Understanding Payment Models: How to Establish your Baseline Costs?

by Trucare Billing

There are a variety of healthcare payment models that physician practices can choose from. The most common are fee-for-service, capitation, and risk sharing.

Fee-for-service is the traditional model in which physicians are paid for each service they provide. This includes office visits, surgeries, and other procedures. While this model allows physicians to control their own income, it also has some drawbacks. First, it can incentivize physicians to provide more services than necessary, which can drive up healthcare costs. Second, it does not account for the quality of care that patients receive. As a result, this model is being increasingly replaced by value-based payment models.

Free for service to Value-based Payment Models

The move from fee-for-service to “value-based” payment models will require physicians to adopt more detailed accounting practices than they have typically used in the past. First, many of these payment models require physicians to assume a level of risk with respect to the services they provide to their patients. Under these models, physicians can no longer assume that they will actually receive payment for each service they provide; on the contrary, they must assume that they will not be paid for services that are determined to be unnecessary or required only because of the physician group`s inefficiency or error.

Moreover, and especially if the physician group has assumed risk for the services provided by others, they will also have to track the services that have been provided but have not yet been captured by their cash-based accounting systems because of delays between the provision of the services and the posting of the bills for those services.

Evaluation and Assessment:

With smaller margins and greater risk, physicians will have to undertake a very serious, business-like review of the services they provide. So how do you stop providing those services where you cannot close the gap between revenue and generally, cost accounting requires allocating costs to the products and services sold? This latter expense tracking usually is the challenge, as it requires tracking and capturing into the accounting system the supplies used, staffing resources, and other expenses unique to that service.

Here are some questions for you to ask yourself:

1. What does it cost you to deliver the clinical service that you provide?

2. What does each payer pay for that service?

3. What is the difference between revenue and expense for each key service?

4. Can you close the gap on services that have a negative delta?

a. Can you provide the service more efficiently by re-engineering the process; will your suppliers, landlord, staff, and other expense sources lower their costs to the practice; or will all of the gap be carried by physician cuts in salary?

5. Do you stop providing those services where you cannot close the gap between revenue and expense and the impact is detrimental to your practice?

6. Do you stop contracting with payers that are not willing to provide you the data you need to manage the risk they are demanding, or that are not willing to pay fairly for that risk?

Suggestions and Recommendations:

This resource will discuss simple approaches that will give you a basic insight into your costs that can be done quite quickly and progress to explore what it will take to establish a more sophisticated accounting practice. We will suggest questions to guide you on whether or not your practice needs anything more than a basic cost of service report. Finally, we will recommend approaches on what you can do to manage costs in your efforts to close the gaps you identify, including coming to terms with the reality that your practice may need to stop providing certain services it cannot practically do anymore.

Capturing Relative Value Unit (RVU) and cost data before agreeing to transition from fee-for-service to an emerging payment system, physician practices must determine whether they will be able to stay in business if they are paid pursuant to the new methodology. The first step to making this evaluation is determining the practice`s underlying costs of doing business. While practice consultants use different methodologies to determine the cost of providing services, one of the easier methods is to use the Centers for Medicare & Medicaid Services (CMS) Resource-Based Relative Value Scale (RBRVS) and its underlying Relative Value Units (RVUs).

Each Current Procedural Terminology (CPT®) code has associated with it a total RVU (tRVU) which can be adjusted based on any modifiers used. RVUs measure the relative level of time, skill, training and intensity to provide a given service.

Total RVUs are a combination of physician work RVUs + malpractice expense RVUs + practice expense RVUs and are intended to reflect the relative costs of providing care, including geographical variances in costs. At the most basic level, calculating revenue per tRVU by payer is done by capturing tRVUs for all of your services billed to a payer and their associated payments. It will never be the same as the real world one you calculated, however, as bad debt costs, denials and other factors will always create a gap between your internal conversion factor (revenue per tRVU) and the one contractually agreed to.

For a blunt analysis, simply add up your total practice costs (physician and non-physician salaries and benefits, rent, professional and other insurance costs, supplies, etc. for the period for which you captured the tRVUs, and divide the total costs by the total tRVUs.

A simple comparison of costs per tRVU to the revenue per tRVU will quickly let you know if there is an issue with one or more of your payers. If you agree to a contract that does not cover the costs of the services you must provide plus the additional overhead associated with risk-based contracting (actuarial assistance, stop-loss insurance, accrual accounting, etc. ) you will ultimately go bankrupt.

You can refine this analysis somewhat to separately evaluate practice overhead associated with practice expense RVUs and labor costs associated with the work RVUs (wRVUs) by using tools available from the AMA, including Fee schedule analysis:

Using your complete practice cost as a guide Following these simple steps, the tools help you calculate your practice`s cost per wRVU and by practicing these tools you will be able to calculate your labor and practice expense costs for each CPT code, based on these RVU values.

To use these tools, the physician practice should implement these tools as they were specifically developed to assist physician practices in developing a fee schedule that reflects the physician practice`s underlying costs, you can also use these tools to create a document showing your costs for each service you provide by simply omitting any profit or other mark-up in the calculations of the physician’s practice considering moving to a risk-based payment arrangement, physicians who anticipate that a significant portion of their revenue will come from risk-based payments in the future are well advised to do so as well.

Conclusion

Physicians with a sophisticated understanding of their practices’ financial and clinical analytics will be best positioned to manage the changing payment environment. While many practices will ultimately want to pursue very robust evaluation and monitoring systems, even small physician practices will benefit from doing the basic evaluation of their costs discussed in this article. It is not recommended that physicians should embark on emerging payment arrangements without understanding the likely financial impact of those arrangements will be happening in the future.

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