Follow the Money

How the Benjamins wind their way from a patient’s pocket to your paycheck (and where they get lost along the way).

 

Do you know how your income gets from the patient to your pocket? If you don’t, you have no one to blame when you are not satisfied with your paycheck. It’s not enough for a clinician to work in a medical vacuum. A physician has to know what factors drive both the group’s earnings and his personal income. Yet, it’s surprising how uninformed most EPs are when it comes to knowing the business side of the practice, says Ed Gaines, a practice consultant with Healthcare Business Resources in Durham, NC.

The reported cost of hospital-based care is outpacing inflation. Meanwhile, physician incomes haven’t kept pace. Why? “A great deal of what EPs earn is ending up everywhere but on their income statements,” Gaines says. Docs are working longer hours and seeing more patients, he adds, but their gross incomes are steadily eroding.

 

So how does this happen? Where does the money stream in EM begin and end? Where are the sinkholes where income is diverted or lost? What can you do to work smarter?

 

The business fundamentals in a group practice are roughly the same as those of any other service-sector business, but with some notable exceptions. Health care may be the only industry in which a business sells a product at a price set by the buyer [the insurance company or government]and which seldom, if ever, adequately covers the seller’s cost, says Patrick Barry, executive director of North Sound Emergency Medicine, a 48-physician group near Seattle.

A practice’s revenue comes from the number and complexity of patients seen in the ED. In principle, the higher the number and of sicker patients seen in the ED, the greater the potential is for higher revenue, even in a managed care climate, Barry says. So if you are seeing a lot of sick patients,
you should be making more money, right?  Maybe.

 

Let’s look at the costs that a group bears before paying you your salary. A bare-bones break-down of group costs might look like this: 76-80 percent for physician compensation, 8 to 12 percent for malpractice insurance and about 12 percent for coding, billing and other overhead expenses. Many groups, especially smaller ones, outsource the billing function, but a growing number of larger practices do it in house. Whether going in-house with billing will save money is a multi-faceted issue,
depending largely on the group’s efficiency and knowledge of emergency medicine. Most hospitals that attempt to do their own emergency medicine billing lack the expertise and motivation to improve on an outside service. Hence, if your hospital is insisting on doing the billing for your professional services, you owe it to yourself to compare it to an outside firm, several if possible. You might get a surprise, and a raise.

 

Since revenues are solely based on the work of the EPs, they are the ones who shoulder the burden of all these fixed costs, which also could include administrative salaries, the cost of mid-level providers, secretarial services, record-keeping costs, and other expenses. In other words, regardless of whether you have a say about the salaries of the secretaries, it’s all coming out of your pocket. Efficient mid-level providers may be making money for the group. And they may not. Paid  administrative time by members of the group may be compensated by the hospital or EMS, or by you. Research is needed and requires time to do it. But who’s paying for it, grant money or your clinical time. You should know.

 

The specialty shares one financial advantage in that its fixed costs are lower than in many other specialties. This is due to the lack of any sizable capital expenditures in emergency medicine, such as office space and costly equipment, which are normally born by the hospital. However, such costs
can be a benefit as well. If your group could increase its gross revenues by investing in, say, its own ultrasound machine, most physicians would be willing to bear part of the cost out of their salaries. Investigate the equipment that would make your practice more productive. If the hospital won’t
spring for it, maybe you should.

 

Many practices pay docs an hourly fee based on a calculation of how many patients they typically see in an hour. Other factors in setting hourly pay are patient acuity and
the group’s average reimbursement per patient. But some contract owners take advantage of another factor, the market.

 

Consultant Frank Adams of PSR, a firm in Dallas, says that “hourly rates are driven by two factors: market conditions, that is, how desirable the practice location is, and total collections.” The practice may collect a lot of money, but the contract holder may not pay appropriately in a desirable market
where physicians are willing to work for less. In a perfect world the rate of compensation is determined as a fraction of the revenue multiplied by the percent of total dollars usually paid in compensation, divided by the total number of hours worked. “Each practice [however]sets up its own
compensation formula and they can vary widely,” says Mary Witt, a vice president with The Camden Group, a consulting firm in El Segundo, CA.

Still, other groups resort to a more complicated system using the Medicare relative value scale (RVS). The chief component of the RVS, the relative value unit (RVU), is supposed to reflect the relative intensity of health care resources used in treating a medical condition. A knee aspiration, for example, is weighted at 1.2 RVUs while an appendectomy is assigned 17.4 RVUs. Medicare assigns a conversion factor to the RVUs, which results in a dollar amount. The benchmark rate for one Medicare RVU is $38. (Medicaid pays about half that amount.)

 

Payers use the Medicare RVU system to pay physicians factoring in a multiplier in the process that increases the Medicare base rate. The amount can range between 100 percent and 165 percent of the base rate, which tops out at $38 x 165 percent, or $62.70 per documented case.

 

See the next page to find out which variable has the biggest impact your bottom line.

