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Journal of Operations Management xxx (2016) 1e9

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Seeing the forest for the trees: Institutional environment impacts on

reimbursement processes and healthcare operations
Seung Jun Lee a, James D. Abbey b, *, Gregory R. Heim b, Duane C. Abbey c
School of Global Innovation & Leadership, Lucas College and Graduate School of Business, San Jos
e State University, One Washington Square, San Jose, CA
95192-0164, United States
Department of Information & Operations Management, Mays Business School at Texas A&M University, 320 Wehner Building j 4217 TAMU, College
Station, TX 77843-4217, United States
Abbey & Abbey Consultants, Inc., P.O. Box 2330, Ames, IA 50010-2330, United States

a r t i c l e i n f o a b s t r a c t

Article history: Healthcare reimbursement processes perform an annual multi-trillion dollar task to remunerate
Received 24 February 2015 healthcare organizations, physicians, and patients. Healthcare reimbursement entails coding, billing, and
Received in revised form payment processes based on care provided to patients. As this research note highlights, though often
6 August 2016
implicitly assumed to be independent of care delivery processes, reimbursement processes are distinctly
Accepted 5 September 2016
Available online xxx
connected to the efcacy of care delivery. Prior research tends to examine neither antecedents nor
Accepted by: Mikko Ketokivi consequences of healthcare reimbursement processes and their operational implications, even though
these issues can lead to unproductive externalities affecting healthcare systems and patients. Most extant
literature tends to focus on medical task environments, with far less attention given to how institutional
Healthcare environment structures reimbursement and thus drives stakeholder incentives and behaviors. Because of
Coding a wide diversity of institutional environments, reimbursement processes differ on a nation-by-nation
Billing basis, and within nations on a state, province, city, or even within-city basis. The varied and complex
Payment reimbursement processes drive divergent stakeholder incentives, varying use of healthcare protocols and
Reimbursement processes, and differing patient outcomes. Even within a single reimbursement regime, a multitude of
Institutional environment reimbursement policies, required processes, and payer institutions creates operational complexity for
physicians and their professional staff, which ultimately affects patient care delivery processes and
outcomes. The task environment focus of extant healthcare OM research suggests a need to understand
institutional environment antecedents, natures, and impacts of reimbursement processes. This research
note illustrates the seemingly simple structural nature of reimbursement processes, yet also reminds
researchers how diverse institutional environments, built to accomplish different healthcare aims, can
lead to similar levels of enormous process complexity. The research note further motivates how such
phenomena may affect research ndings and the quest for operational solutions to healthcare dilemmas.
By focusing on healthcare reimbursement and its operational implications, the note provides useful
insights for continued studies of healthcare operations.
2016 Elsevier B.V. All rights reserved.

We really do believe much harder times are coming from a 1. Introduction

reimbursement standpoint. -Daniel Morissette, Stanford
Health Care CFO (Ellison, 2015) Healthcare reimbursement processes include coding, billing,
and payment processes related to care provided to patients. Though
these processes are known to have massive economic impacts on
national economies and businesses (Baker and Rosnick, 2005; Brill,
2015), the processes also generate many operations management
challenges. Healthcare providers, involved in $3 trillion of annual
nancial ows in the U.S. alone, face salient operating challenges
* Corresponding author. arising from regulatory and market pressures (World Bank, 2014;
E-mail addresses: (S.J. Lee), Brill, 2015). As the scope and costs of regulated healthcare tasks
(J.D. Abbey), (G.R. Heim), (D.C. Abbey).
0272-6963/ 2016 Elsevier B.V. All rights reserved.

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016),
2 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9

