Cost Plus Methodology: Achieving True Cost Containment

Leave a Comment
June 14th, 2012
Categories: Health News

Fair and Effective Medical Cost Containment

Calculate CostsPayerFusion’s unique, three-pronged approach to claims reimbursement allows providers fair reimbursement while simultaneously giving insurance companies and self-funded corporations a competitive advantage in managing their claims costs. Our Cost Plus Methodology is based on the premise that the delivery of effective medical services managed efficiently and fairly compensated should lead to a cycle of responsible charges, while the unnecessary use of resources and lack of quality outcomes would lead to increased costs, inordinate billings and the on-going escalation of insurance premiums to the consumer.

This proprietary process bases its claims pricing on the actual cost of appropriate care – by type of facility, size of facility, type of treatment, and by actual share of unfunded or underfunded care that requires them to cost-shift, not a percentage reduction off of an inflated retail price. We process and analyze this data using a unique algorithm that provides us – and our clients – with a clear advantage in negotiating fair and sustainable savings that results in true cost containment.

Specifically, our Cost-Plus approach incorporates the following components:

  1. Statistical cost information aggregated by type of service rendered and by type of provider as reported by hospitals to the U.S. government. In addition, other sources of public information including quality indicators, overall efficiency of facilities and proprietary analytical tools are also used to assess the medical necessity and/or presence of fraud. We classify the provider into one of the five categories:
    • Owner: Government, Private Not for Profit, or Private for Profit.
    • Teaching Status: Teaching versus Non-Teaching hospitals. In order to be a teaching hospital, the facility needs to be affiliated with a Medical School.
    • Bed size: The number of beds defines the size of the facility that can be grouped into small, me dium or large.
    • Geographical Region: U.S. hospitals are clustered into 1 of 4 regions (Northeast, Midwest, South and West).
    • Hospital Location: Metropolitan versus Non-Metropolitan
  2. Reimbursement data from DRG’s are used as a reference point to demonstrate how providers are reimbursed by Medicare with exposure to loss and the need to transfer those losses to other payers’ claims (what is known as “cost shifting”). Once the provider is classified we observe data from some of the following categories:
    • Mean Length of Stay (LOS) per DRG
    • Mean Charges per DRG
    • Mean Costs per DRG
  3. Significant experience, knowledge and relationships from working with all sides of the healthcare industry including providers, insurers and traditional claims administrators.

What's more, we base our savings calculations on “clean” claims – claims that have been scrubbed of any fraudulent charges, errors or charges for clinically unnecessary procedures. On average, this claim scrubbing will produce an additional 5 – 15% of savings above and beyond the savings we report as a percent reduction from the retail price.

Discount vs. Cost-Plus

From a financial perspective, the discount model employed by PPO’s is ineffective because a discount based on an inflated price does not provide effective cost containment. It is not anchored to the real cost of care. Rather, this outdated approach encourages gaming of the system as providers seize the opportunity to raise their prices disproportionately to their true costs in order to increase their “discount.” However, true cost containment is reached when our cost-plus methodology is used. Once we  have a claim clean of errors and fraudulent charges, we assess the actual cost of the care provided, and then reprice the claim to accomodate the cost, plus a reasonably negotiated fee.

At PayerFusion we aim to create a win-win relationship between payer, provider and patient by accommodating each entity fairly.  Learn more about how we use our cost-plus methodology and cost containment to provide accurate rates.  To become a provider in our provider network visit PayFuseNet.


Leave a Comment