I am regularly amazed at how much time, money, and effort go into reviewing the wording in a payer contract, and how little goes into first understanding whether the contract is profitable. I mean, who cares what it says if, in the long run, the result is that you lose money for every patient you see? Same goes for Medicare. A practice chooses to accept Medicare patients at the assigned Medicare allowed amounts, only the truth is, their cost to provide those services to the beneficiary is higher than what Medicare pays. Therefore it is the same result; a loss of revenue for every patient visit. In essence, under these conditions, the practice is actually choosing to ante up cash for every patient they see. This is wrong on almost every level.
A practice must know how much it costs them to deliver a service or do a procedure, and using the Resource-Based Relative Value Scale (RBRVS) is a great way to go. In fact, the only alternative is a time-motion study and if you ask those who have gone through this, they will likely tell you to stick with the RBRVS. Remember, a relative value unit (RVU) measures the overall consumption of resources committed by a provider for any one of 15,000 individual procedures and services, and for each one, you should know whether you profit, break even, or lose money.
You can break the cost analysis down into two parts — provider costs and operational costs — with the total cost including both. The metric we are after is the cost-per-RVU and you will see shortly why this is so important. The first step is to create a worksheet that contains, on each line, the procedure code reported, the frequency with which it has been reported, the charge for that procedure, and the RVU components (work, practice, and malpractice). Only include those procedures where there is an associated RVU. Some procedures, like drug codes, supplies, and laboratory services will not have RVU values. Create two additional columns: one for total charges and one for total RVUs. For total charges, multiply the charge for the procedure times the frequency, and for total RVUs do the same, only with the RVU value instead. Then, total these procedures to get the grand total charges and grand total RVUs.
Total charge = procedure charge x frequency -> Add all Total charge amounts for grand total charges
Total RVU = RVU value x frequency -> Add all Total RVU amounts for grand total RVU
The next step is to calculate your total costs as a percent of total charges for the practice. Let's say that you bill out $1 million and your total costs to run the practice (including provider compensation, excluding bonuses) are $500,000. In this case, your cost of doing business (CODB) is 50 percent. Let's say that the total charges for procedures with RVU values are $800,000. Multiply the $800,000 by 50 percent and you end up with an expense value (CODB) of $400,000 for those procedures with RVUs. In essence, we are saying that, while it costs you $500,000 to generate a million in charges, it costs you $400,000 to generate $800,000 in charges. In both cases, it is about 50 percent.
Total costs as a % of total charges = billing total / overhead
Now, let's say that the grand total RVUs added up to 12,500. Divide the total expenses ($400,000) by the total RVUs (12,500) and you end up with a cost-per-RVU of $32.
Cost per RVU = total expenditures / grand total RVUs
$32 = $400,000 / 12,500
This means that, for every RVU you report, it costs you $32. So if you provide a service that is associated to six RVUs, then you can estimate that it costs you $192 to provide that service. By calculating this for each procedure, you can then estimate the actual (or approximate) cost for each procedure, comparing them to the fee schedule offered under the payer contract.
Finally, it is important to consider the whole cost-per-RVU amount. In 2014, Medicare allowed $35.8228 per RVU. So for that six-RVU procedure, where it costs you $192, Medicare allows $214.94. But remember, while they allow $214.94, they only pay 80 percent of that to the provider, or $171.95. So actually, under Medicare payments alone, you are losing $20 every time you provide that service. Knowing this, then, it can help you to understand just what portion of the 20 percent patient copay you need to collect in order to break-even.
In summary, using RBRVS to conduct a cost analysis is not only cheap and easy, it is very effective at assessing the value of your payer contracts. And since the practice is a living, breathing, and dynamically changing animal, using the ratio of cost-to-RVU over time is a very effective way of trending your actual changes in practice expenses.