grow, reimbursement processes must evolve and adapt to facilitate yet most papers refer only to one U.S. system for inpatients (O'Neill
a necessary triple aim: enable efcient care provider processes, and Hartz, 2012; Powell et al., 2012). In general, extant literature
deliver effective care for patients, and ensure the nancial health refers to reimbursement as an empirical control rather than a focal
and institutional missions of healthcare institutions (Porter and operational construct.
Lee, 2013). In contrast to academic priors and research practices, healthcare
While scholars and practitioners hold a consensus that health- administrators and policy makers tout reimbursement processes as
care reimbursement systems often have complex structures (ISM, salient causes of wasteful expenditures and poor operational per-
2002; Rouse and Serban, 2014), empirical studies seem to omit formance (O'Malley et al., 2005). As an illustration, consider the
their implicationsdthat is, how institutional environments drive similar impacts yet divergent research between clinical factors and
reimbursement policy, reimbursable care processes, and care out- reimbursement factors. Clinical task environment factors, such as
comes. The institutional environments that drive complex reim- diagnostic and prescription errors, cost billions of dollars annually
bursement processes lead to nancial, operational, and care (Kohn et al., 1999) and cause injuries and deaths (Landro, 2013),
delivery issues (Kaplan and Porter, 2011). For example, in 2013, prompting much task-oriented OM research on care delivery and
10.1% or $36 billion worth of U.S. Medicare payments to care pro- technology. In comparison, institutional environment drives pro-
viders were incorrect (Adamy, 2014). Complex reimbursement cess quirks related to coding, billing, and payment documentation;
processes failed to prevent over $90 billion of annual fraud, abuse, these reimbursement factors drive signicant operational problems
and related nancial issues (Goldman, 2012; Murphy, 2015; that directly and indirectly affect patient care (Kaplan and Porter,
O'Keeffe, 2016). Reimbursement process problems also delay 2011). Among their effects, 30% of medical billing claims contain
diagnostic tests and treatments, causing care delivery conse- errors (Silver-Greenberg, 2011), and the reimbursement policies
quences (AP, 2016; Sachdev, 2016). Avoiding such issues is impor- can prompt doctors to withhold treatments, which can lead to
tant for all parties involved in healthcare consumption, provision, deaths (Allen and Levy, 2009). Further, such policies enable many
and nancial ows. billions of dollars of unwarranted claims (O'Keeffe, 2016). Relatedly,
medical researchers suggest reimbursement factors are salient
1.1. Complex regulatory institutional environments drivers of medical errors (McMains, 2016). Even though overall
impacts are similar, the literature's focus on clinical task environ-
As in any multi-trillion dollar industry, healthcare providers ment brings to mind the idiom that, to date, the research cannot
must conform their processes to the regulations and policies of see the forest for the treesda focus on details has led research to
institutions having power over the providers in both care provision ignore bigger-picture aspects of regulatory and reimbursement
and reimbursement (Hillman and Dalziel, 2003; Hussey et al., impacts on healthcare operations.
2009). Operationally, healthcare providers face ever-expanding In light of these issues, advancing research on institutional an-
sets of medical procedures and required information processes, tecedents and operational consequences of healthcare reimburse-
which increase reimbursement processing tasks and variability, ment is of societal importance (Porter and Lee, 2013). Both for-
potentially harming care quality and increasing costs (Tucker et al., prot and not-for-prot healthcare providers live by the adage of
2007). Frequently changing reimbursement policies also introduce no money, no missiondsustainable care provision (i.e., mission)
new and constantly evolving stakeholder incentives and operating occurs only when both operational processes and nancial ows
conditions that can cause failures of healthcare operations (Peck, (i.e., money) are in place (Chase, 2016). To achieve these triple aims,
2015). researchers can address the scope and complexity of reimburse-
To ensure regulatory compliance and provider protability, ment processes, identify key antecedents of reimbursement pro-
revenue managers increasingly must intervene in physician pro- cess impacts on care delivery, and determine how the OM
cesses. The interventions include revenue managers suggesting community can approach reimbursement topics. This research note
adjustments to physician treatment decisionsdtreatments contributes academically by explicating reimbursement processes
impacting care provisiondas a means to reduce risk, lessen audit and associated impacts on operations via conceptual frameworks
likelihood, and increase overall reimbursements (Porter and that detail ows of services and nancial transactions within
Kaplan, 2015). In cases where payers do not reimburse care pro- healthcare systemsda necessary step before developing detailed
viders promptly, care delivery can be delayed signicantly or empirical research (Rouse and Serban, 2014). This note also serves
completely interrupted while waiting for approvals (Lawrence, to remind researchers that operations are always embedded in
2016). In extreme cases, if payers and providers cannot agree on institutional environments. In the case of healthcare OM, institu-
appropriate care, patient coverage may be terminated mid- tional environment, acting through reimbursement processes, may
treatment, even after a patient already has paid for coverage help or hinder the task environments and interventions upon
(Sachdev, 2016). Despite the impacts of institutional environment which researchers focus.
upon reimbursement and care processes of healthcare organiza- The coming sections use illustrative examples to show how even
tions, operations, and stakeholders, the extant literature often as- a simple medical procedure can yield complex reimbursement
sumes that reimbursement processes exhibit little consequential processes and unexpected care outcomes. The discussions then
effect. illustrate how the complexities in reimbursements arise and
consider how such phenomena may affect operational solutions to
1.2. Overview of reimbursement process and impacts healthcare dilemmas.

