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Focus on Health Care: Managing a Physician Practice in Uncertain Times

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In July, Congress passed the Medicare Improvement for Patients and Provider Act of 2008. On July 1, 2008, the Medicare physician fee schedule was set to be reduced by 10.6 percent, with another 5.4 percent cut on Jan. 1, 2009.
January 14, 2009

In July, Congress passed the Medicare Improvement for Patients and Provider Act of 2008. On July 1, 2008, the Medicare physician fee schedule was set to be reduced by 10.6 percent, with another 5.4 percent cut on Jan. 1, 2009. However, MIPPA extended the June 2008 rates and provided for a 1.1 percent increase for 2009. While this move is positive for physician practices, with a new Congress and president, the talk of “health care reform” may roll back reimbursement for physicians, thus adding to the existing uncertainty in the health care industry. While other businesses are trying to figure out ways to maximize revenue in these uncertain times, physician practices have been struggling with the issue of uncertainty for years, as physicians have seen their reimbursement for certain services from Medicare and managed care plans on a decline while operating costs have been increasing.

Unlike other industries, raising the price for services does not increase the net income for a physician practice because of the fixed reimbursement from the payers. So, what can a physician practice do to enhance the bottom line? Physician practices need to:

  • Ensure that the proper amount of reimbursement is received from Medicare and other payers:
  • Assess the profitability of procedures
  • Establish metrics to monitor the operational performance of the practice

Ensuring Proper Reimbursement

Generally speaking, most physicians are participants in multiple managed care plans, which cover multiple services provided by the practice. As a result, a complex billing matrix is created that is difficult for a billing staff to memorize and ensure that the practice is receiving the correct payment from Medicare or a managed care plan.

For example, if a practice is in 20 managed care plans and the 20 procedures provided by the practice are covered by the contracts, the billing staff would need to know the reimbursement rate by procedure by contract. Since this method is not practical, many billing offices simply post the payments received and assume the payer paid the correct amount.

A better solution would be to leverage the billing system by loading the contract reimbursement rates into the system. The advantage of having payment terms loaded in the billing system is that the payment posted to the system from the remittance advice received from the payer is compared to the contract rate loaded in the billing system. Any variances from the contracted rates are identified immediately. In addition, the billing system is now to able to calculate expected net revenue, which will provide a better estimate in predicting the cash flow for the practice. The one caveat to the aforementioned process would be if the billing system did not have the functionality to load payment terms.

For physician practices that use an outside billing service, the physician practice would want to ask the billing service if the contracts for the practice are loaded in the billing system to ensure that proper payment is received. If the billing service cannot accommodate loading specific managed care contracts, the practice would want to inquire as to what controls are in place to ensure that proper payments are received from payers.

Profitability Analysis

A physician practice should perform a profitability analysis by procedure as well as by payer. The results of an analysis will identify those procedures that are most profitable for the practice or even identify those losing money. Based on the results, the physician practice would have to weigh the financial and clinical implications of discontinuing procedures that are losing money. The results of the analysis by payer may result in the physician practice discontinuing participation in a managed care plan or not accepting patients who participate in certain health plans.

To perform a profitability analysis by procedure, the net revenue per procedure and the associated direct unit cost would need to be calculated. The indirect cost per procedure would need to be calculated as well. The indirect cost per procedure represents the allocation of the general expenses (such as rent, utilities and administrative salaries) associated with operating a physician practice, divided by the number of procedures performed by the practice.

Once the net revenue, the direct cost and the indirect cost per procedure have been calculated, the direct and indirect costs are subtracted from net revenue to determine the net profit or loss per procedure. Because reimbursement for the same procedure may vary among the different payers, the net profit or loss per procedure may not always be the same. Calculating net revenue per procedure by payer will provide the physician practice with information needed to maximize net profit.

Development of Operational Metrics

Developing a set of metrics will assist in monitoring the operational performance of the practice. The metrics should focus on scheduling activities, cash collection, accounts receivables, denial of claims and payer mix.

  • Patient scheduling metrics will track the number of patients scheduled and the patient appointment no-show rate.
  • Cash collection metrics will track payments, both at the time of services and payment received by payers.
  • Accounts receivable will track the age of outstanding accounts by payer. Because payers settle claims according to different time schedules, accounts billed to payers need to be reviewed frequently to ensure timely payment. For example, Medicare will pay claims every 14 days, so it would be unusual to have claims older than 30 days. Generally, a Medicare claim past 30 days would indicate that a claim was denied and would need to be investigated and appropriately re-billed.
  • Claims that are denied need to be tracked routinely to determine the cause. Generally, denied claims must be appealed within a certain time limit as prescribed by Medicare or a managed care contract.
  • Payer mix will determine the composition of the patient population the practice serves. To maximize revenue, practices need to focus on the mix that provides the highest level of reimbursement.

In these uncertain times, physician practices can enhance their financial performance by examining and enhancing operational procedures. With more than 25 years advising physician practices, RubinBrown is well-qualified to answer the critical questions facing our clients in the healthcare industry. We focus on helping our clients realize a sound financial future and enhance operating returns through a range of business advisory and planning techniques.


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