Health Care Finance and Economics
Core concepts
Understand payment methodologies: fee-for-service, capitation, bundled/episode payments, pay-for-performance, and shared savings. Know the difference between charges, costs, and reimbursement, and how Medicare's IPPS, OPPS, and physician fee schedule (RBRVS with RVUs and the conversion factor) work. Grasp basic economics: supply and demand in health care, moral hazard, adverse selection, price elasticity, and the principal–agent problem between physician and patient. Know contribution margin, fixed vs. variable costs, break-even analysis, and the concept of payer mix.
Traps
Examiners love to ask whether capitation incentivizes more or less care - capitation shifts financial risk to the provider and can incentivize underutilization, while fee-for-service can incentivize overutilization. Another trap: confusing charge (list price) with reimbursement (negotiated or set payment). Adverse selection (sicker patients buy more insurance) differs from moral hazard (insured people use more care because they don't bear the cost).
Worked example / rule of thumb
A practice has fixed costs of $500,000, variable cost of $40 per visit, and receives $90 per visit. Contribution margin = $90 − $40 = $50. Break-even visits = $500,000 ÷ $50 = 10,000 visits. Rule of thumb: break-even = fixed costs ÷ contribution margin. If a question asks how many visits to cover costs, compute contribution margin first, never total revenue.
Also remember RVU = (work RVU × GPCI) + (practice expense RVU × GPCI) + (malpractice RVU × GPCI), multiplied by the conversion factor.