Improve Your Bottom Line

by Susanne Madden [published in Physician’s Practice PEARLS newsletter]

Whenever possible, you should negotiate with your payers for better contract terms and payment rates. However, in this economic climate negotiations are becoming tougher and many payers are refusing negotiation requests outright.

So what can you do? Consider adjusting your payer mix to create optimum value. That means evaluating your payers to determine your participation costs, as well as your reimbursement rates. Once you figure out which payers are good and which are bad, you can put a plan in place to allow you to reduce the percentage of visits for the high-cost, lower-paying plans, and grow your business in low-cost, higher-paying plans instead.

The simplest way to evaluate cost and payment is by doing a quick “litmus test” to look at your effort vs. reward ratio. This requires only six simple steps:

1. Pick a time frame to measure, preferably one at least three months in the past to allow for most claims in that period to have been paid.

2. Total all of the revenues received from all your payers during that period, breaking out the revenue received from each payer.

3. Total the number of procedures (or visits, if you prefer) performed in that period and then break down that number by payer.

4. Divide each payer’s revenue by the total revenue to determine the percentage received for services rendered to that plan’s members in that time period.

5. Divide the number of procedures for each payer by the total number of procedures to calculate the percentage of “effort” rendered to each payer’s members.

6. Compare the percentage of revenues for each payer to its corresponding percentage of effort. The higher the percentage of revenue compared to the percentage of effort, the better. Equal ratios, for example, 14 percent of effort and 14 percent of revenue, mean you are getting out only what you put in, with little margin. Where the revenue ratio is less than the effort ratio, it indicates very poor performance indeed.

Looking at your numbers this way helps to identify problem payers quickly. It is a good way to measure both payment and cost together — that is, slow payers and payers who routinely don’t pay procedures or have a high denial rate will be the ones that stand out in this brief analysis. However, it is only a quick and easy method to begin quantifying your payers and should only be used as such.

To really understand a plan’s performance drivers, you should compare specific rates for specific codes across your payers, as well as analyze participation costs for each individual payer; for example, the amount of time spent following up on claims, the denial rate, the resubmission rate, and so forth.

The next step is to put a plan together that will allow you to minimize the bad and optimize the good. Participating with only those plans that offer reasonable rates and have reasonable costs will ensure that your payer mix is blended for optimal value.

The Cost of Healthcare, Quantified (Maybe)

The other day I read a RWJF report entitled “High and rising health care costs: Demystifying U.S. health care spending” over at after a fellow listserve member directed our attention to it. The report basically points out that rising malpractice rates aren’t one of the primary reasons for the increase in healthcare costs in the US, a seemingly popular belief. Instead it’s “…prices, inefficiency, and insurance administration.”  Finally we are getting somewhere close to pinpoining the real drivers, I thought. Then I read the report.

There is very good analysis in here, but it is disappointing to note that while they were identified, administrative costs were not more intensively examined. The authors do state that much of the differences we see between the US and OECD countries comes down to the lack of a universal delivery system, creating a costly fragmented system here. But the level of detail in the analysis seems to stop there.

For example, when comparing physician compensation, the findings state that in the US it is 6.6 times per capita GDP for specialists and 4.2 times for primary care, compared to 4 and 3.2, respectively. However, the authors don’t take that next step to note that in countries where there is universal care, physicians are (for the most part) salaried employees in some form or another. By contrast, the majority of physicians in the US own their own medical businesses, meaning that they are bearing the overhead and expense incurred in doing so. An analysis that factors that in would be more helpful than simply pointing at hard numbers. Without backing out those costs, we cannot know if physician compensation (I am defining compensation as the amount that physicians get to keep) is actually much higher than in OECD countries. Perhaps the authors are looking only at take-home pay, but that isn’t indicated [that said, I just looked up the McKinsey report upon which this is based, and McKinsey IS looking at TOTAL compensation, NOT take home pay – so I rest my case on that point]

The paper goes on to note that ‘MGI (McKinsey) estimated that the United States spends six times more for administration than OECD countries, not including the costs borne by providers in interacting with payers’. Why aren’t those costs included? If they were , the numbers would be much higher and help reveal that the cost of supporting the current private payer system is exorbitant. The authors get close to this idea in Table 1, Drivers of Cost Trend, where ‘changes in third party payment’ and ‘administrative costs’ are identified – when combined these two items account for 23%-26%, and that is without taking in to consideration ‘the costs borne by providers in interacting with payers’. What would the number be if those costs were included? In a study released by Ingenix recently, they state that ‘claims processing inefficiencies impose significant administrative costs on payers and providers, with estimates ranging from $210 billion to $250 billion annually’. Let’s say that again – $210-$250 BILLION, ANNUALLY! They further estimate that 14% of physician revenue is spent on claims activity; 12-24% of health plan revenue is spent on same. So why are the authors NOT including ‘the costs borne by providers in interacting with payers’ in either physician compensation or administrative spending?

