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Surviving at Medicare Rates: An Exercise for Physicians to Consider


Here's a five-step way to calculate the cost of your common procedures and decide if lower reimbursement is actually fatal to your medical practice.

I am currently working with a health system that is examining what would happen if all payers reimbursed care at current Medicare rates. This is especially surprising since commercial insurance plans are paying the system at about twice that level. What value would such an examination bring to their strategic planning process if they are enjoying such good rates? It is entirely likely that a growing portion of total reimbursement for both hospitals and physicians will be tied to performance metrics and the base compensation levels may sink to those of public payers, especially Medicare.

Many physicians understand the cost of operating their practice and, as long as the total cost allows an acceptable margin after the bills are paid, they look no further. When faced with an uncertain reimbursement future, the actual cost of producing the services offered becomes a critical data element that can be used to identify problems before they occur. Maybe the cost of running the practice is generally too high or maybe there are just a few services that are costing more than they return. Knowing the difference can have a major impact on bottom line performance.

What seems like a daunting task is really fairly easy if your practice has an automated practice management (billing) system. Hopefully I’m not being too basic by explain the role of relative value units (RVUs) that are the basis of the Medicare fee schedule. Every CPT code has a relative value that is comprised of three elements:

1. The amount of work that goes into producing the service;

2. The malpractice risk (complexity) involved in producing the service; and

3.  The cost of producing the service, which reflects the non-provider expenses.

Cost and risk vary slightly by the area of the country in which you practice. These values can be found via CMS' Physician Fee Schedule . If your billing system doesn’t have the ability to match RVUs to CPT codes you can get close manually.

The method for determining the cost of your common procedures, regardless if they are performed in the office or in the operating room, is as follows:

Step 1: CPT Frequency Report You will need to run a report that reflects the total number of CPT codes that you charged during a recent 12-month period. Be sure that the period you select will be able to be matched to the costs of running the practice for the same period. This report should contain the RVU weight of each of those procedures. You might need to obtain this file from your software vendor and it might cost a few hundred dollars, but that varies by vendor. Your goal is to find the total RVUs that were delivered during the year.

Step 2: Expenses This is the cash expense for the period. Don’t include items such as depreciation or repayment of debt. You want the total cost of running the practice less the items mentioned.

Step 3: Cost per RVU Simple division will yield the cost of producing a single RVU. You can find the cost of a Level 3 Established Patient visit (2.14 RUVs) by multiplying the CPT RVU value by the cost per RVU. Repeat this for the top 10 codes to20 codes that generate most of your revenue to identify any outliers.

Step 4: Analysis Now compare the cost of the 99213 against the allowed amounts from your major carriers. Are you making money or losing money? Now use just Medicare. Does what they allow exceed the cost? Medicare pays about $34 per RVU (this will vary slightly by region) but the difference between your cost and the $34 times the total RVUs is what you will need to live on if payers move to this level of reimbursement. Is there anything left over for you after the cost of staff rent and supplies?

Step 5: Manual Option You will need to generate a charges and collections report by CPT code and find the top 25 codes to30 codes that likely generate 80 percent to 90 percent of your revenue and then manually multiple frequency by RVU weight and then use that total to divide into your cost. This will slightly overstate your cost but you’ll be close.

Future payment models may provide for incentive payments that will get you above Medicare rates but, typically, these will be paid on a quarterly or annual basis so you will need to fund day-to-day operations from the basic rate. If you find that expenses exceed this basic rate, consider options for reducing operating costs (or your income) to bring the numbers in line. You might want to read an earlier blog about cost reductions to get some ideas.

Change is coming. Maybe not this year or next but they are inevitable. Planning can avoid some unpleasant surprises.

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