Increase Your Earnings

January 1, 2004

Improve reimbursement through active management

Barbara Smith, MD, used to have it easy. As CEO of Desoto Family Medical Center, a large primary-care practice in Northern Mississippi, Smith used to be one of just a few physicians in her county, making it relatively simple to keep the business running.

But times have changed. "Since then," Smith explains, "the population has grown, and the supply of physicians has increased. We have had to expand our services to differentiate ourselves from the competition."

That expansion added costs -- but payer contracts didn't change. High costs didn't translate to higher payments. When the practice's income failed to keep pace with rising expenses, the physicians decided to drop payers that wouldn't meet their demands for better reimbursement. They ended up trashing lots of managed-care contracts. The result? Patient volume fell and income plummeted.

Smith and her colleagues felt trapped -- as so many physicians do. On the one hand, you aren't being paid enough to make ends meet. On the other hand, if you insist on higher payments, you risk losing payer contracts and all the patients that come with them, meaning the scenario could get worse, not better.

So what's a practice to do? Smith and her group settled on a moderate course that brought them back on firmer financial footing.

Early last year, they approached their payers again. This time, they tied their fee schedule to Medicare and negotiated for a more reasonable margin over current Medicare rates. (The going rate for physician fees is between 200 percent and 400 percent of Medicare, with some as low as 150 percent.)

The negotiation went smoothly because the group was able to point out specifically what they had to offer the insurance companies. Namely, as it grew, the practice had added a wide array of ancillary services as well as multiple offices and extended hours. Nearly everyone in the area knows the practice.

Generally, payers agreed that the comprehensive services and geographic coverage, as well as the excellent community reputation of the physicians, made Desoto Family Medical Center deserve more than their typical fee schedules and the sides were willing to reach an agreement.

Within the first three months of trying their new approach, Smith and her colleagues began to see positive results, and they continue to stay on track by taking an active role in reviewing fees and payer contracts - tasks they used to ignore. Smith routinely reviews payments by CPT code, and the practice is prepared to drop unprofitable services instead of dropping entire health plans.

"Once we became more involved in running our practice, better understood what we needed to pay our bills and what the insurance plans were willing to pay, we began to approach our fees and our services in a more logical way. The positive impact on our revenue per patient is proof that we did the right thing," Smith says.

In fact, physician involvement and intimate knowledge of both your practice and what you are getting paid are crucial to better reimbursement. You don't have to feel trapped.

Collect data

It's not enough to just complain that you're not making enough money. You need to gather sufficient data to understand your current reimbursement. Whether your practice uses sophisticated billing software, you outsource your billing to a vendor, or your process is manual, you can follow these steps:

List your most common CPT codes

Most practice revenue will be tied to a handful of codes. Even surgical practices generate a significant portion of their income from office care. Rank your codes by the dollar volume of charges and include enough in your list so you account for at least 75 percent of total practice charges. These data are most useful if you can use a full-year period.


Practices with billing software should be able to run reports that list codes and their frequency of use. These reports may have titles like "procedure report," "practice analysis," "production analysis," or "CPT frequency." If the report does not automatically include charges, simply multiply the frequency by your fee for that code and divide the answer by your total charges.

If your practice generates invoices manually, have the billing staff keep a notebook on their desks listing the CPT codes that you have included on your office superbill. They should place a check mark next to the appropriate code each time they send a bill. Three months of data should be enough to give a good idea of which codes will generate the most revenue. If you use this method of tracking, try to do so during three of your busiest months.

List your top payers

Just as most of your charges are tied to a limited number of codes, most of your income comes from a few payers. Generate a report of charges by payer and, again, include enough payers so that you can account for 75 percent to 80 percent of annual charges. Typically Medicare, your local Blue Cross plan, and two or three managed-care plans will account for most of your revenue. Since Medicare and Medicaid don't negotiate, don't spend any time plotting their reimbursement profiles unless you want to use them as the basis for evaluating other payers.

Determine reimbursement

Develop a chart showing your top CPT codes and their frequency (number of times you performed this service. A three-month picture will help get you started). Review the Explanation of Benefit reports (EOB) that the practice receives from each payer and identify the amounts that each of the payers allows for your key codes. Be sure to use the "allowed" amount, and not the "paid" amount, which will be reduced by any copayment or deductible that the patient pays to the practice. Determine the percentage of your current income that is represented by the reimbursement for each code.

Keep in mind that this analysis makes the assumption that all of your patients come from the single payer. However, you are merely trying to identify areas that need to be addressed during negotiations. Knowing the actual dollar amounts tied to that payer is less important.

This process will also highlight specific codes that may be underpaid. The reimbursement for 10 codes, which represent approximately 7 percent of charges, only resulted in 4 percent of actual collections (see percentages in bold). Some plans may offer especially low amounts for preventive care or procedures. Certain lab tests may not be worth performing. In any case, it is only through this sort of analysis that you can see whether your pay is fair.