Things get really fuzzy when the authors adopt the position of only looking at cost drivers from the perspective of analyzing what actually drives changes in the spending trend. In doing so, they arrive at conclusions such as ’standard assumptions about how a change in health insurance affects an individual’s spending on health care lead to a conclusion that health insurance is not a dominant driver of spending trends’. However counter-intuitive this might seem then, utilization is not a key cost driver; as this study examines, it is the cost per unit of utilization that best represents overall costs, and that per unit cost is composed of the key drivers identified in this study. But once the authors have made that claim, it shifts their commentary from being about end costs of delivery (the numbers initially referenced in the study) to shifting to utilization when it comes to discussing insurance. Therefore they fail to examine the end cost of securing that insurance, which ultimately is THE cost that needs to be examined because that cost includes the profit margins made by insurers, and the associated administrative costs to secure those profits in the process.

It would appear that by missing this point, the conclusions arrived at based on the numbers used are therefore somewhat skewed. That is, the authors are looking at such universal numbers as physician compensation as a percentage of GDP but without applying the cost associated in being a physician in the US system (a very different cost structure than in OECD countries); they are not looking at the cost of premiums as compared to what percentage of those premiums are actually SPENT on care delivery; and they are not examining the cost associated the fragmentation involved in the different middlemen associated with payment delivery. Notably, the section on managed care begins by stating ‘because of data limitations, most of the literature defined managed care as health maintenance organizations (HMOs), entities that play a much smaller role in health care financing today’ – so there is the realization that even the quantification of these entities is difficult,
and due to the identification and research on only perhaps one type of insurer it raises methodological concerns about the research itself. Perhaps because of the lack of comprehensive data on private insurance, the authors choose to make the following closing argument for improving efficiency – ‘payment mechanisms potentially more consistent with efficiency include a single per episode payment that goes to all providers involved in a major acute procedure and capitation payments to a medical practice for the management of patients’ chronic diseases’ – with no consideration about HOW such a single payment would be administered across multiple providers of care. To me, this simply sounds like another level of payment administration being added to the fragmented mix, and a costly one for providers at that.

Finally, at the end of the paper the authors address administrative costs. And yet, they do not scratch the surface here other than to simply note ‘a multipayer system can be made more efficient’ and suggest that more ‘administrative controls’ such as prior authorizations are being ‘re-introduced’ as a way to help with restraining spending. This leads me to believe that the authors have limited experience in the processes involved in administration and revenue cycle management. The opportunity to improve efficiencies in payer-provider interactions there is considerable; adding prior authorizations to procedures drives up physician costs, rather than simply limiting utilization is a way that is significant enough to minimize utilization. The argument cannot continue to be that insurers administrative burdens are a necessary cost in order to keep utilization down. Certainly these administrative burden HAVE resulted in less SPENDING by the insurers, but how much is based on decreasing utilization and how much is due to lack of payment by insurers for services rendered in the event that the rules are not adhered to is open to debate. Therefore, this does not translate to supporting administrative burden as a necessary cost.

To conclude, the authors state under ‘the need for additional information’ that their ‘understanding of high and rising costs is fairly solid. . . yet go on to say ‘paying multiple providers for acute episodes of care requires advances in patient classification and risk adjustment. Paying for medical homes similarly needs better risk-adjustment models and the gathering of data on resources that go into care coordination. To put it differently, existing research has given us a satisfactory understanding of the problem. Now the energies of researchers should be directed toward developing and implementing solutions’. I’m all for directing energies toward implementing solutions. However, I challenge that while the authors may have a reasonable understanding regarding spending, they have not adequately understood the single biggest COST driver of all: health care insurance companies. Until researchers adequately explore just how much cost is involved in allowing these organizations (that have an inherent conflict-of-interest) to set policies on payment, utilization, and provider cost burdens, we cannot move toward meaningful reform in that area. I back up this comment by pointing out that most insurers do not pay for nutritional counseling at the primary care level, do not pay for smoking cessation counseling, do not pay for pediatric counseling and developmental screenings – all of the things that may help to reduce illness in society (and therefore reduce costs). So how can the other lofty goals of improving health and wellness, focusing in on best practices, development of better guidelines, etc and so on, be implemented in a system where insurers have effectively killed primary care and preventive medicine?

