By David H. Glusman, CPA

Published May 1999

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When the same procedures is performed in a physician’s office, reimbursement is provided only for the surgeon’s professional services (including office expenses), and perhaps for some supplies used in the procedure. Under a universal reimbursement mechanism, the same amount would be paid for the service, regardless of where it is performed.

As the low-cost provider in the health care delivery system, physician group practices stand the chance of gaining substantially under a single rate reimbursement mechanism. If this regulation or change in reimbursement methodology comes about, the key to success for medical practices lies in their ability to understand control expenses.

Results from the American Medical Association’s studies indicate that physicians are effectively controlling practice expenses. As reimbursement has decreased for many physician services because of the Medicare Resource-Based Relative Value Scale and cuts from private insurers, according to the AMA study, physicians have successfully reduced practice expenses.

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. Until now the expense that has been wrung out of physician practices perhaps has been for discretionary items that may have been easy to eliminate. As additional reimbursement cuts—such as the new Medicare practice expense Relative Value Units (RVUs)—take effect, the next round of expense reductions may reflect much tougher decisions that affect core practice operations.

Expense Budgets

There are several approaches physicians and practice administrators can use to control expenses or to make the cuts that may be required in the near future. 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.

The most common approach to budgets is to prepare one annually, with the assumption that each month’s expenses are one twelfth of the target amount. A more powerful budget would be broken down into monthly amounts for each expense item with variations based upon assumptions about activity levels and seasonal variations in practice activities.

There are several important steps to making an expense budget work for your practice. One is to make sure that a specific time is set aside each month to review the previous month’s actual expense against the budget and determine what corrective actions are necessary. A budget has very little value unless actual expenses are reviewed on a regular basis.

Expense Benchmarking

A more sophisticated approach to controlling expenses is to implement a benchmarking program based upon the RVUs. 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. As the volume of services increases the benchmark expense will increase proportionately. Likewise, if the volume of services decreases, this mechanism will facilitate the identification of line items that are excessive, thus focusing increased attention on the control of expenditures.

One of the components of the Medicare RVUs is a unit value that identifies the administrative and overhead costs of providing each service. A benchmarking program using practice expense RVUs follows three 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 benchmark and determining if there is a positive or negative variance.

A specific example of this methodology follows.

We will assume that for the month of April 1999, 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.

The value of the practice expense component of the Medicare RVUs for each procedure is as follows. The practice expense RVUs do not include the physician compensation or the physician work component. This information is taken from the 1999 Medicare RVUs.

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.

The next step involves applying 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. Theoretically, the Medicare conversion factor has some relationship to the resources required to provide a particular service. Your practice may choose a different conversion factor, if you have determined that your expenses are higher or lower than the "average" practice. For convenience we will use the Medicare conversion factor.

The next step is to calculate the volume-related expense for each service provided in April.

CPT Code: 99213, Expense RVUs: 0.51, April # 200, Conversion Factor: $34.73, Benchmark $3542.

CPT Code 99244, Expense RVUs 1.48, April # 10, Conversion Factor $34.73, Benchmark $514.

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

Total Benchmark Expense: $4166.

For April 1999, the benchmark expense amount for this medical practice is $4166. If the actual expenses for the month were below this amount, the practice would be performing favorably in comparison to the benchmark.

Several variations in this methodology are possible. One is to 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.

The present focus on cost containment and reimbursement cuts will continue. Benchmarking practice expenses can be a useful technique for monitoring and controlling practice expenses in physician practices.

David H. Glusman, CPA is regional director of Healthcare Advisory Services at BDO Seidman, LLP in Philadelphia.