What are Retrospective Payments in Healthcare?

In the American healthcare system, most patients do not self-pay medical bills directly to the provider, but instead have insurance of some sort, whether private or government. Providers will submit claim forms to the patient's insurance company for reimbursement under most methodologies. There are various types of reimbursement schemes and retrospective payments refer to the traditional method of reimbursement to healthcare providers.

Retrospective Payment Method

• The retrospective payment method is considered a fee-for service payment method. This methodology involves insurance companies and other third parties making payments after the provider has rendered a service, based on what the provider charges for the service rendered. Fees under this methodology are reimbursed based on each individual service rendered. The rationale behind the retrospective payment method is to give maximum freedom of choice in required services for the patient and the provider.

Why Retrospective Payments

• Retrospective payments keep the choice of medical treatments and service in the hands of qualified healthcare professionals, aligned with the comfort level of the patient. Rather than having unqualified professional in finance companies decide on the treatment plan for a patient, based on economic assumptions, healthcare professionals and patients can put healthcare concerns first. Yet, no system is perfect and inefficiencies can result.

Retrospective Payments and Medicare

• In 1965, Congress established Medicare and adopted the retrospective payment method, traditionally used in the private sector. The rationale seemed in-line with keeping America healthy, particular the elderly for whom the Medicare plan was intended. Medicare took this a step further, and defined a payment method where the government made interim payments to providers throughout the year and providers reconciled those payments with allowable costs, as defined by regulations are the year's end. This lead to ever-escalating Medicare costs over a period of 18 years, increasing to almost $37 billion annually by 1983. Consequently, Medicare abandoned the retrospective payment method.

Problems Noted With Retrospective Payments

• Controversially, retrospective payments have come under fire for bloated expenditures, despite offering incentives to provide quality healthcare. The main issue -- as illustrated with the Medicare problem -- is cost containment and adequate control of healthcare resources. For example, a hospital under this system might maximize patient stays in the hospital, because this theoretically equates to more payments. This wastes resources on patients that don't really need the resources, thus putting strain on the healthcare system, while driving up costs for the individual patient and his third-party payment provider.