I therefore call on the authors to re-examine their ‘fairly solid’ ‘understanding’ of high and rising costs. They, and other researchers, must take a much closer look at how insurers’ policy decisions have impacted the ability of providers of care to actually provide the lowest-cost, best-outcome focused care. With that level of scrutiny, comprehension about the impact of those policies can finally be assessed and the impact of private insurers on COST can accurately be quantified and thus called upon to improve.

The Debate Over Concierge Care

In the last week, the Houston Chronicle and the Washington Post have both issued stories on the topic of concierge care from the perspective of patients and managed care companies. Meanwhile my esteemed colleague, Chip Hart, has been busy making the case by analyzing numbers specific to pediatrics.

By now, most of you know that primary care practices are the hardest hit in terms of reimbursement for services rendered and vaccines administrated. In order to alleviate the sheer volume of work faced by these practices in order to keep revenues up, some are beginning to offer their patients the option to pay a fee in order to receive less compressed care and better personal service. So what is all the fuss about?

In the case of insurers, some don’t want physicians to charge these fees to their members citing contract provisions excluding them from doing so, while others do not have a problem with it. However, many are concerned that about access to care issues, because by offering concierge care physicians naturally have to restrict the number of patients they are willing to see in order to make the time available to satisfy that offering.

Today we are beginning to see to the effects of lower reimbursement on the number of physicians entering primary care specialties, and realize that shortages are becoming a big problem. By setting up such offerings, this will restrict access to physicians even further, or so the argument goes.

But is that really the case? It might be, were it not for minute-clinics and other competitors moving in to the marketplace to help compensate for the volume spilling over from established practices. The reality is, many physician practices do not want to be clinics or mills. These doctors want to provide the best care they can, but current managed care policies do not allow for that.

So let the minute-clinics be the mills for strep tests and ear infections, if that’s what some consumers want. But let the physicians limit the number of patients that walk through their doors in order to regain some quality of care and put the sanity back into practicing medicine. In doing so, it might just help redress the imbalance that insurers have so successfully created.

For more information about concierge care, check out MDVIP.

Tipping Point for Insurers?

Has the tipping point regarding profitability versus viability finally come? Fed up with escalating premiums, employer groups appear to be aggressively shopping around, and in many cases dropping coverage for their employees altogether.

Today the New York Times reported that shares of WellPoint plummeted more than 16 percent in after-hours trading Monday after the company lowered its profit forecast, citing higher medical costs and lower-than-expected insurance enrollments. Humana and Aetna shares dropped 10% and United dropped 9% following this outcome. 

With the shift by employer groups to self-funded plans (meaning insurers simply pass along the costs of employee health costs with an administrative fee to the employer) and with more individuals becoming responsible for finding and funding insurance coverage for themselves, enrollment is not what it used to be in the large insurer market.

According to Sheryl Skolnick, a health care analyst with CRT Capital in Stamford, Conn., and quoted in the NYT article, with regard to insurance premiums, “prices are higher than people feel they are able to afford,” especially for individuals who buy their own insurance because they do not have coverage from an employer.

So, have insurers premiums finally reached the tipping point where their prices are too high to be sustainable? I believe so. And until these companies start offering products such as catastrophic insurance (without requiring a separate managed care plan) and lower priced, appropriately managed, affordable plans I don’t think this will turn around any day soon.

The good news? Perhaps this will reduce the trend of physician reimbursement gouging that has been sustaining profits and begin to put the emphasis on insurers’ operational efficiency to drive excess dollars in the future. And no, that doesn’t mean insurers should further cut their customer service staff and cut back on the resources necessary to manage all of the myriad and convuluted processes that these companies have built up over time. Rather, a focus on lean and efficient simplified processing, less complexity in medical and administrative policy making, and more accountability that leads to partnering with the other stakeholders in health care might be the way forward for these behemoths.  Or, they can simply lumber along and wait for the market to finally, finally!, correct for the abuses of the past.

When Profit equals Improved Service (shouldn’t it be the other way ’round?)

The Wall Street Journal reports “UnitedHealth reported a 3.5% rise in quarterly net income, as the health-insurance giant benefited from strong growth in its prescription-solutions unit”.

