General Financial Performance

• Business Processes that Generate Income
• Understanding Your Reimbursements and Fee Schedules
• Payor Mix Analysis
• The Billing Process
• Using Your Computer System
• Collection Target and Performance Analysis
• Calculating Collection Target
• Accounts Receivable Analysis
• Overhead Cost Analysis
• 13 Tips for Effective Billing
• Financial Performance Analysis and Reports
• Monitoring Third-Party Payments
• Monthly Management Reports
• Managing Staff Costs
• Relative Value Units - a history and calculations

General Practice Management

• How to Have Your Staff Be Effective
• The Myth That Physicians Are Not Trained In Business
• Co-Employment/Staff Leasing
• Computer Selection, Part I
• End of Year Opportunities
• Incentive Compensation for Optometrists and Opticians
• Financing Eyecare Services
• Outsourcing in Ophthalmology Practices
• Medical Equipment Acquisition
• Staff Incentives and Bonuses

Payor Class Identification
A “payor-class” or “financial class” categorization is key to this analysis. There are three reasons for categorizing insurance plans into classes:

Financial planning The classes should group insurance plans by expectation of payment. For example, the contracted, fee-for-service managed care plans, which have relatively similar payment levels, can form one group, and the expected percentage of charges that can be collected from that group can be defined. This allows you to accurately budget your practice expenses and to predict collected revenue.

Targeting collection performance By classifying each plan into a class of plans with similar expectation of payments, you can begin to set collection performance targets for each class as well as targets for overall collections. This will allow you to manage your billing vendor or your own billing and receivables management operations against calculated targets. By accurately predicting expected collections, you can quickly detect problems in the billing process. Similarly, if you generate your accounts receivable summary by payor class, you can identify patterns of growing receivables. If a class has increasing receivables over 90 days, you can then look at an AR summary by individual plan to determine which plan or plans are paying slowly.

Identifying your “customers” for strategic planning and management A report of your charges by payor-class tells you to whom you are providing your services ­ who your customers are. This information is invaluable for the strategic management of your practice, including analysis of potential managed care opportunities, the introduction of new services, and the addition of new providers.

Defining Payor Class Categories

There are three criteria for defining a payor class:

First, there is the expectation of payment (payment level);

Second, there are unique payment and/or collection characteristics that a particular set of insurance plans may have that can facilitate accurate billing and/or collections (e.g., are balances billed to patients); and

Finally, there may be an individual insurance plan that receives a critical percentage of your charges (5% to 10% or more) that justifies a class of its own (e.g., Blue Shield).

A typical set of categories might be:

• Medicare (set fee schedule) … Medicaid (set fee schedule)
• Medicare/Medicaid (expect approximately 80% of the Medicare Fee Schedule ­ Medicare Fee Schedule minus co-payments)
• Contracted, discounted fee-for-service managed care (agreement to accept contracted amount as payment-in-full - most plans in a market allow payments within a relatively narrow range)
• Capitation (no fee-for-service payments)
• Workers Compensation (fee schedule)
• Indemnity Insurance (insurance pays, patient responsible for balance, expectation of receipt of 100% of charges)
• Refractive/cosmetic
• Self-Pay (uninsured, other)

Assigning Insurance Plans into Payor-Classes

• The process of assigning insurance plans into payor-classes is relatively straightforward. Most practice management/billing computer systems have an “insurance set-up” function, usually a screen that allows the user to assign characteristics to each insurance plan.
• Each contract written by an insurer has its own characteristics.
  For instance, “Acme Insurance Company” may have “Acme Choice PPO” as well as, the Acme Choice PPO contract with “Ace Machine Tool” with a $10 co-payment. Or, there may be a contract with “Zero Hardware” requiring $5 co-payments which also includes refractive surgery. It is obvious that the insurance for the employees of these two employers, although both Acme Choice PPO, must be entered into the computer as separate plans even though they are in the same class.

It makes no difference if the plan is a PPO or an HMO, as long as the payment expectations are similar.

Avoid these Common Pitfalls

Do not mix different types of plans offered by the same insurance company into the same class. For instance, Acme Insurance Company may offer another set of products that are “indemnity” plans. That is, these plans pay all or part of the physician’s bill, and the patient is responsible for the balance. The expectation of payment is 100% of the charge, so these plans cannot be mixed into the same class as the contracted fee-for-service plans.

Do not place a PPO plan in which your practice does not participate into the fee-for-service managed care class. Remember, if you do not have a contract with a particular plan, the patient is responsible for the balance of your bill after the insurer pays.

Practice Management System Shortcomings
There are still a large number of practice systems that do not report on charges by payor or payor-class. One common work-around is to enter two leading digits that signify payor class in the plan’s name. For instance, the Acme Choice PPO may be entered as “13Acme Choice PPO”, where 13 is the class number for contracted fee-for-service. While not ideal, this work-around may allow you to overcome a system shortcoming by allowing the listing of plans in “alphabetical” order, and the simple categorization of plans into categories from that list.

