Medical Practice Cost Accounting and Managed Care

In today's economic environment, it is more important than ever to understand all costs incurred in delivering medical services. Costs must be known before prices can be established and certainly prior to entering any managed care contract.

Many contracts do not provide reimbursement sufficient to cover the costs of your services. This problem is magnified exponentially if contracted patients replace those willing to pay cash, or those with more favorable insurance coverage. Imagine the revenue loss that results from spending two hours performing a laparoscopy for a contracted rate of $500 when five new patients could be seen in the office.

Sometimes physicians accept poor reimbursement, especially when starting a new practice, because they need to generate revenue to cover overhead. A solo practitioner does not have the managed care bargaining power of a large group practice. In all cases, the practitioner must be precisely aware of how much potential revenue is lost.

Competition among practices is increasing and many subspecialty practices serve every major United States market. One may open the door to a new practice, but targeted marketing is needed to generate an adequate volume of patients with reasonable reimbursement. All money invested in marketing must yield offsetting revenue.

Unfortunately, "relative value" systems and "reasonable and customary charges" along with other managed care inventions force many practices to operate on very small profit margins (if any). Relative value systems rarely adequately account for the superior training and skills of subspecialty trained physicians. Direct cost accounting, including physician labor, is always more accurate than RVUs. Actual costs must be known before a strategy to control them can be devised. Practices should charge prices derived from their actual costs, expected reimbursement, and an appropriate profit margin.

One caveat is that cost, and therefore price, are impacted by volume. Suppose an andrology department "breaks even" conducting 100 semen analysis. Obviously, in this scenario semen analyses are not profitable. Consider that the 100 semen analyses "carry" x percent of practice overhead costs. This means that overhead, and therefore costs, of other procedures are reduced by the work done in andrology. In general, performing more procedures reduces costs where overhead is fixed, materials requirements are not excessive (i.e., office visits, venopunctures), and variable costs are minimal.

One hundred office visits would carry overhead in proportion to their revenue. Assume that these 100 visits carry (x) overhead. The overhead per procedure is determined by x/100. If volume is increased to 200, the amount of overhead per procedure is x/200 thus reducing overhead cost per procedure. This relationship exists only when fixed and variable costs do not increase significantly with higher volume. For example: a significant increase in cost would be incurred if a physician were hired to handle the increased volume (increased fixed overhead).

Physicians in states with mandated infertility coverage have learned hard lessons about the need to understand their costs. In mandated states, the cash market for IVF declined and prices dropped. Only those who understood their costs could adjust to market variables while maintaining profitability.

The most difficult aspect of cost analyses is gathering and analyzing data. The analytic algorithms must be derived from detailed examination of many practice variables. MMA works with clients to help them understand their costs. This knowledge was gained through close association with the Jones Institute for Reproductive Medicine at Eastern Virginia Medical School, where we completed detailed costs analyses.

We do not take a "cookie cutter" approach and strongly believe that the myriad of practice specific variables have a major impact upon costs. Exactness is required to insure profitability, especially when assessing managed care contracts.

We have included an article illustrating cost analysis in a reproductive medicine practice authored by Barry Verkauf, MD, RE. Much of our work is based upon his model with practice specific modifications. Also included is an article contributed by Dr. Richard Grazi, MD, RE at Maimonides Medical Center in Brooklyn IVF. His paper discusses the efficiency of electronic record keeping and it's applicability to cost control.

Please contact us to discuss how we can help you better understand and control your costs and improve profitability. Savings from increased efficiency always offset the costs of our services.

Additional Managed Care Reading Reading:

• Richard Blackwell, MD, Ph.D, University of Alabama, School of Medicine, Birmingham, AL- "The Infertilitiy Benefit; What Should It Cost? "
• Stan Colquitt, BS, MCP, CIW, Medical Market Analysts, "Marketing in a Managed Care Environment "
• Kaylan Silvereberg, Medical Director, Texas Fertility Center, Austin, TX, "Southwest Airlines, Coverage Initiative"
• Barry Verkauf, MD, MS, A Penny Saved is a Penny Earned, The Reproductive Medicine Group, Tampa, Fl.
• Stan Colquitt, "Cost Accounting in IVF-Example"

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