From what we have seen through our tracking of policies, ‘prescription-solutions’ means drug pre-authorizations, tiering and other administrative hurdles that have been added to the cost of running practices. Physicians carry the administrative cost, UHC profits. Nice, right?

If you read the article, you’ll note that there is much talk about United’s improved service, yet the member numbers don’t hold up. Maybe you’ll be as confused as I am when you read Mr. Helmsley’s comment “Our service levels have recovered strongly”, followed by ‘UnitedHealth continues to expect a 2%, or about 550,000-member, decline in commercial enrollment in the first quarter’ and ‘the outlook for the decline in risk-based commercial members is now closer to 400,000 than to 350,000, Mr. Hemsley said.

Furthermore, the article goes on to state ‘In the fourth quarter, UnitedHealth saw a 75,000-member decline sequentially in commercial risk-based membership and a 480,000-member decline year over year. Total commercial enrollment was flat sequentially at nearly 25.53 million and down 175,000 year over year, as fee-based commercial membership increased’.

Let’s see: decline in enrollement + increased profits = improved service. Yep, that makes perfect sense alright.  

I don’t see a quantification of HOW service levels have improved, other than discussion of PROFIT as an indicator. But as anyone who has studied statistics will know, correlation does not equal causation.

Looks to me like UHC are equating improved dollars to improved service, regardless of declining enrollment. How can that be? Wouldn’t it be the other way ’round, that improved service would mean an increase in enrollment? Perhaps service is the least of what is feeding the bottom line numbers. In addtion to the stated ‘prescription-solutions’, SEC filings suggest that acquisitions, policy change initiatives and lack of claims payments are all helping to boost the bottom line. That has nothing to do with improvements.

So what I want to know is, when is a journalist going ask “What have you actually done to improve SERVICE?”


Private health insurers have jumped on the band wagon when it comes to not paying for preventable injury or illness occuring through hospital errors. Medicare instituted non-payment of errors last October.

Aetna, Wellpoint, and some other large insurers are starting with a shorter list than Medicare’s so-called ‘never-event’ list. Primarily focused on the most egregious errors such as bed sores, falls and hospital infections, the list could expand quickly as these initiatives are implemented.

The idea is that insurers will no longer pay for mistakes, and hospitals cannot bill patients directly for the cost of care associated with fixing these problems, in an attempt to improve patient safety. But is that going to be the outcome? What about the patient who, say, has a sponge left inside after an operation? Will a procedure be performed gratis to remove it, or will it simply be left there instead?

If insurers are truly seeking to improve safety and lower the overall costs of care, it strikes me that responding punitively is not the right answer. Rather, why not help support safety by paying for screenings that help identify MRSA in patients coming in to the hospital, and reward those hospitals that have significantly fewer errors over time.

Indeed, every effort should be made to prevent errors in the first place, so shouldn’t the focus be on paying for preventive measures rather than on not paying for fixes when they occur?

Otherwise, this will just become another reason for insurers to not pay for needed care which will cycle through the system adding more expense elswhere. Meanwhile patient welfare may be compromised when things go wrong, which can only exacerbate the problem going forward.

Another side of Consumer-Directed Health Plans (CDHP)

Advocates believe CDHPs promote better decision making regarding patients’ use of health care services. According to a McKinsey study, CDHC patients were twice as likely as patients in traditional plans to ask about cost and three times as likely to choose a less expensive treatment option, and chronic patients were 20 percent more likely to follow treament regimes carefully. Well that works great for insurers – premiums coming in without reimbursements going out.

Critics believe that CDHPs cause consumers, particularly those who are poorer and less educated, to avoid needed and appropriate health care because of the cost burden and lack of available information needed to make informed, appropriate choices. I suppose cost-sharing the price of the premium with an employer is taxing enough, doesn’t leave much left over to contribute to deductible expenses.

But these are just two sides of an octagon, in my opinion. The latest profit-maker for insurers, CDHPs are big business. Not only does this model allow for more profit from premium dollars that only need to be spent in the event of catastrophic illness, it has also opened the door to banking for many of the larger companies.

Let’s think about this.

First, if your CDHP comes with a high deductible, and you are relatively healthy, then the premiums you pay will never be used. Many plans come with deductibles of $3,000 and up. A tyical family of four plan may have a deductible of $5,000 and roughly $12,000 in premiums per year. If everyone is healthy, and the majority of insurance consumers are, then you have the privilege of paying for any health care costs throughout the year out of your own pocket while handing over thousands for insurance benefits you won’t use.  Rather than shopping around to save money, I’d be more likely to want to reach the deductible limit in order for my benefits to kick in. You want something to show for those dollars, right?

