Getting the Most from Your Practice by Looking Within: Part 4 of a Four-Part Series

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By Christine M. Duprey

Part Four: How Are Your Contracts Impacting Your Bottom Line?

The O&P EDGE concludes its four-part series of articles that focus on key elements of your business and provide some tips for performing analyses and improving your processes.

Negotiating contracts with third-party payers can be a daunting task for O&P providers: Credentialing processes are difficult to maneuver, contracts are hard to understand, and reimbursement offers are seemingly undecipherable. However, contracting is one of the most critical aspects of your bottom line if you decide to join the managed care arena.

To Contract or Not to Contract?

If you haven't contracted with third-party payers and you have a successful business, think carefully about the impacts of doing so. Some of the primary reasons healthcare providers contract with third-party payers include the following:

  1. To attract more patients. Patients are encouraged by their insurance carriers to seek care from in-network (or contracted) providers. Because the contracted provider has agreed to accept a reduced allowable amount from the carrier for the service or care he or she provides, the patient's out-of-pocket costs are generally reduced by about 10-40 percent and the insurance carrier also saves money. The potential of paying lower out-of-pocket costs is attractive to many patients and may encourage them to seek care from you, as an in-network provider.
  2. To ease the burden on your referral sources. O&P practitioners count on the referral relationships they have built over time as revenue-generating sources for their businesses. Contracting with the same carriers as your referring physicians can make it easier for the referrals to continue sending patients to you. However, if your carrier contracts are limited, it may be a deterrent for referral sources to send patients to you.
  3. To increase revenue. By attracting patients and making it easier for referral sources to send their patients your way, you, in turn, increase patient and service volume, and your revenue should increase as well. However, because you contract for a specific reimbursement rate, be sure to analyze whether or not the additional anticipated volume will generate more revenue at the negotiated rate than your current situation allows. For example, obtaining a contract at 40 percent of Medicare reimbursement rates and seeing 1,000 more patients a year is not a revenue generator. If your break-even is about 70 percent of the Medicare reimbursement and a carrier is offering you less than your break-even, you will be losing on each of the additional patients you may have gained with the contract. For example, if your loss is $5 on every item or service, those 1,000 new patients just cost your business $5,000.
  4. To be competitive in your market. This is a driving force and represents a primary reason to participate in insurance carrier networks. It can create a new patient base, and increased volume will make you a competitive force in your market as long as it is profitable for you to participate.

Analyze Your Business, Analyze the Contract

Effective contracting is more than signing on the dotted line. As with any legal document, thoroughly review and understand the terms, conditions, and reimbursements outlined in the contract. Otherwise you may find yourself experiencing the same downward trend in reimbursements that other O&P professionals are-whereby contracted reimbursement rates are less than the cost of services and care provided. Third-party payer contracts in O&P have been less than favorable in many markets, which makes it that much more important to analyze your own business prior to entering a contract. Make sure to review the following elements of your business:

  1. Know your patient population and the services you provide. While this sounds simple, you will need to gather specific data so you can determine what the contract will do for you.
  2. Know the top 25 Healthcare Common Procedure Coding System (HCPCS) codes that you provide by volume and by dollars. While many times these lists overlap, they often yield different results. The top 25 codes by volume are the services you provide most often; the top 25 codes by dollars are the services that generate the most income (based on charge amounts). Cross-reference the overlap. Compare the fee schedule being offered for these codes to the charge amounts to determine how the contract will affect your overall bottom line.
  3. Know your break-even point. A profitable contract cannot be negotiated without knowing your business' breakeven point. To do so, consider your fixed and variable costs and what percentage of those costs will need to be added to the cost of the products and services you provide. If you determine that your costs must include 6 percent of all fixed and variable expenses to break even, then you will know if the contract reimbursement rate will provide your business with a profit or a loss. Determining an appropriate break-even point is often the most challenging task for providers and not doing so is the largest reason for signing an inequitable contract.
  4. Establish a profit margin. Once you know what your break-even point is, you need to determine a price point to establish your profit margin; this becomes your "walkaway" point during contracting. Compare your price point to Medicare's fee schedule to give you a practical gauge of third-party payer fee schedules when they are presented. Will you make a profit or will it drain your revenue?

Use an Excel Spreadsheet to Analyze Contract Profitability

Once you have gathered your data, you can use an Excel spreadsheet to help you analyze whether a given contract will be beneficial for your business. Create a comparison spreadsheet by using the following steps:

  1. In the first column of two separate worksheets, enter the top 25 HCPCS codes you provide by volume and the top 25 HCPCS codes you provide by dollars. Perform the following steps for each worksheet.
  2. Enter your cost for the items represented by each code in the second column.
  3. Enter the charge amounts for each code in the third column. The charge amount should reflect your fixed and variable costs and profit margin. This is the amount you are billing to the carriers.
  4. Enter the allowable amount from the current Medicare fee schedule in the fourth column.
  5. In the fifth column, enter the fee schedule amounts presented by the carrier. If a fee schedule is not provided or only a sample has been provided, send your top 25 codes from both lists (combined to one list) with the charge amounts to the carrier and ask for a complete fee schedule for O&P products and services. If the contract is offering a percentage reimbursement based on the Medicare fee schedule, enter the formula to determine the reimbursement rate.
  6. Compare the proposed fee schedule in column five to your break-even and walk-away points in columns two and three, respectively. Will you make a profit or will it drain your revenue?

There may be some codes that are profitable and some that are not; examine codes by volume to determine if the profitable ones are performed most often or only periodically. In some cases, the profitable codes can make up for the codes appearing as a loss if the latter represent a small portion of your total business activities.

Consider comparing your current claims experience against the proposed reimbursement rates based on the actual volume of claims to determine the difference in revenue. This would give you an idea of the potential gain or loss if the anticipated additional volume does not occur, since that variable is not guaranteed.

Additional Factors to Consider

  • What carriers do the largest employers in the area use?
  • Determine what the largest patient population pull will be to your clinic: Medicare, Medicaid, workers' compensation, or commercial plans. Be sure to contract for the patient population you have or anticipate gaining.
  • Know your market. Which payer is most prominent in your area? Typically, there are five that are at the top for each market. If you do not know which ones these are, ask your referral sources.
  • If you have elected not to contract with a payer deemed important by your referral source, it is important that you are able to explain your decision, supported by facts.

If You Are Rejected from Joining a Network

Many third-party payers group durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) together and close their network when they actually may not have enough prosthetists, orthotists, pedorthists, or mastectomy fitters in the area to service existing members. While it is not always successful, you may want to ask the payer to look only at the number of available O&P providers in the network, and as a separate classification from the durable medical equipment (DME) providers. This may persuade the carrier to open the network for your services. Also, do your homework regarding the location of other in-network providers; if they are more than 30 miles away, there may be an opening to add your practice.

Ultimately, whether or not you decide to contract as a network provider with third-party payers will depend on a variety of aspects that are specific to your business. Carefully analyze the results of the spreadsheet you create in comparison to each contract to determine all the potential effects on your business. Knowing the facts behind the contract will ensure the most advantageous agreement for your practice, and one that will will allow you to provide the best service and care for your patients.

Christine M. Duprey is the owner of Caris Consulting, Abrams, Wisconsin. She can be reached at 920.826.5300 or at