Considering a merger? Don’t forget to negotiate and maximize your payer contracts.

One of most common trends in our industry right now is the merging of practices.  We see an acceleration of mergers largely due to the implementation of the Affordable Care Act, the roll out of ACO’s, and, last but not least, the ongoing pressure on practices to accept lower Medicare reimbursements along with the challenge of increasing reimbursements on commercial payer agreements.

I and my team have personally dealt with many recent mergers on the contracting side of the equation.  What I have learned is that, while the merger happens from a legal entity perspective, i.e.,  a single tax id entity is the result, the individual practices may continue to operate as silos either permanently or for a period of time.  The challenge is that the practices that merge come to the table with existing in network payer contracted rates that are inconsistent.  Here is an example:

Let’s assume that there are two practices that merge, Practice A and Practice B, into a new practice, named Practice C.    Let’s further assume that, prior to the merger, Practice A had a PPO agreement with Payer 1 for Practice A paid, in network, $1,000,000 the 12 months just before the merger.   Their overall weighted average rate of reimbursement with Payer 1 is 100% of Medicare.

Also, prior to the merger, Practice B had an in network PPO agreement with Payer 1 that paid $200,000 the 12 months just before the merger.   Their overall weighted average rate of reimbursement with Payer 1 for Practice B is 120% of Medicare.

Practice C, the merged practice, has decided to remain in Payer 1’s network, as long as their total new group reimbursement with Payer 1 increases in aggregate.  After a long and difficult and protracted negotiation with Practice C, Payer 1 made a final offer of 108% of Medicare, down 12% of local Medicare from Practice B’s current Payer 1 reimbursements. 

Assuming that, this is Payer 1’s best offer and, in the absence of this change,  revenues will remain constant, should practice C accept this new and final offer from payer 1?

The answer is a resounding Yes.  But, as the old saying goes, the devil is in the details.  The reason that this is a good offer for practice C, compared to prior reimbursements for practices A and B is that, in this scenario, the revenue for practice C is $60,000 higher than the original $1,200,000 aggregate revenue for the two individual practices.  However, when you peel back the details, notice that the reason for this aggregate increase is that the larger practice, Practice A, was making $1,000,000 of payments from payer 1 prior to the merger and was getting 100% of Medicare, overall, so a 108% of Medicare rate, therefore, raises practice A’s revenue by $80,000.  However, 108% of Medicare is actually a 12% of Medicare or a roughly 10% decline in revenue for practice B.  Since practice A is the “Gorilla” of the merger, from a revenue perspective, and practice B is the “Minnow”, the increase for practice A more than offsets the decrease for practice B.  That is, Practice A increases by $80,000 while practice B decreases by $20,000 for a net gain for practice C of $60,000. 

The tricky part is making sure that incentives for these likely outcomes is handled in advance of a merger.  A suggestion is to do revenue allocation.  After all, more money flowing into practice C is a good thing for all physicians in Practice C if they share in the upside.  First figure out the current percentage of revenue contribution of Practice A vs. Practice B.,  pre-merger, to the new combined revenues of Practice C.  In this example, Practice A is about 83% of the total revenue for this payer while Practice B is about 17%.  Therefore, a simple and equitable approach is to allocate the incremental $60,000 using this algorithm for allocation purposes.  In this example, about $50,000 would go to Practice A while about $10,000 would go to Practice B.  Now, Practice B is happy because it continues to accrue the pre-merger revenues and adds $10,000 more.  This is certainly a lot better than if Practice B had to reduce its revenues by 10% to accept this offer.

The take away here is that, regardless of the rates of reimbursements on payer contracts entering into a merger, take the time and make the effort to figure out how all entities that merger share in the upside benefit of newly negotiated payer agreements that increase.  Also, make sure that you do the necessary math to assess the upside revenue based not only on Medicare Percentages but on the actual effect on the revenue that flow into the practice.  I wish you good luck and a more prosperous future in your mergers and hope that you find this example and the information useful to you.