While nancial ows are fundamental supply chain processes 2. Why are reimbursement processes interesting, impactful,
(Chopra and Meindl, 2007), an extensive review of extant literature and important?
reveals healthcare OM studies rarely examine reimbursement (Lee,
2016). In this review of healthcare operations management and Many OM readers may be unfamiliar with reimbursement
information systems papers in leading journals, only ten papers out processes, even for relatively simple medical procedures. Hence,
of 48 even mention reimbursement, and only a few studies focus on this section uses a simple framework to describe how care provi-
reimbursement as a salient driver of operational outcomes. Many sion interfaces to reimbursement processes. The framework shows
diverse healthcare reimbursement systems exist across the globe, how the seeming structural simplicity, when implemented in

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016),
S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9 3

different institutional environments, embodies similar enormous treatment, and only after treatment pays a co-payment and bill, as
levels of managerial complexity. Using a common real-world determined by insurance contracts between a patient and TPPs.
example for a laceration treatment procedure, the framework A second set of ows occurs between care provider and third
provides insights into how reimbursement processes affect patient party payer(s). While Fig. 1 only shows one TPP, in many patient
care provision decisions, operations outcomes, and nancial treatment cases, multiple TPPs will need to coordinate reim-
performance. bursement. For example, a U.S. patient may use a primary TPP (e.g.,
Medicare) as well as a supplementary TPP (e.g., Humana). TPP
2.1. The complex is actually quite simple: triadic model of subrogation occurs when one TPP takes over a portion of a payment
healthcare reimbursement obligation from another TPP; subrogation requires one or more
additional TPPs at the right side of Fig. 1 (CMS, 2015c). In contrast,
At a high level, healthcare delivery can be reduced into a simple in China, a patient is covered by one of three government health-
set of triadic process ows involving patient, care providers, and care plans. Thus, depending on the operant set of care providers
third party payers (TPPs). The upper part of Fig. 1 shows a simple and TPP insurance contracts, care provision and reimbursement
triadic model of the healthcare delivery system in terms of ows of processes along the triadic structure may differ substantially.
care and reimbursement processes. The rst set of ows occurs Indeed, institutional environment leads to dramatic triadic differ-
between patient and care provider. A patient presents herself for ences across the globedin the U.S., subrogation among payers is
care, and care provision takes place. A patient also may need to common (e.g., among CMS and supplemental insurers), whereas in
make payments directly to a care provider; doing so may remove China, patients often do not trust private TPPs and usually rely on
the TPP from the gure, or the payments may be reimbursed by a the government programs.
TPP directly to a patient. For example, in China, hospital patients
must make a monetary deposit before treatment covering the cost 2.2. What seems simple is actually complex: institutional
for the treatment; after treatment, a hospital will refund excess environment impact
deposit amounts, while a government healthcare program will later
refund to the patient a percentage of the treatment cost paid (Guo Next, consider the dyadic reimbursement processes at the right
et al., 2016). In contrast, a U.S. patient typically presents, receives side of Fig. 1. The processes involve three basic stepsdcoding,

Fig. 1. A triadic view of the healthcare delivery system.

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016),
4 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9

