What Is Cost Basis Health Insurance?

Medicare and Medicaid were initially cost-basis programs. Health care providers reported their costs to the federal government, who then reimbursed a percentage of that cost. In 1964, the federal cost basis reimbursement rate for these programs was 80 percent, according to the book "Understanding Health Insurance: A Guide to Billing and Reimbursement." Blue Cross Blue Shield also paid medical claims on a cost-basis at that time.

Disadvantages

• Under cost-basis health insurance, the insurer only paid documented costs that it deemed reasonable. This resulted in patients being overcharged for services to cover legitimate overhead like admissions departments. It also failed to prevent abuse in overcharging for services rendered. This prevented accurate accounting of the actual cost of medical services. Inefficiency evolved as hospitals could bill increasing amounts and still be reimbursed.

Effects

• Cost basis health insurance changed to a prospective payment system in which a predetermined payment was given for services based on their diagnostic related group. Costs are reimbursed based on the diagnostic code entered, regardless of the actual cost to perform the service.

Co-Insurance

• Co-insurance uses code based reimbursement with cost basis cost sharing with patients.

  Cost sharing is used in coinsurance health plans. Patients pay a percentage of the bill with the insurer covering the rest. Co-insurance differs from cost-sharing in that there is a maximum cap, at which point the insured patient no longer pays the remaining bills.