Benchmarking role grows with move to RVUs

Get a handle on your expenses

Before the advent of managed care, maximizing revenue was the key to a financially successful practice. But in today’s managed care environment, the economic dynamics have been reversed. Increasingly, the new paradigm for prosperity — or at least the avoidance of economic disaster — for most practices has become controlling expenses.

"The problem is, physician practices are characterized by a large portion of uncontrollable fixed costs, such as rent or malpractice insurance, and few variable expenses such as medical supplies. That makes reducing expenses difficult," says David H. Glusman, regional director of health care advisory services at BDO Seidman in Philadelphia.

The implementation of Medicare’s new relative value unit (RVU) based system for determining physician practice expense payments makes it even more important that practices have an accurate picture of how well they are managing their expenses.

One of the most sophisticated and effective ways to control practice expenses is to organize an ongoing RVU-based benchmarking program, says Glusman. For instance, "a benchmarking system based on RVUs has the advantage of being able to link administrative and overhead expenses directly to the volume and complexity of services provided in the practice," he notes. As the volume of services increases, the benchmark expense will increase proportionately. Likewise, if the volume of services decreases, the benchmarking program will help identify line item costs that are getting out of control.

Fundamental to an RVU system for benchmarking Medicare practice expenses is the ability to identify the administrative and overhead costs of providing each medical service or procedure. In the following example, assume that during the month of March, your practice provides the following services:

• Office visit, CPT code 99213, volume 200;

• Office consult, CPT code 99244, volume 10;

• Lesion excision, CPT code 11401, volume 3.

Glusman says you can establish your practice expense benchmark by following these steps:

1. Establish the RVU allotted by Medicare for the practice expense component of the procedures normally performed at your practice. Remember, practice expense RVUs do not include the physician compensation or the physician work component. (For purpose of this example, RVUs are based on 1999 values.)

That translates into:

• Office visit, CPT code 99213, expense RVUs 0.51;

• Office consult, CPT code 99244, expense RVUs 1.48;

• Lesion excision, CPT code 11401, expense RVUs 1.06.

2. Apply a conversion factor to the expense RVUs. The conversion factor is a dollar amount that translates the RVUs into a benchmark. Medi care’s 1999 conversion factor was $34.73, the amount the Health Care Financing Administration established to determine that year’s reimbursement levels.

Theoretically, the Medicare conversion factor has some factual relationship to the resources your office needs to provide a particular service, says Glusman. However, feel free to use a conversion factor that is different from the official Medicare number if your expenses are particularly higher or lower than the average practice. A historical average is one such option. For instance, if your practice averaged operating expenses of $15,000 per month and total practice expense RVUs of $500 per month, its conversion factor would be $30 per RVU. (For convenience, this example uses the 1999 Medicare conversion factor.)

3. Calculate the volume-related expense for each service provided in March.

• CPT code 99213, expense RVUs 0.51, April volume 200, conversion factor $34.73, benchmark $3,542.

• CPT code 99244, expense RVUs 1.48, April volume 10, conversion factor $34.73, benchmark $514.

• CPT code 11401, expense RVUs 1.06, April volume 3, conversion factor $34.73, benchmark $110.

• Total benchmark expense: $4,166.

For that month, the benchmark expense amount for this practice is $4,166. If the actual expenses for the month were below $4,166, the practice would receive a gold star for outperforming the benchmark.