billing, and paymentdstarting with the development of clinical systems and coding systems. Each Phase generates TPP documen-
documentation by physicians who participate in care provision tation and billing constraints for the order and timing of treatment
during an encounter. An encounter refers to direct contact between procedures. The process also involves various stakeholders
a patient and an authorized care provider (e.g., a physician) for throughout the treatment and reimbursement processes, which
patient diagnoses or treatments (Medicare, 2008). In an encounter, can lead to communication challenges (e.g., during translation of
a care provider evaluates a patient's medical issues and provides physician notes into billing codes). Based on a triage decision for
care. The physician then creates documentation regarding the na- inpatient or outpatient care, and the possibility of post-discharge
ture of care. This documentation ows to reimbursement home health agency care, various payment systems can interact
personnel, who evaluate and translate the physician's notes into a and intensify process complexity.
billing claim. The post-treatment reimbursement process (Steps 4 to 7) in-
The lower part of Fig. 1 provides details of the reimbursement herits outcomes from Steps 1 to 3 that amplify reimbursement
process. In the rst stepdthe coding processda physician, or other complexity. Much like a bullwhip effect in inventory systems, dis-
licensed care provider, les a patient's medical record for services torted information and treatment documentation issues during a
provided and items supplied for the patient's treatment. The phy- care provider's billing process can lead to increased claim vari-
sician's documentation moves to professional coding staff, who ability for providers and TPPs (Powell et al., 2012). This claim
identify a set of appropriate codes (i.e., alphanumeric strings) variability can amplify the complexity of the post-treatment
representing the care and facilitating material inputs. The second reimbursement process by increasing the chance for denials of
step is the billing process. One treatment may require several codes billing claims at various stages (CMS, 2015a). If denials do not occur,
in a billing package. The coder assembles the set of codes into a TPPs need to complete the payment process (Step 4 and Step 5).
claimdfor the portfolio of delivered servicesdto collect payment Yet even after Step 5, a TPP (e.g., CMS) can still dispute care
for the billing package. In the third step, the payment process en- provision decisions, such as the decision to treat David on an
tails ling a claim to a payer. Eventuallydbarring denials or other inpatient basis (higher cost via Medicare Part A) or outpatient basis
issues discussed belowdthe provider receives nal payment. (lower cost via Medicare Part B) (CMS, 2015a). To improve efciency
While again supercially simple, the institutional environment and prevent fraud and abuse (Step 6), CMS and other TPPs often
affects these process steps in a manner that can alter physician audit care providers. In 2010, CMS moved to use of Recovery Audit
treatment choices, create operational complexity, and generate Contractors (RACs) to audit care providers (AAPS, 2000; RAC, 2014).
revenue management uncertaintydthe motivation for the coming RAC auditing rms collect fees based on claim amounts recovered
sections. Institutional environment plays a critical role in deter- via audits (RAC, 2014). A major issue RACs investigate is the location
mining exactly how the involved coding process steps play out in of service delivery, as TPPs pays far more for inpatient than
practice (Powell et al., 2012). Politics and bureaucratic policy dif- outpatient treatment (CMS, 2013). If RACs report that, in retrospect,
ferences among and within countries can lead to starkly different a care provider used excessive inpatient claims to increase charges
outcomes. We illustrate these consequences of institutional envi- and reimbursement claims, a TPP will issue nes, denials, and re-
ronment and the subsequent realization via reimbursement pro- coupments of claims. A survey of 2489 U.S. hospitals found
cesses next. increasing frequency and dollar amounts in RAC audits leading to
over $3 billion of recoupments and denials in a single quarter of
2.3. Reimbursement complexity affects treatment processes: A 2014 (AHA, 2014). Due to the monetary sums involved, care pro-
laceration example viders often respond to RAC ndings (Step 7).
Together, the complexity and uncertainty involved in docu-
Many individuals across the globe experience a lacerationda mentation of care provision, related billing processes, and multi-
wound from splitting or tearing of skin. Over six million laceration year audits all impact reimbursements. As in this laceration
treatments occur in U.S. inpatient emergency departments each example, the most common form of claim denial reported was
year at a cost of well over $3 billion (Quinn et al., 2014). Fig. 2 inappropriate use of inpatient care when outpatient care may have
outlines the laceration treatment process, including care provi- been sufcient (AHA, 2014). In effect, RAC auditors have authority
sion (upper row, left box) and reimbursement (all other cells) to second-guess a physician's choices about care delivery, providing
involved in a patient encounter. Though the treatment process for a means to deny and recoup previous reimbursements from CMS.
laceration is straightforward, the complexity of a resulting reim- For each case a RAC auditor asserts to be in error, the care provider
bursement process can be signicant (Barton, 2010). Here, we must at least reimburse CMS the difference between outpatient and
illustrate how different institutional environments and subsequent inpatient billings (restarting Step 4 in Fig. 2), which can cost mil-
reimbursement processes (i.e., U.S. vs. China) dramatically affect a lions of dollars for a small-to-mid-sized hospital system (AHA,
patient's treatment process. 2014). This situation illustrates how care provider managers oper-
Institutional Environment: U.S. In this example, suppose David, ate under long-term nancial uncertainty, since previous TPP
a 66-year-old professor, has severe lacerations on his hand from payments are at risk of audit for multiple years (CMS, 2015a). Un-
working on a lawn mower. David has access to Medicareda like in other industries, where a revenue management cycle n-
governmental TPPdand a university healthcare private insurance ishes after bill processing and payment, healthcare systems face
planda supplemental TPP. Thus, David can visit a preferred pro- uncertainty from auditing processes that occur years later to adjust
vider hospital for laceration treatment (Phase 1). As the lacerations and deny claims. In creating such uncertainty, institutional envi-
are signicant, David also met with a specialist physician several ronment threatens the care provider's solvency and ability to
times (Phase 2), followed by rehabilitation via home health agency perform the care provision mission.
nursing care visits (Phase 3). Moreover, these audit risks also have policy implications for care
In Fig. 2, the reimbursement process ow includes Steps 1e7. providers deciding when to use certain medical treatments (U.S.
While David receives treatment (Phases 1e3), the care provider's Cong, 2015). Both audits and care provider responses have the
billing system proceeds from an initial presentation stage (Step 1) potential to signicantly impact patient care. As the example il-
to care provision (Step 2) to a post-discharge stage (Step 3). lustrates, this situation has potential to create a serious operating
Although the laceration treatment is fairly simple in each Phase, incentive mismatch, since patient care quality is not part of the
each treatment Phase may require use of unique sets of billing incentive structure for RAC auditors (CMS, 2013). When a TPP uses

