Understanding Practice Costs Is Key to Participation in Evolving Reimbursement Plans

In an article in last month’s newsletter entitled “Change on the Horizon for Compensation Models” we began a discussion on the evolution of the reimbursement system for professional services.  This month we discuss how understanding the cost of providing care is critical to successful participation in the evolving reimbursement plans.

Why Costs Matter

Consider that on January 31, 2013 the Center for Medicare and Medicaid Services (CMS) announced the Bundled Payments for Care Improvement initiative.  This initiative is designed to “align incentives for providers – hospitals, post-acute care providers, physicians, and other practitioners– allowing them to work closely together across all specialties and settings.”  At this time there are no obstetric or gynecologic procedures or surgeries included in the CMS program.  However, it is only a matter of time before CMS and commercial insurers include the specialty in the bundled payment categories.

Many anticipate that global obstetrics will be among the first.  There will also likely be a focus on surgeries performed by gynecologic oncologists.  As your practice is approached to participate in these payment methodologies, understanding what it costs to deliver your services will be the key to profitability. 

Determining Costs

This process is accomplished with data from your practice.  The source documents are:

  • CPT codes for your procedures with total relative value units (RVUs) for each procedure
  • Practice’s operating expenses (excluding physicians’ compensation)

It’s best to conduct a cost analysis for a significant time period to allow for swings in expenses or production.  For example, if you pay malpractice premiums in the first quarter of the year, expenses for that quarter will be higher than other quarters and may not give you a true picture of what your costs really are.  Six months or a year can provide you with data that is not skewed.  Also make sure that the time frame for CPT frequency matches the time frame for expenses, or you can get inaccurate results.

The RVUs reflect the effort it takes you and the other providers in your practice to provide a basic unit of service.  If your practice management system cannot provide the RVU data you need it is available free of charge from the CMS web site (http://www.cms.gov/apps/physician-fee-schedule/overview.aspx).

Here’s how to complete the process:

  1. Create a spreadsheet that matches CPT codes and RVUs.
  2. Enter the frequency of each CPT code.
  3. Compute the total RVUs for that code.
  4. Compute the total RVUs for your practice by adding the total RVUs for each code.
  5. Divide the total practice expenses (including desired doctor compensation levels) by the total RVUs to arrive at the cost per RVU.
  6. Finally, multiply RVUs for specific codes by the cost per RVU to obtain cost per procedure.

Note that we said “desired doctor compensation levels”.  This is stated as such so that you can consider what your cost would be at different levels of compensation.  Thus you can actually use the results of this exercise to project “what if” scenarios.  Also note that all medical practices operate differently, and the RVU assigned to specific procedures may not reflect precisely the costs that occur in a specific medical practice. The data produced will not provide information on unused capacity or trends in procedure costs.  None-the-less, without a more specific, detailed analysis, this method will provide you the basic information that you need.

What You Can Learn

Let’s use global obstetric care as an example in this analysis.  The hypothetical Only for Women’s Ob-Gyn (OWOG) five doctor practice complied their data and learned that their cost per RVU for calendar year 2012 was $46.72*.  Consider that the total non-facility RVUs are 63.26.  In this scenario, it costs OWOG $2,955.51 to provide the services, supplies, facility and administrative costs that comprise global obstetric services to one patient.

As another point of reference, the Medicare 2012 national conversion factor, the dollar amount reimbursed for each total RVU, was $34.0376.  Thus if OWOG was compensated at straight Medicare rates it would have received $2,155.65 for the global ob services.  This point is referenced since many practices have commercial insurance reimbursement rates that are based on Medicare rates plus/minus a percentage.

Here is where this information comes into play.  The Local Accountable Care Organization (LACO) in their effort to control costs, wishes to align incentives for OWOG and the facility at which they deliver all of their patients, Our Community Hospital (OCH), for global obstetric services.  The financial arrangement proposed by LACO is a flat $25,000 per single delivery.  The caveat is that this fee includes: professional services for vaginal or Cesarean deliveries; high risk pregnancies (enter perinatologists); ultrasound; amniocentesis; services of an anesthesiologist; and, all facility costs incurred by OCH. 

Only if you are armed with your practice cost information will you be able to negotiate for your portion of the flat reimbursement rate in a knowledgeable manner.

The advantages of using the straightforward average cost per RVU method of allocation outlined herein are low cost and ease of implementation. This method does not require time studies or direct cost allocation of resources to specific procedures. The drawback is a slight lack of accuracy in that not every patient encounter is the same.  Some patients may require more resources than others.  Regardless, the results will provide you with a basis to begin informed discussions as the reimbursement system evolves.

*Median Cost per Total RVU as reported by Medical Group Management Association, Cost Survey for Single Specialty  Practices; 2012 Report Based on 2011 Data

March 2013
L. Michael Fleischman
Stroudwater Associate


American College of Obstetricians and Gynecologists
409 12th Street SW, Washington, DC  20024-2188
Mailing Address: PO Box 96920, Washington, DC 20024-9998