For more information about payer contracts, payer fee schedule analysis, and / or the effect of mergers on payer fee schedules please contact Steve Selbst, CEO Healthcents Inc. at 831-455-2174 or selbst@healthcents.com

Information about Steve may be found at www.healthcents.com/steve and information about Healthcents Inc. the largest and most successful payer contracting firm in the country is at www.healthcents.com

Auditing Charge Masters:  Why it is important and what you should be looking for

One of the most often overlooked parts of the revenue cycle in practices, medical supply company,  hospital owned physician groups and ASC’s is the auditing of a charge master.   The charge master is a list of your top procedure codes, along with your billed charges (retail rates that are paid out of network) and the site of service.

The reasons for auditing your charge master, at least once every six months, is that charge masters are used in two key parts of the revenue cycle and, therefore,  affect your revenue in multiple ways.  First, charge masters are used, routinely, in payer contracts to determine your payments on claims.  That is, your billed charges are compared to your contracted rates for each procedure and, if the billed charge is less than the contracted rate on a particular service, you will be paid the billed charges.  Whatever you do, don’t pop the champagne cork when you do an audit and find out you are being paid at 100% of billed charges!  Instead, raise your charges well above any of your payer contracted rates to avoid this problem.

Second, your cash based book of business is affected by your charge master.  Today it is common for medical providers, including practices, ASC’s, ancillary providers and supply companies to offer as much as a 20% discount off billed charges to patients who pay cash.  More often than not, these patients have an out of network payment as part of their benefit plan with a payer and the patient is required to make up the difference.  Our recommended best practices is to collect your billed charges, less discounts from these patients and let them handle the out of network reimbursements with the payers directly.  This will save you both administration time and headaches.  In any event, if your charge master is set too low, you also run the risk of being paid less than UCR (Usual and Customary Rates) for your services.  In the absence of specific guidance from an accounting professional who will also consider the tax consequences and write offs, our guidance is that a charge master should be set in the range of 225% - 300% of a current year’s Medicare rates.  This will insure that you get reasonable value for your services and will insure that you avoid the “lesser of” problem and will likely result in a reasonable range of write offs.

Figure 1, below, demonstrates good charge master hygiene.  This snap shot was taken from the billed charges modeler in HealthcentsRevolution® Software.  The model parameters are set to detect the lesser billed charges vs. contracted rates and an out of network volume of 5% of this payer is assumed.  Further, we have chosen a UCR Threshold of 250% of Medicare for each CPT code as our desired billed charged.  The output of this model shows us which codes have a billed charge less than the contracted rates (flagged in red in the right hand column) and which codes that have a Medicare rate are set below 250% of current year Medicare.  We can see a block of E and M and pathology codes, in the middle of this chart that are set below 250% of Medicare currently.  The advice provided in Figure 1 is the recommended billed charge (in red) and the upside revenue (in green).  Also, just below the model parameters, the total possible upside revenue, assuming no change to volume of services provided, and changing all codes to 250% of current year Medicare that are below 250% to this threshold is $14,993.

In summary, whether your use a tool like RevolutionSoftware or spreadsheets or even a cocktail napkin, it is important to audit your charge master on a regular basis to detect both the lesser of issue and to make sure that you maximize your out of network revenue as well. 

For more information and for help with your payer contracts, contact Steve Selbst, author and CEO / Co-Owner, Healthcents Inc. at 831-455-2174 or selbst@healthcents.com.  Steve’s profile is at www.healthcents.com/steve  and the Healthcents Company Website is at http://www.healthcents.com.

                                                                Figure 1

                                                                   
                             Physician Billed Charges Modeler for a Sample Player
                                                          Medicare Year 2013

Model Parameters

Lesser of Bill Charge Language:
Out of Network Volume:
Bill Charges as % of Medicare:
Out of Network Discount:
Possible Out of Network Upside of Adjustment $14,993

 