Second, it costs you to have a health savings acocunt (HSA/HRA). I had the pleasure of being covered by a UnitedHealthcare CDHP plan, who owns a bank specifically created to manage consumer and employer contributions deposited toward deductible expenses. When I received my account information, I made sure to read the fine print. It was full of charges – a monthly fee for the privilege of owning the account, a per-transaction fee any time I used the funds for health care related expenses, and even a fee for recieving statements. And I got the impression that reading the fine print had resulted in charges too. . .

So can someone please explain where the value proposition is in this for the consumer? High premiums (though lower than ‘traditional’ plans), large out-of-pocket expenses, nickled and dimed for the privilege of having an HSA/HRA, and none of the premiums being returned in the form of covered health care services – I just don’t see the value in it.

But the insurance companies sure do. Caa-ching!

Profit Maximizers Are Not Cost Minimizers

I don’t know about you, but I’m tired of hearing managed care companies talk about health care ‘affordability’. They seem to think that by offering bare-bones health plans at prices that are lower than more comprehensive policies, they are fulfilling the needs of society and ensuring that health insurance is within reach for more consumers.

But is that really the case? Many of these new plans come with lifetime caps not significant enough to cover any real catastrophic event. Several are targeted toward the young and healthy, ensuring healthy profits from an under-tapped maket. At least plans are being offered to consumers that previously had no other options, so that can be seen as progress, but is it progress in the right direction?

I think not. Insurance companies are profit maximizers, not cost minimizers. Until the focus shifts from taking as much profit as possible from the system to truly minimizing the cost of running such a system, we are simply seeing costs being shifted around. The winners? Managed care companies of course.

Who is setting the price of health care?

Today I spoke with a journalist about medical cost ratios. At one point in the conversation he asked me if I thought managed care had the potential to contain costs, even though they seem to be adding to their bottom lines currently instead. And then it struck me – managed care companies are the ones setting the price for health care. 

Let’s look at it this way – MCOs  set the price of premiums, then determine how much of those premium dollars they are going to pay out on rendered services. Contrary to what the industry would have us believe, it’s not the other way ’round (services rendered drive premiums).  Of course they cannot directly control utilization of servces, but they can control access to them, create ways to not pay for them, lower payments for them, and deny claims associated with them. So, if I’m an insurer, I simply need to be creative enough to figure out how to hold on to premium dollars, and then charge more to society for that privilege in the next underwriting cycle.

How else can we explain why medical cost ratios are going down and premiums are going up? At what point do insurers begin to cap their charges? Well, they won’t, because we continue to pay, pay, pay.

Medical Cost Ratios (or, Big Profits for Insurers)

Medical Cost Ratios Q1-Q3 2007

Insuers’ profit margin comes not only from increasing premiums, but by lowering the amount spent on healthcare.  As insurers spend less, their Medical Cost Ratios (MCR) decline. The definition of MCR is simply the amount of money brought in by premiums minus the amount of money spent on reimbursing health care providers.

Insurers reduce what they spend by controlling costs in a number of ways. In its finest form, cost-cutting comes about through efficient operations, negotiating better contracts with such high volume service management companies as labs and diagnostics, and actively promoting well care programs to achieve healthier members.  Some of this happens, of course, but there is a growing trend across the board to simply cut reimbursement rates to providers and erode reimbursement through policy and procedure changes. I believe that this is having the biggest impact on the ever-growing profits of publicly traded MCOs this year.

Note – Each incremental percentage point decrease in MCR is worth millions of dollars in savings to these insurers.

Using the figures in the chart, let’s look at UnitedHealthcare to see what those savings might add up to be. Aggregated over three quarters, UnitedHealthcare’s MCR in the chart above adds up to a decline of 3.2%. Based on SEC filings UnitedHealth Group reported premiums totaling $16,984,000,000 for those same three quarters. If we simply calculate what saving 3.2% of those premiums represent, we get a net of $543,488,000. That is, a 3.2% decline in MCR over 9 months translates to more than a half billion dollars in savings to UnitedHealthcare’s bottom line.

Sadly, these ‘savings’ are not being passed along to employers and individuals in the form of lower premiums.  Instead, premuims are projected to rise by 7.5% in 2008.