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016),
S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9 5

Fig. 2. Case example of Medicare patient: life cycle of a laceration case.

RAC auditors to ne a hospital system and deny claims, patient care (CMS, 2015a). Appealing RAC decisions is a prolonged task that
quality may decline if care providers subsequently reduce audit risk continues to worsen e 85% of hospitals report delays of at least 120
by enforcing changes to inpatient care (AHA, 2014). The AHA (2014) days (AHA, 2014). To lessen this backlog, CMS offered $1.3 billion to
also notes that risk of audit penalties and denials may override the nearly two thousand hospitals to drop appeals regarding inpatient
risks to patient health and diminish care quality. Hence, due to such versus outpatient reimbursement audits (CMS, 2015b). Anecdotally,
audit risks, institutional environment inuences both process and hospitals with less developed operations and revenue management
performance of the care provision mission. processes appear to accept such offers, while hospitals having
The reimbursement process will be even more complex if a care mature processes are inclined to continue disputes due to high
provider decides to challenge denials. After a RAC audit denies or likelihood of winning (Chase, 2016). In short, institutional envi-
recoups a claim, a provider may challenge RAC ndings. In this case, ronment mechanisms, intended to ensure provider legitimacy, may
the reimbursement process may take years to nalize and involve harm the care provision mission by altering care decisions and
high legal costs (Griswold, 2014). If the RAC and care provider reducing provider solvency.
cannot agree to mandatory dispute resolution, the provider faces Unfortunately, the effects of such processes are not isolated to
immediate nes, interest charges, and non-compliance penalties providers and TPPs. Patients are affected. David may receive a

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016),
6 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9