Loc	Proc	Units	Bill Charge	Medicare Payment	Rec'd Bill Charge	Diff Between Rec. and Actual	Possible Upside	Current % Medicare	Payer Rate	Bill Charges Less Payer Allowable
O	99245	229	$515.00	$0.00	$515.00	$0.00	$0.00	0%	$342.28	$172.72
O	99244	562	$390.00	$0.00	$390.00	$0.00	$0.00	0%	$279.84	$110.16
O	99243	149	$280.00	$0.00	$280.00	$0.00	$0.00	0%	$188.54	$91.46
O	99215	228	$255.00	$148.10	$370.25	$115.25	$1,051.08	172%	$84.82	$170.18
O	99214	30	$159.82	$110.97	$277.43	$117.61	$141.13	144%	$96.37	$63.45
O	99213	1,500	$105.00	$75.70	$189.25	$84.25	$5,055.00	139%	$64.21	$40.79
O	99211	1,618	$280.00	$21.59	$280.00	$0.00	$0.00	1,297%	$12.40	$267.60
O	99204	50	$283.97	$169.42	$423.55	$139.58	$279.16	168%	$147.72	$136.25
O	99203	25	$185.00	$111.88	$279.70	$94.70	$94.70	165%	$97.11	$87.89
O	97032	66	$35.00	$19.97	$49.93	$14.93	$39.40	175%	$20.56	$14.44
O	96372	169	$30.00	$27.52	$68.80	$38.80	$262.29	109%	$32.21	$-2.21
O	88305	1,398	$150.00	$74.12	$185.30	$35.30	$1,973.98	202%	$93.23	$56.77
O	88112	64	$210.00	$115.50	$288.75	$78.75	$201.60	182%	$92.57	$117.43

 

 

Using Weighted Averages, not averages, when you assess payer fee schedules, why is this important and why you may be leaving money on the table

Written by Steve Selbst, CEO and Co-Owner of Healthcents Inc.

When you are assessing the percentage of local Medicare represented by a payer’s fee schedule in aggregate, it is important to “normalize” the calculation across your fee schedule to take into account the revenue produced by each CPT code, i.e., the volume performed * the payer rate at 100% including patient co-payment vs. the Medicare Revenue produced by that code at the same volume .  Otherwise, you will calculate an average which is simply calculated by summing each percentage of Medicare by CPT code and dividing by the total. 

 
The problem with using averages, not weighted averages, when assessing a payer’s fee schedule is that the average does not take into account the relative “revenue importance” of the code.  That is, the average treats all codes equally whether they product $1 of revenue or $250,000 of revenue.   
 

The example in figure 1, below, illustrates the importance of using weighted averages.  In this example, the average percentage of Medicare, in aggregate, for the two codes combined is 178.5%.  This is what the payer will tell you and this, in fact,  is accurate.  The only problem is your real average reimbursement, i.e., the weighted average is actually 137%.  This is because when you average the reimbursement across these two codes, the 266% associated with code 77418 is weighted the same as the 91%.  What is not factored in is either the Medicare revenue or the revenue value of the code.  In this case, the Medicare rate is higher that the payer rate for CPT code 99213 while the Medicare rate is much lower for CPT code 77418 that its payer rate.   Therefore, our effective rate of reimbursement, on a weighted average basis is only 137%.   The fact is, the average places too much importance, in this case, on CPT code 77418 since it has such a high payer rate relative to its Medicare Rate. 

 

 If this were a real payer contract negotiation, we should be negotiating up from this 137%  not from 178.5%.  Further, the payer may be averaging across all CPT codes in our fee schedule, not just the top revenue producing codes.  The outcome, in cases like this, would be skewed against you.  It is not that the payer is “wrong” for telling you that the average rate of reimbursement is 178.5%.  Rather, is wrong for you to base your negotiation on the average.  It is best to use weighted averages to maximize your reimbursements.

 

As the old saying goes, beauty is in the eyes of the beholder.   

 

For more information and for questions about payer contracting and payer contracts' analysis, contact Steve Selbst at selbst@healthcents.com or 831-455-2174.  Healthcents Inc.'s website is at www.healthcents.com.

 

                                                                                           Figure 1

A	B	C	D	E	F	G	H
CPT	Volume	Payer $ Rate	Payer         Revenue         Col C * Col B	Medicare $ Rate	Medicare       Revenue          Col E * Col B	Average        (Column C / Column E)	Wt. Average by CPT              (∑ Column D)/(∑ Column F)
99213	3000	100	$300,000	110	$330,000	91%	N/A, same as AVG
77418	200	1600	$320,000	600	$120,000	266%	N/A, same as AVG
AGGREGATE	3200		$620,000		$450,000	178.5%	137%
							(∑ of Col D/∑ of Col F)

 

 

 

 

How to avoid becoming a victim of the "lesser of" language in payer contracts