The problem becomes more difficult if you have a system that will not report charges by payor or payor-class. The only solutions are to export your data and generate reports off the system, or to upgrade to a system that will provide adequate management reporting.

Reporting and Analyzing
There are two basic methods for reporting and analyzing your payor-mix ­ Charges by payor-class and RBRVS RVUs provided by payor class. Of course, if your fee schedule was developed using RBRVS and a conversion factor (the methodology for this will be covered in a future issue) the payor-mix will be identical using either methodology.

The following is an illustration of a payor-mix analysis using gross charges:

Payor Class	Charges (1/1/98-12/31/98)	Mix (by Charges)	RBRVS RVUs (1/1/98-12/31/98	Mix (by RVUs)
Medicare	$680,000	34%	17,000	34%
Medicaid	$100,000	5%	2,500	5%
Medicare/Medicaid	$40,000	2%	1,000	2%
Contracted Fee-For Service	$620,000	31%	15,500	31%
Indemnity	$40,000	2%	1,000	2%
Workers Compensation	$80,000	4%	2,000	4%
Capitation - Commercial	$160,000	8%	4,000	8%
Capitation -Senior	$260,000	13%	6,500	13%
Self Pay	$20,000	1%	500	1%
TOTAL Charges	$2,000,000	100%	50,000	100%

Note that there are two capitation classes, one for senior patients and one for commercial. Even though there is no direct, fee-for-service income for the services, or “charges” for those patients, it is important to separate these patients into two separate classes for analysis purposes.

Another aspect of using gross charges or RVUs to define payor-mix is the effect of multiple procedures and/or surgical assists. While this is not a major problem in Ophthalmology, it must still be considered.

Secondary procedures, while generally charged at 100% of the practice’s fee, are paid at 50% or less of the allowable payment schedule. For accurate payor-mix assessment, those procedures modified with a ­51 (multiple procedure) or ­80 or ­81 (surgical assist) should have the corresponding charges and/or RVUs reduced FOR THE PURPOSE OF THIS CALCULATION, and not for billing. They should be charged to the insurer at full fee.

The Table above was derived from a practice that used RBRVS at $40 per unit to generate its fee schedule, which explains the identical payor-mix using both gross charges and RVUs.

Monitoring Shifts
The payor-mix analysis should be run quarterly, with comparisons to previous time periods to show any significant changes in mix, especially if your practice is “full” (operating at full capacity). If your mix is shifting with increasingly larger proportions of lower-paying patients, while the wait-time required for a new patient to get an appointment is getting longer, the practice’s income will be headed lower. This is compounded as you begin to lose new patients when the wait for a new patient visit becomes longer than tolerable. Regularly assessing payor-mix can identify this issue before it becomes a significant problem.

Similarly, if the proportion of your services provided to capitated patients is increasing faster than your capitation income, you must investigate whether you have adverse selection (disproportionate number of patients with serious pathology requiring higher than normal intensity of services). This will impact the equity of the income distribution and “profitability” of the contract.

Finally, regular review of your payor-mix will alert you to changes that may prompt the need to recalculate your collection target.

Using Payor-Mix Data for Strategic Management
As we said in the beginning of this issue, knowing who your customers are is a critical component in managing any business. Making strategic decisions is impossible without this information.

Each time a new managed care contract comes across your desk, part of the evaluation process is to determine how the added patients will impact your payor-mix. Will these patients increase or decrease your expected collections? Will they displace higher paying patients? Lower paying patients? If you don’t know your payor mix, these evaluations are impossible.

Another aspect of assessing managed care contracts and/or new managed care opportunities is the comparison of your payor mix (the measure of the quantity of services provided to each class) to the same analysis using collected revenue. Your income per payor class compared to the amount of service required to earn that income is another measure for evaluating managed care opportunities and whether to renew or renegotiate existing contracts (this will be covered in greater detail in a future newsletter issue).

If you are contemplating opening an additional office, part of that evaluation is to determine how the patients in the area of your potential new office will impact your mix. Similarly, if you evaluate your payor-mix and find that your lower paying plans are becoming the major proportion of your practice, that may drive your decision to seek an additional location ­ a location whose demographics may offer a better mix.

Finally, the decision to add providers to your practice may be driven by information beyond simply “how busy are you?”. What part of your mix will the new provider serve and manage? Can the reimbursement from the patients your new provider serves support that new provider? Can your new providers become credentialled in the critical plans that require added capacity to serve?

Summary
Running a business requires knowing who your customers are. In today’s medical environment, with increasing competition, lowered reimbursement, changing practice patterns, and new “product” opportunities such as refractive surgery, understanding that customer mix is even more critical, and the payor-mix analysis is the method to gain that understanding.

Prepared for the Academy by: Ron Rosenberg, P.A., MPH Practice Management Resource Group