supplemental bill after an extended time once the care provider differences, manager efforts to comply with policies, and how in-
and TPPs nally determine their contractual obligations. Such dividual stakeholders (e.g., physicians, hospital managers, TPP
events impact patients emotional and physical constitutions and managers, and patients) respond to the policies.
their solvency (Himmelstein et al., 2009). Again, patients are
affected in very different ways across different institutional envi- 3. How does complexity arise in reimbursement and care
ronments. Thus, we next briey contrast the U.S. experience of delivery processes?
David with potential experiences in China.
Institutional Environment: China (PRC) If David were in China Institutional environment drives complexity in reimbursement,
and needed the same laceration treatment, the situation would be and thus in care delivery, through a wide variety of mechanisms.
different. China uses three government TPP programs (i.e., Urban Researchers must remember that physicians and their institution
Employed; Urban Unemployed; and Rural Farmer) (Dong, 2009; staff are the operational agents that ultimately ensure, or fail to
Meng et al., 2015). Each program is administered at a province, ensure, that medical treatments delivered to patients will comply
city, or county (within-city) level, thus there are many differences with a patient's allowed treatments, as determined through one or
in covered treatments and reimbursements from one administra- more TPP contracts. Doing so involves work tasks, which are
tive area to another (i.e., 2852 Urban Employed, 333 Urban Un- innately affected by the extent and variability of task steps. Time
employed, and 333 Rural Farmer schemes) (Meng et al., 2015). used by physicians to ensure reimbursement accuracy is explicitly
David's treatment thus depends on which plan he qualies for, time taken away from patient-centered care delivery
which city and county he lives in, whether he is treated outside his effortsdconstraints of reimbursement lead to a less-optimal sys-
home city, and local economic conditions, which enable broad or tem, from the perspective of serving patient needs. Inspired by
less broad lists of covered treatment processes. work of Bozarth et al. (2009), we developed an inventory of reim-
The institutional environments of China's administrative dis- bursement process complexity dimensions that may affect
tricts, as well as local payment and reimbursement processes, also healthcare delivery in an onerous manner. Table 1 presents salient
affect stakeholder behaviors quite differently versus elsewhere. sources of detail complexity and dynamic complexity, which are
Prior to treatment, patients in China must pay fully for their hos- manifested during discussions about and actual execution of
pital expenses. As a professor, David has a salary and access to healthcare treatments. We do not claim these dimensions are the
credit, and thus will be able to make the required monetary de- only reasonable dimensions that arise in practice, but rather pre-
posits. As an urban employed citizen, David likely will be reim- sent this list as a means to inspire continued research.
bursed for 70%e90% of treatment costs. Depending on his own Beyond identifying several reimbursement task characteristics
treatment decisions, David may very well experience a treatment that can affect and mediate the medical treatment process, Table 1
process similar to his U.S. counterpart. In other words, though the also allows a researcher to envision the wide breadth of institu-
institutional environment differences are stark, the care outcomes tional agents that can play a role in causing such complexity. Bu-
may be quite similar. reaucracy ultimately originates many of these dimensions. For
In contrast, if David were a rural farmer, he may be able to afford example, bureaucratic negotiations that result in different care
initial diagnosis costs (e.g., on the order of $1-$3). However, due to coverage and reimbursement programs for rural versus urban cit-
reimbursement incentives aimed to convince farmers to use rural izens create a multiplicity of tasks for professional reimbursement
doctors, and distrust of rural doctors, farmer David likely would not staff to process. Some of the aspects of complexity arise from the
be able to afford costs of treatment at an urban hospital, which are fact that treatment processes often involve multiple stakeholders.
reimbursed for out-of-city farmers at a lower rate. This reim- For example, the number and variety of physicians in a care delivery
bursement scheme thus results in patients choosing to turn down team will multiply the number and types of interacting reim-
or discontinue treatments mid-course, return home, and perform bursement decisions that must be made. The effect of multiple
self-care (Guo et al., 2016). In this instance, full visibility of price stakeholders will cascade through billing via increased numbers of
and reimbursement leads to treatment challenges for underserved steps to complete, each of which ultimately embodies a certain
populations. Conversely, in the U.S., Emergency Medical Treatment level of uncertainty as to whether a reimbursement claim was
& Labor Act (EMTALA) policies would require the farmer David to processed successfully. Finally, regulatory policies and systems
be treated, irrespective of ability to pay, after which the U.S. created as means to ensure compliance objectives (e.g. detailed
reimbursement process would start. In this instance, the stark illness classications and treatment code set systems) lead to more
institutional environment differences may indeed lead to vastly things to know and more things to do for healthcare personnel and
divergent care outcomes. professional coding staff. Whatever the institutional environment
mechanisms from which they arise, as shown earlier, these
2.4. Summary notes: institutional environment and reimbursement complexity dimensions have the potential to proactively affect ef-
complexity cacy of care delivery.

