How new payment models will redefine ‘cost of care’

September 13, 2013

In this article, I examine the importance of understanding the “cost” side as urology practices prepare to face a changing landscape of reimbursement systems.

Emerging reimbursement models in health care-value-based payment, patient-centered medical homes, narrow networks, accountable care organizations, and others-are fundamentally different from a fee-for-service model in that the medical practice must accept some degree of financial risk. Many of these models are anchored in concepts of population health management, patient risk assessment, utilization rates, global payments, and episodes of care; successful participation will require a detailed understanding and management of practice expenses because the revenues may be fixed.

In this article, I will examine the importance of understanding the “cost” side as urology practices prepare to face a changing landscape of reimbursement systems.

Challenges: Episode of care costs

According to a Medical Group Management Association 2013 survey of its members, understanding the total cost of an episode of care is one of the top five challenges facing medical group practices. Most urologists have long understood that some activities in their practice are more profitable than others, but few have actually measured or managed beyond a monthly overall income and expense analysis.

One of the challenges is the lack of full integration between the system used to manage patient care (the electronic health record [EHR]), the system used to file claims and manage accounts receivable (typically the practice management [PM] system), and the system used to track accounts payable and other financial processes (the general ledger [GL] or accounting system). In many practices, the GL system is completely “stand alone,” and in order to even generate a balance sheet, the accounts receivable value must be manually populated from a report produced by the PM system.

A second challenge is that while the EHR and PM systems record patient encounter transactions that could possibly be grouped into an “episode” of care for analysis, the financial systems in use today have no mechanism for linking a cost to a patient or an encounter. Finally, while most medical accounting systems have a “chart of accounts” that meets the basic needs of a urology practice, the users may not have created enough accounts and/or the reporting modules are often not powerful enough to permit a detailed analysis of costs within the practice.

Let’s look at one simple example that will highlight the challenges and guide the solutions needed to address the cost of care. Many patients are referred to a urologist for the evaluation and management of hypogonadism, and once diagnosed, many factors will influence the choice of testosterone replacement therapy. Some patients and their physicians continue to choose injection therapy because it is “cheaper” than other replacement therapy-a lower charge for the patient or insurance company paying the bill in a fee-for-service environment. In a reimbursement system where urologists might be providing that care under a fixed payment or otherwise be held accountable for the total cost of the patient’s care (such as the cost of the prescription), they must better understand the financial impact of their decisions.

Determining the profitability of this service line requires knowing the potential revenue, which may be completely different under a global payment (per patient, for example) than a fee for service (per encounter, for example); the cost of acquiring the drug, which is usually buried in a monthly payment to a medical supply house together with other supplies; and overhead costs. Sensibly calculating or modeling the cost of administration requires apportioning salaries of staff, physician time, supplies, general overhead, and other costs. I’ve created an example that uses actual Centers for Medicare & Medicaid Services 2011 payment data and a hypothetical commercial payer; the model assumes testosterone enanthate, 200 mg every 2 weeks is administered in the office by a clinical staff member, and apportions all other practice expenses except drugs to general overhead based on time (table).

Specificity key when listing expenses

While this model and its assumptions could be criticized for its simplicity, it is the type of analysis of costs that needs to be conducted to inform decisions about whether to assume financial risk and, if so, the potential upside and downside of the decision. The model illustrates the importance of classifying expenses as specifically as possible; for example, a chart of accounts should include accounts for testosterone, bacillus Calmette–Guérin (TheraCys, TICE BCG), LHRH drugs, catheters, etc.-not just line items for “medications” or “clinical supplies.”

Your supply vendor or group purchasing organization may already have both the framework and amounts to track this information in your practice more specifically. Armed with this information, you should be able to estimate the cost-and the potential profit or loss-of each of your major service lines, patient types, and even “episodes of care.” Together with an understanding of the population at risk-and the utilization rates of those patients-the urologist can do some simple multiplication to predict the impact of their participation decisions.

Bottom line: The “cost of care” means something different to a patient, a population, a physician, an insurance company, and the federal government. Regardless of the perspective, urologists need to understand the revenue and expenses associated with every aspect of their practice in order to thrive in a changing business environment. It is no longer sufficient to think in terms of overall income and expenses, or even net revenue per patient. The new paradigm requires better accounting systems and practices to understand new numbers: net revenue per patient type, expenses per service line, cost per episode of care, and best-case scenario.UT

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