Costs and profits: What urologists need to know

November 1, 2006

It is not enough to maintain control over the profitability of your practice. In order to gain control, you need to know the cost of each procedure you perform in the office, the reimbursement from each of your payers, and the profit margin for each service you offer your patients.

Most urologists, including me, have a handle on the profit margin that is affecting our practices. Some of us have benchmarked our reimbursements to Medicare payments, thinking that anything above Medicare fee levels was acceptable and anything below Medicare levels was not profitable. That may be the extent of our understanding of practice analysis.

Today, however, this is not enough to maintain control over the profitability of your practice. In order to gain control, you need to know the cost of each procedure you perform in the office, the reimbursement from each of your payers, and the profit margin for each service you offer your patients. For this article, I have interviewed Philip Mosca, MD, PhD, a urologist in Oklahoma City, on how to determine the cost and profitability of running a urology practice. After reading this article, you will have a greater understanding of which procedures are the most profitable and which are losers (and which you may want to outsource to increase your net profitability).

It was just 20 years ago that revenue enhancement was as simple as raising your fees. In the era of managed care and capitated compensation, raising fees was not possible, and the only opportunity to increase revenue was to reduce overhead expenses. As a result, most practices cut the fat out of their practices and reduced staff and operating expenses to a minimum.

Today, reimbursements are discounted, the compensation for our services is falling fast (Medicare has a planned across-the-board reduction of 4.7%), and overhead costs are rising. So what happens to the bottom line? You don?t need an MBA to know that this scenario results in an erosion of our incomes.

Measuring profits

What is the solution? According to Dr. Mosca, we need to measure the profit margins for all of the services and procedures we offer our patients. This is easily calculated by measuring the fees collected and subtracting the cost of providing the service. With that information, we can replace lower-profit procedures and poor payers with higher-profit procedures and better payers. Of course, it is important not to just look at costs and reimbursements. We have to balance efficacy, safety, and efficiency with the profits and costs associated with offering certain services.

Assigning costs to productivity using classic accounting models consists of measuring the fixed costs (rent, salaries of staff and physicians, insurance, and utilities) and variable costs (expenses incurred by seeing a patient or doing a procedure, which vary by procedure and supplies consumed). Next, a percentage of fixed and variable costs is assigned to each patient visit by disease or procedure. These data allow you to trace each diagnosis and procedure, and the average cost per diagnosis and procedure and revenue per diagnosis can be compared with yield profit margin per diagnosis or procedure. This classic method is very accurate, but also very time consuming and very expensive to perform.

An attractive alternative that is within the reach of all of us is the resource-based relative value scale (RBRVS) cost ac-counting method. This is easy to perform, can be estimated from minimal data, and can help manage fee-for-service reimbursement and even capitated reimbursement.

This is accomplished by obtaining your procedures by CPT code and by ICD-9 diagnoses for the past year. These data are readily available from your billing system.

Next, use the RBRVS units per procedure, which is also available from your billing system or the CMS web site. Multiply the total RBRVS units per procedure by procedure frequency on an annual basis. Then add the total number of RBRVS units performed per unit of time (see figure)

Deciding on procedures

Dr. Mosca notes that the data collected can be helpful in determining which procedures and services are most profitable and are worth including in your practice offering and even in your marketing strategies. These data will also help you to decide which procedures or services to discontinue or refer to others.Dr. Mosca advises calculating practice expenses with and without the physician salaries, bonuses, and retirement expenses. If you are planning to hire a new associate, you can include the salary with practice expenses to determine whether you can financially support a new physician. These data can also be used to determine what bonuses can be awarded to the physicians.

This becomes even more useful if you group procedures by gross revenue, by gross margin, by payer, and by diagnosis. Now you can compare units of costs to units of revenue with and without physician expenses as a portion of costs.

Performing the calculation with physician costs included also allows you to determine what reimbursement you must receive from a payer to reach the physician reimbursement threshold you have established. Finally, these data will help you determine which payers meet or exceed your costs and which ones should be kept in your payer mix or should be the focus of payer negotiations.

Successful practices are also profitable practices. To be successful, you have to drill down into your practice and learn what makes economic sense. This is best accomplished by identifying the costs and profits for your most common procedures and diagnoses.