{mospagebreak title=Compensation break-down}

 

 

Let’s look at how this kind of formula can work its way out in practice. If the doc typically sees 2.5 patients per hour (the national norm), using the maximum RVU rate of $62.70 per case, his hourly gross pay would range between $95.00 and $156.75. That’s a pretty big spread. Now lets say the
group sees 40,000 patients per year. In a group of ten doctors each doc will work 1600 hours at 2.5 patients/hour to see the total. The group’s revenues, if the entire patient population were Medicare, would be between $1.52 to 2.5 million. For his 10 percent of the volume, the physician’s gross earnings would be between $152,000 and $253,000. Reduce that by 20-24% for overhead and the EP would make between $115,000 and192,000 per year for 1600 hours of work. Reduce the group to eight doctors (and increase the hours to 2000 per year) and the compensation rises to between $144,000 and $238,000 per year.

 

From a physician’s standpoint, of course, it’s not as simple as that, says Michael Harris, a principal with Harris Consulting in Torrance, CA. Six out of every ten ED patients generally pay less than billed
charges or some lower contractual rate, Harris says. Moreover, many don’t pay anything at all. The effect is that the benchmark of 165% of the RVU base rate gets lowered significantly.

 

The amount of uncompensated care has to be borne by the EP, who in effect has to spread each hour of pay across every nonpaying patient. The amount is actually quite a bit, says practice consultant Ronald A. Hellstern, MD, with PSR in Dallas.The cost shift drops the original $62.70 per hour, in the idealized model, down to $53 per hour, Hellstern says. At a certain point, hospitals are apt to subsidize the fee in order to make their hospital attractive enough to qualified physicians.

“To function without a subsidy, most groups need to operate at about 150 percent of RVU. If you drop below that, you’re generally not making enough to compensate your physicians,” Hellstern says.

 

What’s left after covering the shortfall from the cost shifting goes to covering each doc’s share of the group’s fixed costs, including malpractice expenses, an extremely fluid, changeable amount. “Malpractice is a moving target,” says Harris.

Groups vary in the way they cover the cost of medical malpractice. Some deduct a fixed percentage of the premium from each physician based on the number of patient visits. Docs who see fewer patients pay less. Others pay the total amount “off the top” as a gross operating expense. In either case, the EP ends up paying for the coverage.

 

Although the patient-visit method is less typical, most groups prefer it because it’s more flexible that the other option and can easily cover part-timers and “moonlighters,” says Adams of PSR. Some of the large contract groups are opting for the patient-visit method as a way to spread the premium costs over a large number of EPs in different hospitals. And groups with substantial cash flow are selfinsuring the first dollars by building cash reserves or “set-asides” to shelter them in the event of a suit. This amount only pays the initial part of a malpractice cost. The balance is covered by the purchase of additional insurance. If unused, at the end of the year the surplus in the set-asides is
distributed among the fund holders. This distribution, though not without risk, can be substantial and may be reserved for an ‘inner circle’ of physicians, the founders, or partners. Some groups are so large that they can afford to form their own “captive” insurance companies and pay themselves
the premiums. Profit, and losses, from this insurance company may also be restricted to a few insiders or big money investors. If you are not scared by the risk and are certain that you will be with the group for many years, see if you can get into this action. Good medicine by your partners could pay you big dividends.

Malpractice insurance premium costs can range per physician from $18,000 to $60,000 per year and are set by market conditions. However, the premiums are not set according to an EP’s past quality
performance, as many people believe, says Adams.

 

The key to increasing compensation all lies in working smarter and faster, the experts say. “If you go from seeing 2.0 patients per hour to 2.5 without adversely affecting your outcomes, you can have a
huge impact on a group’s reimbursements,” Gaines says. See the chart.

 

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True, a lot depends on externals such as payer mix and a hospital’s entrenched ancillaries. But physicians can still achieve efficiencies by doing more of the little things in less time and depending less often on others. Many physicians complain that the contract holder is taking too much in expenses, and they may. But that’s not where the big money is located. A few years ago, the EPs at North Sound Emergency Medicine near Seattle found themselves in a deep hole financially. The 48-member contract management group was bleeding money – a great deal of it. Revenues were falling, physician incomes were dropping, and fixed costs were skyrocketing. Medical malpractice expenses, alone, spiked up to nearly 20 percent of gross revenue, double the national average. Several of its best EPs had already walked, threatening the group’s three existing hospital contracts. It was clear that expenses were burning a hole in the bottom line, says Patrick Barry, North Sound’s executive director.

 

The group elected a new physician president Liam Yore, MD, who immediately instituted a round of
reforms. EPs were taken off hourly pay and compensated based on the number of patients and the complexity of cases they treated. Incentive pay was also developed to reward docs seeing additional patients. The group renegotiated its managed care contracts to increase their average patient
collection, keeping the good ones and canceling those that paid poorly or were difficult to work with. “It caused a public relations problem with the hospital and patients but was necessary,” Barry recalls.

The group began to work with its hospitals to reduce patient waiting times following triage, making it easier to see more patients per hour. The strategy worked by increasing productivity and patient flow.

 

North Sound is still in the process of achieving benchmarks, but the lessons learned from the past, Barry hints, is that the physicians’ financial fortunes are inextricably tied to the group’s and vice
versa. “You have to keep the docs happy to keep them around,” Barry says.