Finance: Beyond Reimbursement

Savvy stock players know that high management costs and overhead expenses can eat away at an investment’s potential return. Determining these variables can help them decide whether one investment might be a better match for their goals than another. So why not take an investor’s approach to determining which payers you contract with?

Unfortunately, many physicians just look at a payer’s promised fee schedule (the return) when signing up for or renewing a contract. They give little thought to the costs required to collect that return. A payer’s policies and practices can significantly add to your practice’s overhead expenses.

“That juicy fee schedule won’t be worth much if the payer always denies your claims and makes your staff spend hours and hours doing follow-up work just to get payment,” says Atlanta-based medical practice consultant Elizabeth Woodcock.

Woodcock says the time your staff spends to rework unjustly denied claims, chase down preauthorizations for routine tests, and tend to other payer issues could add up to hundreds of hours over the course of a year. Every dollar a payer adds to your overhead costs is one dollar less you’ll receive for providing services to your patients.

Rate your payers

Why not put a little effort into figuring out which ones add value to your practice and which do not?

Some indicators of payer performance, such as days in A/R, are easily measured. Others, such as how well a payer communicates with your staff, are more subjective. But subjective measures are also important, says Marilyn Happold-Latham, the administrator of the eight-physician Women’s Clinic in Portland, Ore. “When I put it all together, it helps me to decide whether or not I’m going to keep dealing with a payer.”

When rating payers, Woodcock suggests using Medicare as a standard against which to judge commercial insurers. To evaluate payers in the categories listed in Table 1, assign a score of “0” to payers that are comparable to Medicare in each measurement; assign a “+1” to payers that are more difficult to work with than Medicare in each category; and give a “-1” score to payers in the areas in which they are easier to deal with than Medicare. Guidance for evaluating each category of performance is provided in the text box, “Rating Categories Explained.”

Why use Medicare as your yardstick? Although physicians may complain about Medicare reimbursement, the program’s impact on staff time and finances are known and consistent, says Woodcock. “Things are black and white with Medicare,” she says.

Keep in mind that this exercise doesn’t weight any of the categories. That is, a payer may rate poorly in only one or two categories, but those difficulties could just be too disruptive and costly to be worth the bother. On the other hand, some payers with several average or poor ratings might be too integral to your practice to abandon.

Money isn’t everything

An alternative approach would be to set the scale according to the payers at the extreme high and low ends of performance and assign relative scores to the rest. For example, give a +5 to your slowest, most complex payer that causes you the most hassle (often that’s worker’s compensation) and a -5 to your dream payer if you have one, or perhaps the hypothetical cash-paying patient who always pays in full at the time of service.

After tallying each payer’s scores using either approach, place them in the appropriate quadrants of a table (see Table 2) that takes into account both their perceived hassles and their allowable amounts based on the top 10 or 20 codes your practice uses. You may find that high-hassle payers pay more and low-hassle payers pay less. This adds another dimension to your evaluation.

Your final step is to rate payers according to amount of hassle and the percentage of your practice’s gross charges they represent. As you can see in Table 3, Payer D may present a lot of hassle, but it also represents a large part (55 percent) of the practice’s business.

These exercises should not serve as your sole method of evaluating your payers, but they can help paint a better portrait of which payers are worth keeping and which ones you should send packing when contract renewal time rolls around.

Bob Redling, MS, has written on practice management topics for 10 years. He has been practice management editor for Physicians Practice, Web content editor and senior writer for the Medical Group Management Association, and a speechwriter for the American Academy of Family Physicians. He can be reached at editor@physicianspractice.com.

This article originally appeared in the January 2008 issue of Physicians Practice.