Institutional environment has profound effects on healthcare 4. Implications for OM researchers

task execution, the mission of operational care provision, and a care
provider's nancial solvency. This section provided a brief overview As institutional environments generate many of the reim-
of how a simple medical procedure can have far-reaching opera- bursement process drivers of operational complexity in healthcare
tional and reimbursement revenue consequences for care providers operations, multiple natural questions arise regarding these
and TPPs. The example highlights the complex nature of reim- potentially confounding factors. This section discusses these sig-
bursement processes and their impacts on the lifecycle of patient nicant challenges.
care decisions. The example also illustrates how national and local OM Solutions to Institutional Environment Reimbursement
institutional environment impacts the effectiveness of the task Problems? Having read the above, readers may question whether it
environment in which medical professionals treat patients. Reim- is even possible for operations managers to put in place actionable
bursement processes can both enable and impede care delivery responses to such diverse and constantly changing institutional
across different regions and populations. Patient care outcomes environments. Yet, managers face this task every day. Clearly, a
thus can be affected by bureaucratic policy, regional economic healthcare operations manager's task is to respond to government

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016),
S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9 7

Table 1
Sources and symptoms of detail and dynamic complexity in healthcare reimbursement systems.

Detail complexity Dynamic complexity

Sources Category Symptoms Category Symptoms

Coding Breadth of disease classications  Inaccurate compliance between Missing care information within the  Delays and inaccuracies of coding
care provider IT system and medical records of a patient data transfer between stakeholders
coding system  Care providers can be penalized by
 Increasing overhead cost for RACs
adapting new code classication
Size and expansion of code set  Increasing overhead cost for Ambiguity in code set denitions  Inaccurate claims
systems understanding code set systems  Inefcient coding and billing
 Inaccurate compliance between feedback processes
physicians and coders
Number and variety of providers in  Delays and inaccuracies of coding Geographical difference in access to  Coding errors due to different
care delivery team data transfer between care care payment systems between rural
providers vs. non-rural providers
 Inaccurate billing  Redundant reimbursement
processes at different sites
Billing Number of steps within claims  Delays in ling claims Uncertainty of formatting of bills  Inadequate provider claims
development procedures  Inefcient coding and billing  Inefcient coding and billing
feedback processes feedback processes
 Care providers can be penalized by  Care providers can be penalized by
Specic requirements maintained by  Inaccurate bills and claims
different TPPs for billing processes  Inefcient coding and billing
feedback processes
Payment Extent of authority of Recovery Audit  Increasing additional tasks for care Timing of payment  Risk of fraudulent transactions
Contractor to dispute a specic claim providers  Reimbursement processes may not
 Care providers can be penalized by be nalized in a timely manner
 Delays in nalizing reimbursement
Count of rules/regulations pertaining  Increasing additional tasks for care Subrogation among TPPs  Redundant payment adjudication
to a healthcare reimbursement providers processes
 Increasing payment uncertainties  Inaccurate claims
 Reimbursement processes may not
be nalized in a timely manner
Existence of multi-level payers (i.e.  Redundant payment adjudication
subrogation) for a patient processes
 Reimbursement processes may not
be nalized in a timely manner
A number of separate reporting  Delay in claims adjudication
systems  Risk of fraudulent transaction

and TPP reimbursement policy, putting in place sustainable sys- Empirical Adjustments for Institutional Environment Reim-
tems that can achieve effective care provision (i.e., mission) facili- bursement Factors Given the innately local nature of a medical
tated by both efcient operational process ows (i.e., task treatment process (i.e., task environment) and constraints that
environment) and nancial ows (i.e., monetary payments and reimbursement policies may generate, biasing impacts of reim-
reimbursements). The skills of analytical researchers may be of bursement processes are a distinct possibility. Treatment task en-
much use to solve questions of system design for optimal strategic vironments are embedded within hospital departments and
response to reimbursement policy (Green, 2012). Yet whether hospitals, which are embedded within local reimbursement
analytical or empirical, investigations into healthcare operation schemes and systems. Thus, econometric adjustments and multi-
interventions should be holistic in nature, considering the triple- level empirical modeling approaches clearly may be necessary to
aim of effective care provision, efcient process operation, and ensure empirical parameter estimates and ndings are robust.
nancial solvency objectives. Failure to consider these three aims Further, in light of the above, endogeneity of healthcare stake-
together may have potentially unexpected impacts, as a task holder behaviors should be carefully addressed in healthcare
environment intervention that inadvertently complicates reim- research. Multiple research papers appear to dismiss data on
bursement may harm the provider's ability to achieve the ultimate reimbursement processes, omitting reimbursement as irrelevant
care delivery mission in a sustainable manner. for treatment decisions or questions of healthcare technology
Independent of whether it is possible for local operations man- impact. Empirical research within an institutional environment
agers to congure a system-wide operational solution to a problem (i.e., TPPs, government agencies) needs to assess impacts of
born from institutional environment, such systems often will be healthcare interventions on nancial metrics of institutional suc-
fairly local in nature. The implicitly regional impacts (e.g., state-level cess (e.g., audits, billing errors, recoupments, revenue per treat-
U.S. Medicaid; county-level Chinese coverage) of reimbursement ment). In a somewhat counter-intuitive fashion, the
policies upon care delivery prompts questions about the extent to reimbursement process commonly drives the treatment task
which empirical research might reasonably claim to exhibit gener- environment, expanding the potential usefulness of healthcare
alizability. With medical task environment explicitly interrelated technology, rather than simply serving as an administrative process
with local reimbursement institutional environment, demonstrating independent from and responding to treatments having already
broad generalizability of ndings may prove exceedingly difcult. taken place.

Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016),
8 S.J. Lee et al. / Journal of Operations Management xxx (2016) 1e9

5. Conclusion ags-on-medicare-lab-billing-1404878463.
AHA, 2014. Exploring the Impact of the RAC Program on Hospitals Nationwide.
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This research note highlights healthcare delivery and reim- ation (Accessed September 12, 2014).
bursement processes that are yet to be examined in detail by OM 14q1ractracresults.pdf.
healthcare scholars. To illustrate fundamentals of reimbursement Allen, V., Levy, A., 2009. Doctors told me it was against the rules to save my pre-
mature baby. Dly. Mail. September 10. (Accessed August 2, 2016). http://www.
processes, the manuscript develops conceptual frameworks and
uses the frameworks to highlight the high complexity of reim- mother-gives-birth-just-days-22-week-care-limit.html.
bursement processes. This note uses an illustrative care provision AP, 2016. HMSA's New Rule for Imaging Exams Frustrates Physicians. Danbury
NewsTimes. January 30. (Accessed February 3, 2016). http://www.newstimes.
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contribution of the paper stems from demonstrating the counter- php.
intuitive reality that, in contrast to typical literature assumptions, Baker, D., Rosnick, D., 2005. The Burden of Social Security Taxes and the Burden of
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cesses drive the healthcare task environment. Thus, even though index.php/publications/reports/the-burden-of-social-security-taxes-and-the-
some researchers have done so in the past, this note highlights that burden-of-excessive-health-care-costs/
Barton, P.L., 2010. Understanding the U.S. Health Services System, fourth ed. Health
researchers should not claim reimbursement has minimal impact Administration Press, Chicago, IL.
on healthcare operations (Porter and Kaplan, 2015). Rather, we Bozarth, C.C., Warsing, D.P., Flynn, B.B., Flynn, E.J., 2009. The impact of supply chain
provide evidence that institutional environment, as reected in complexity on manufacturing plant performance. J. Operations Manag. 27 (1),
reimbursement policies and processes, structure much of what
Brill, S., 2015. America's Bitter Pill. Random House LLC, New York, NY.
takes place in healthcare operations. As such, reimbursement Chase, R., 2016. Executive Director, Alliance Health Providers, Inc. Personal
should be embraced, not dismissed, by OM literature. Communication.
Even with increasing legislative pressures and mounting frus- Christensen, C.M., Grossman, J.H., Hwang, J., 2008. The Innovator's Prescription: a
Disruptive Solution for Health Care, New York, New York, USA.
trations of the general public with healthcare reimbursement CMS, 2013. Recovery Auditing in Medicare for Fiscal Year 2013. Centers for Medicaid
problems, there is a scarcity of research that connects reimburse- and Medicare Services (Accessed July 2, 2015).
ment processes to care provision and operational outcomes, or to Statistics-Data-and-Systems/Monitoring-Programs/Medicare-FFS-Compliance-
the institutional environment antecedents that lead to reimburse- pdf.
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reimbursement processes and the resultant nancial decisions of Medicare Secondary Payer (Accessed July 16, 2015).
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quality healthcare servicedan omission bias. Operation. Prentice Hall, Upper Saddle River, NJ, p. 4.
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Please cite this article in press as: Lee, S.J., et al., Seeing the forest for the trees: Institutional environment impacts on reimbursement processes
and healthcare operations, Journal of Operations Management (2016),