mistake. Because of this, it is imperative that a physician’s billing is done right the first time.

Conclusions

The process in which a physician tracks their work, bills for it and collects on it is a complicated process. Unlike other professionals who can bill purely for their time, a physician’s work has been sub-divided into pre-determined values. Although the system has tried to standardize itself through the use of codes and agreed-upon reimbursement amounts, it is a messy process that is difficult for both physicians and patients to follow. To be paid accurately and in a timely manner, it is imperative that physicians understand the process in which they are reimbursed.