June 16, 2016

Strategies for Benchmarking Physician Practice Revenue

By David Glusman, Partner, Advisory Services

Strategies for Benchmarking Physician Practice Revenue

The long-term sustainability of physician practices is directly tied to their revenue, and that means physicians must have a thorough understanding of their current and future revenue sources and their effectiveness in maximizing revenue.

In many parts of the country and in many physician specialties, practice revenues now include sources beyond fee-for-service patient care. These additional sources include incentives for quality reporting or achieving quality benchmarks, compensation for medical directorships, and revenue from financial risk arrangements or shared savings programs.

In primary care, revenue from other than fee-for-service patient care can total as much as 20% of total practice revenues. Revenue from sources such as risk arrangements is also growing as evidenced by Medicare’s Oncology Care Model and Comprehensive Care for Joint Replacement, which place specialists at financial risk.

The analysis and benchmarking of fee-for-service revenue from direct patient care should start with a coding analysis and also include a detailed payer mix analysis. It is still common to see errors in CPT coding that result in lost revenue. In today’s world, where practices use coding software and other tools, such as those available in EHRs, we have seen practices that have systemic coding errors that are driven by the parameters used in setting up coding software. This is particularly true for evaluation and management (E&M) services.

Payer consolidation has occurred in most healthcare markets, and physician practices commonly face a situation where (4) to (6) payers, including Medicare and private insurance companies, dominate the market. Overwhelmingly, reimbursement from private payers is based upon a set fee schedule, and in many cases, these fee schedules are just a few percentage points above or below Medicare rates.

The benchmarking of revenue then becomes a matter of determining a composite relative value unit (RVU) conversion factor (CF) similar to Medicare’s RVU conversion factor. For example, the 2016 Medicare conversion factor is $35.8279. A comprehensive payer mix analysis will determine a practice’s benchmark conversion factor. This, coupled with a detailed analysis of total RVUs for a practice, will generally result in the practice’s total benchmark revenue for the year.

This analysis can be accompanied by a billing efficiency analysis that examines how effective the billing department is in achieving the practice’s benchmark revenue. This billing efficiency analysis is based upon a receivables analysis for each payer to determine the timeliness of billing and collections. Equally important, billing efficiency should include an analysis of contractual allowances and other adjustments. A key element in this analysis is an accurate determination of bad debt levels, which mean that billing efficiency, in normal circumstances, cannot be 100%.

In our work with practices in many different specialties, billing departments should be able to achieve a billing efficiency score above 96%, after adjustment for bad debts. And in situations where billing departments are improving their efforts, they may achieve billing efficiency above 100% if they are successful in working down accounts receivable.

Benchmarking practice revenues from sources other than fee-for-service billing requires a different approach. Continuing payment reforms indicate that revenue from alternative payment models will continue to grow. Thus, benchmarking these revenues requires an approach where a practice’s physicians and administrative leaders conduct a detailed analysis of payment reform trends in their market and set strategic goals for responding to payment reform trends. Many practices will develop a strategy that attempts to capitalize on category of payment reform, such as participation with a specific payer or participation in a specific type of program such as a shared savings arrangement for specific categories of patients. Primary care practices may want to focus on diabetes patients while orthopedic practices may want to focus on joint replacements.

The bottom line for physician practices, whether they are freestanding private practices or practices integrated into a health system, is that their success will largely depend upon their revenue and upon a thorough understanding of their current revenue sources and future opportunities for revenue enhancement.

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