The Changing Payment Taxonomy

One of the most talked about aspect of healthcare reform is the changing payment taxonomy which will dictate how payers and patients pay providers for services. The ongoing struggle to contain healthcare costs, which have been spiraling out of control for decades under the unsustainable fee-for-service model of payment, is likely a long while away from being corrected in toto. At this stage in the game, even a little progress in a direction towards savings is reason for hope.

Hospital Readmissions

Four Categories of Healthcare Reimbursement

The layout for the new healthcare reimbursement taxonomy is divided into four categories of possible payment: fee-for-service with no link to quality, fee-for-service with a link to quality, alternative payment models built on the fee-for-service model and population-based payment models.

This framework can be further broken down as such:

CATEGORY 1: Fee-for-Service, No Link to Quality

  • Payments are made based on the volume of services provided and aren’t determined by quality or efficiency of the services.

CATEGORY 2: Fee-for-Service, Link to Quality

  • Some, but not all, of the payments are made based on the quality and efficiency of the healthcare services (example: value-based purchasing)

CATEGORY 3: Alternative Payment Models Based on Fee-For-Service

  • Some of the payments are linked to management of services or particular episodes of care. The patients are still made based on the delivery of services but there are opportunities for shared savings and a certain degree of shared risk (example: bundled payments)


  • Payment isn’t necessarily made based on service delivery so it’s not inherently linked to volume. Payments are made for care provided to patients who are seen over a long period of time, generally speaking.

Moving Toward Value-Based Purchasing

In order for the necessary shifts to occur through multiple phases of development toward value-based purchasing, providers need to change their day-to-day operations; a prospect which is not very appealing, particularly when the payoff is seeming relatively slow. Hospitals and providers, then, are expected to balance both fee-for-service payers as well as the burgeoning alternative models; one cannot, yet, be completely forsaken for the other. The goal for the transition as it stands right now is for 85% of Medicare to be linked to quality by 2016 and 90% by 2018. Currently, about ¼ of payments are determined via this quality focused method.

Changes to IPPS

Additional changes stem from CMS’s IPPS, which this year will see a raise in inpatient payment for Medicare beneficiaries by 1.4% and also carries a focus on price transparency. Moving forward, this will continue to be an important priority for providers and hospitals.

Readmission Penalties

Additionally, the maximum penalty for readmissions will rise to 3% this year, and the lowest overall performing hospitals will see a 1% reduction in reimbursement from Medicare. This will continue to present challenges to those physicians or hospitals that serve particularly complex patient demographics: the fear being that if patients are routinely readmitted to the hospital because they are, quite simply, very sick doctors will be deterred from treating them or helping them with chronic care management if they know they will be penalized financially when these patients land back in the hospital. Regardless of the fact that they may have done everything in their power, as a physician, to prevent it.

The “2-Midnight Rule”

In the same vein, the persistence of the “2-midnight rule” to justify the length of a hospital stay needed to constitute an admittance continues to challenge physicians, patients and payers as there is an increasing number of patients who are in limbo, not quite an inpatient but nor are they an outpatient. These observation patients present not just a mass of clinical challenges, but certainly financial ones, particularly where coding and bill procedures are concerned.

The challenges faced in healthcare reimbursement today aren’t insurmountable by any means — but for many, it’s certainly enough to be termed a thorn in their side.