RVU benchmarking key to controlling expenses

This formula can boost profits

One of the major changes in Medicare’s new method for calculating physician practice expense payments is a differential which attempts to adjust payouts so the same rate is paid for a specific service no matter the site of service.

While not all specialties like the idea, it is good news for others — particularly office-based physicians. "Group practices especially stand to gain substantially under a single-rate reimbursement mechanism," says David H. Glusman, CPA, regional director of Healthcare Advisory Services at BDO Seidman, LLP in Philadelphia.

However, the key to profiting under this new reimbursement system depends on how well a practice is able to understand and control its expenses, he stresses.

"As a rule, physician practices are known for having a large percentage of uncontrollable fixed costs such as rent and malpractice insurance — and few variable expenses such as medical supplies. This can make cutting expenses difficult," says Glusman.

Drafting an expense budget

According to Glusman, there are several measures that physicians and practice administrators can implement to help control practice expenses. "The simplest method of maintaining control over expenses is to develop a monthly expense budget and stick to it by comparing each month’s actual expenses to the budgeted amounts."

An expense budget should be viewed as a financial management tool that sets the ceiling for each line item. The amount set for each line item should be based upon an analysis of past expenses and a projection of future changes due to expanded activity levels or price increases.

Most practices simply prepare an annual budget, assuming each month’s expenses are one-twelfth of the target amount. A more powerful approach is to "break down each expense item into monthly costs with variations based upon past activity levels and seasonal variations in practice patterns," he says.

An even more sophisticated method for controlling expenses is to implement a benchmarking program based upon the relative value units (RVUs), Glusman says. "The advantage here is you are able to link administrative and overhead expenses directly to the volume and complexity of services provided in the practice. As the volume of services increases, the benchmark expense will increase proportionately."

On the flip side, if the volume of services decreases, using RVUs makes it easier to identify costs that are out of line.

Implementing a RVU-based benchmarking program involves three basic steps:

• determining the practice expense RVUs based upon the volume of services provided each month;

• using the practice expense RVUs to calculate the benchmark work target expense for providing these services;

• comparing the actual expenses for the month to the projected benchmark.

Walking through the numbers

To illustrate how to use RVUs, here is a case study:

1. Assume during September 1999, your practice provides these services: Office Visit, CPT Code 99213, Volume 200; Office Consult, CPT Code 99244, Volume 10; Lesion Excision, CPT Code 11401, Volume 3.

The value of the practice expense component of the Medicare RVUs for each procedure is: Office Visit, CPT Code 99213, Expense RVU 0.51; Office Consult, CPT Code 99244, Expense RVU 1.48; Lesion Excision, CPT Code 11401, Expense RVU 1.06. (Assume the practice expense RVUs do not include the physician compensation or the physician work component. This information is taken from the 1999 Medicare RVUs.)

2. Apply a conversion factor to the expense RVUs. The conversion factor is a dollar amount that translates the RVUs into a benchmark. Medicare’s 1999 conversion factor is $34.73. This is the amount that HCFA has calculated to determine 1999 reimbursement levels.

"In theory, Medicare’s conversion factor has some relationship to the resources required to provide a particular service," says Glusman. "Your practice may choose a different conversion factor if you have determined that your expenses are higher or lower than the average practice."

3. Calculate the volume-related expense for each service provided in September. CPT Code: 99213, Expense RVU: 0.51, April #200, Conversion Factor: $34.73, Benchmark $3,542.

CPT Code 99244, Expense RVU 1.48, Conver sion Factor $34.73, Benchmark $514.

CPT Code 11401, Expense RVU 1.06, April #3, Conversion Factor $34.73, Benchmark $110.

Total Benchmark Expense: $4,166.

4. Result: For September, 1999, the benchmark expense amount for this medical practice is $4,166. If the actual expenses for the month were below this amount, the practice would be performing on the plus side compared to the benchmark.

You can also use a conversion factor that is different from the Medicare conversion factor. For example, 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. This approach sets the benchmark at the historical average for the practice.