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.
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)
|
