Payment & Delivery Models

Answers to 6 key questions on cost will prep you for new pay era

Medical practices that have taken a detailed cost accounting approach are the exception rather than the rule—for now at least. 

It is becoming clear, however, that physicians with an understanding of their practices’ financial and clinical analytics will be best positioned to manage the changing payment environment. And even small practices can benefit from doing a basic evaluation of their costs.

Physicians are taking on more financial risk as payers make more demands for cost containment.

Also, if a practice has assumed financial risk for services provided by others, the practice will have to track the provision of those services and the posting of bills for those services.

With smaller margins and greater risk, physicians must take a business-like approach to the services they provide, according to an AMA resource that is part of a new webpage on payment essentials that offers a nuts-and-bolts approach physicians can use for evaluating proposals, negotiating agreements and managing revenue cycles under new payment models.

It is recommended that these six questions be part of such a review:

  • What does it cost you to deliver a clinical service you provide?
  • What does each payer pay for that service?
  • What is the difference between revenue and expense for each key service?
  • Can you close the gap on money-losing services by providing the service more efficiently through reengineered processes or reduced practice costs, or will any gaps have to be filled by physician salary cuts? 
  • Should you stop providing those services where you cannot close the gap between revenue and expense and the impact is detrimental to your practice?
  • Should 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?

Cost accounting requires allocating costs to products sold and services provided. Some costs, such as administrative overhead, can be shared by the physicians in the practice according to  an established formula, and other costs  can be directly allocated to individual physicians.

Direct allocation of costs is often a challenge. It requires tracking and recording the supplies used and the staffing resources and other expenses unique to that service. This can be manually intensive. Reasonable accounting compromises are expected between estimated and actual amounts.

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Use CPT codes to calculate costs

One of the easier methods to determine the cost of providing services is to use the Centers for Medicare and 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) that can be adjusted based on any modifiers used.

Calculating revenue per tRVU by payer is done by capturing tRVUs for all of your services billed to a payer and their associated payments. Simply divide the total revenue by the tRVUs and you now have your number.

Calculating costs per tRVU can be done in a similar fashion. 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, according to the AMA manual.

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 lose money under that contract.

As new payment methodologies develop, knowing at the granular level which services you actually make money on will become the norm. With a good analysis, physicians will know what costs they can control, which payers are costing them money, which services are ones they should provide, and whether they are being paid properly.

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