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)