Five Steps to Ensuring Reasonableness in Cost-Based Reimbursement Programs

As the debate over national health policy continues, many state health administrators are looking for ways to do more with less. A key step towards maximizing the impact of state and federal healthcare dollars is ensuring reasonable spending on existing programs. There are endless factors which impact the cost of healthcare such as geographic location, patient demographics, intensity of services and availability of resources. Consequently, reasonable cost is difficult to pinpoint.

PCG’s team partners with state health departments nationwide to ensure reasonableness of health-related cost incurred by hospitals, schools, localities, EMS providers, FQHCs and other healthcare providers. Below are five of the most effective and easily transferrable tools we use.

  1. Risk Sharing. If 100% of the cost of health service provision is reimbursed to the provider through state and federal funding sources, providers have no incentive to control cost. Allocating a portion of the cost to the provider motivates providers to implement cost-cutting mechanisms which can lead to a higher quality of care and an expanded patient pool.

  2. The “Prudent Buyer” rule. Costs are deemed reasonable if they are both necessary and ordinary costs related to patient care which a prudent buyer would pay for a given service. By training providers to conduct make-or-buy analysis, seek cost effective solutions and trim unnecessary cost, administrators can create a more efficient system of care.

  3. Benchmarking. Costs incurred by providers should be reviewed in comparison to the costs of providing comparable services in other states or locations as well as costs incurred in previous years or reporting periods. Large variance in cost compared to similar programs or prior reporting periods can be a red flag.

  4. Consideration for geographical cost factors. Benchmarking is only valuable to a point – it is critical that factors such as regional cost of living and availability of resources are considered. For example, limited access to specialty care clinicians for certain rural providers can have a substantial impact on cost.

  5. Compliance with federal regulations. The most important solution to safeguarding cost reasonableness is familiarizing providers with federal guidelines such as Provider Reimbursement Manual 15-1 and 42 CFR 405.2401.