Take action

So suppose you've gathered your data and you find out you're getting shortchanged. Now what?

Knowing that you are underpaid and being able to change the situation are two very different things. Many health plans would actually like to limit the size of their provider network, and they almost always assume a "take it or leave it" posture with participating providers. Practices that simply ask for more money will nearly always be disappointed with the response.

What can be done? Here are some options and their benefits and drawbacks.

Review your fees

It's not unusual for practices to let their fee schedule go unrevised for years. Who wants to bother figuring that payers never pay according to the fee schedule anyway? True, but here's the catch -- sometimes payers actually pay more than your fee schedule, especially an outdated one. But you can be sure that they won't offer to pay more than you are billing them.

Use the data you've collected to see if payers are reimbursing you in full -- or are paying at your charged rate -- for any services. If they are, this means that they consider your fees reasonable, and they may be willing to pay more. You may want to consider selectively raising those fees.

Haggle over individual fees

Some CPT codes may be reimbursed at very low levels -- even lower than the standard low rate. If you find that a few of the codes that are important to your practice fall into this category, you may have some luck in negotiating higher rates just for those services. This is especially true with HMOs that pay poorly for preventive care. Remember, they're in business to keep members well.

To make this argument, of course, you have to know what each of your payers is allowing for all your major services. That's why the data collection stage is so important -- it lets you come to the table armed.

Also, if you are one of only a few physicians who provide a specific procedure or service you may be able to negotiate preferential rates for those codes. This process will also highlight specific codes that may be underpaid.

Use the relative value scale

The easiest way to monitor fees and reimbursement is to convert your fees to a resource-based relative value scale (RBRVS) schedule. The theory behind this scale is that every procedure is related to others, in effort, cost, and risk. Medicare uses physician effort, practice expenses, and malpractice risk to reach a "Total Relative Value" weight for every CPT code. If you assign a dollar weight for each Relative Value Unit (RVU) it is easy to calculate a fee for any procedure (Total RVUs times the dollar value).

This approach is roughly based on studies performed at Yale University and offers a scientific basis for negotiations. Most insurance plans are adopting the Medicare RBRVS methodology and tying their reimbursement to some percentage of Medicare. If your fees are also tied to Medicare rates (typically some percentage higher) you will quickly see -- if you are paying attention -- when individual payments are too low or if the stated reimbursement plan is not being followed. Just because the plan says it's paying 110 percent of Medicare doesn't mean they will always pay it.

A number of companies sell software that works with common spreadsheet programs that make annual fee adjustments easy and quick. For a simple version, try the Fee Schedule Setter in the Tools section of www.PhysiciansPractice.com.

Drop the plan

While dropping plans entirely didn't work well for Barbara Smith, you can always decide that payment levels are so low that you will no longer accept patients from a given health plan. This is not a good strategy if you are in a highly competitive market because patients will easily find another physician, and you will simply lose market share. In less competitive markets, patients may complain to their employers that the loss of your practice creates a hardship. Those employers may then bring pressure on the insurance company to return to the bargaining table.

Consider your patient volume, too. If your patients can currently be seen the same day, be very careful. For a practice already starving for patients, dropping a payer is a bad idea because that means even fewer patients will opt for your practice. On the other hand, if your practice is in high demand (thus, you have a lot of patients who can't get appointments in a timely manner) don't be too afraid to drop a contract. You can replace the patients you lose with those waiting to get in. Just keep in mind that few patients choose physicians not included their insurance panel. And don't threaten to drop out of a plan unless you intend to follow through - most plans will call your bluff.

What's ahead?

Dramatic annual increases in the cost of healthcare are beginning to meet with resistance from employers and legislators, who pay most of the bills. The pressure to contain overall costs will depress future reimbursement, even despite more and more critical physician shortages. Practices should plan for the likelihood that any annual adjustments will not be sufficient to keep pace with labor, malpractice, and supply cost increases.

This means that, unless physicians want to work harder, they will need to generate more revenue for the work they now do. Practices that present a well-documented argument for fair reimbursement may be rewarded with the response they want from payers. And don't overlook the importance of accurate coding and a fail-safe method of capturing all of the charges generated in the office and the hospital. Most primary-care physicians undercode 16 percent of office visits, at a loss of $12 to $15 per visit. Forgetting the occasional inpatient visit or procedure or failing to charge now and then for lab tests or an elastic wrap can mean the loss of critical revenue.

As Barbara Smith shows, physician involvement in monitoring the business affairs of their practices can produce very positive results. Simply raising fees will seldom result in added revenue, and may create an added burden for those patients that must pay for their own care. But understanding how your needs and the goals of the payers can be aligned can provide the greatest opportunity to grow the bottom line.

Gregory Mertz, FACMPE, can be reached via editor@physicianspractice.com.

This article originally appeared in the January 2004 issue of Physicians Practice.