Does your practice understand the nuances of each managed care contract term? All too frequently, the practice manager, overwhelmed by the practice’s daily operations, scarcely has time to scan managed care contracts, much less fully comprehend the “fine print” implications contained within each. The result is widespread acceptance of all payment terms set forth in every contract.
To make wise decisions about accepting a managed care contract, you and your practice administrator need a good understanding of how the contract payments relate to the cost of providing services in your practice. You can calculate the necessary cost information by using elements of the Medicare Resource-Based Relative Value Scale (RBRVS), which allow you to calculate the return your practice must have to operate at a profit.
First, Add Up Your “Widgets”
Factories produce “widgets;” medical practices produce a variety of services that can be counted in “relative value units” (RVUs). RVUs are nonmonetary, numeric values that Medicare has developed to represent the relative amount of physician time, resources, and expertise needed to provide various services to patients.
For example, if an office visit is assigned an RVU of 1, a midlevel visit might be rated with an RVU of 1.5, and a surgical procedure an RVU of 20. Or, you could say an office visit equals one “medical widget,” and a midlevel visit equals one and a half widgets, while the surgery equals 20. To access the official Medicare RVUs, listed by CPT code, go to the Medicare Physician Fee Schedule Look-up.
Medicare bases RVUs on three components:
- Physician work, which takes into account the physician’s expertise and time spent in preparation and follow-up documentation of each service performed;
- Practice expense (either “facility” or “nonfacility,” depending on whether you performed the procedure at an outside medical facility or your office), which accounts for the cost to operate a medical practice; and
- Professional liability insurance expense, which estimates the relative risk of services.
Although Medicare develops a final RVU for each CPT code by also factoring in a geographic practice cost index based on practice location, you can arrive at a simple but relevant RVU total for each CPT code in your practice thus:
Total RVU = (RVU work) + (RVU practice expense) + (RVU liability)
For example, for CPT code 13131, Repair of Wound or Lesion, the calculation would look like this for a procedure performed in your office:
RVU work 3.83 + RVU practice expense 3.02+ RVU liability .41 = 7.36 Total RVU
Each time you perform CPT code 13131, then, you’ve produced 7.36 medical widgets. Now, add up all your widgets: For a given period of time, say 12 months, list all the CPT codes your practice billed and calculate the RVU for each code. Add up your RVUs, and that’s your widget production for a year.
Next, Calculate Your Cost
To determine how much you will be paid, multiply the per-RVU dollar amount from third-party payers by the RVU for each service. If a CPT code has an RVU of 2, and a payer’s conversion factor is $37, the fee is $74 for that service. Is that enough for your practice to generate a reasonable profit? Use your RVUs to find out. Add up what it costs to run your practice for a year — overhead, salary, insurance, supplies — and divide that amount by your annual widget production. Now you know how much each widget — each RVU — costs to produce. That’s YOUR conversion factor. Does each of your payers meet or exceed this amount?
The most difficult aspect of this process is following up on your commitment to develop templates to calculate and analyze the data. But for your practice to operate in the black, your managed care contracts must allow for a profitable payment of your services. If you accept a conversion factor lower than your cost per RVU, you will lose money on every procedure billed to that carrier. RVU cost accounting provides administrators with considerable leverage when negotiating third-party payer contracts.
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