Physiatry Practice Management Resources

Volume for discounts: it’s the classic managed care tradeoff.

The idea is that you can afford to cut your fees if you make it up on volume. Your income may not rise, but it won’t fall either — at least not too much.

Therein lies a classic trap for doctors, says Robert J. Solomon, Ph.D., a professor of business administration at the Graduate School of Business Administration at the College of William and Mary in Williamsburg, Va. “A lot of doctors equate working harder with making more money. The solution to falling income is to take on more patients.”

But that only works if you are receiving enough payment for your services to cover your costs plus putting some money in your own pocket at the end of the day, says Dr. Solomon, who has written two books on medical practice management and works with medical groups and health systems across the country as a consultant for VHA Inc. “There are some contracts that it is better to just walk away from than to accept the financial consequences.”

Telling the good from the bad and ugly contracts

The problem is distinguishing money-losing managed care contracts from those with reasonable discounts that will build your practice. Finding the answer is more complex than simply projecting how much money a given contract may bring in, Dr. Solomon says. It also involves analyzing the impact the contract will have on your costs and operations, how it affects other business opportunities and how it fits in with your long-range plans.

For example, a contract may not cover your immediate costs for delivering office-based services. But it may generate additional fees for hospital services that make the whole package profitable. Or a contract may allow you to tap into referral streams that pay more, making the contract useful as a loss leader.

A managed care contract that doesn’t cover your current operating costs may yet be worthwhile if it gives you an opportunity to cut your overhead. For example, if capitated payments allow you to trim office staff or fees you pay a billing service, you may be able to afford a deeper discount.

Always know where your risks lie and try to offset them in negotiations, Dr. Solomon says. With a capitated contract, volume is often the least predictable element. Stop-loss coverage and options to reopen negotiations are important hedges against volume risk.

But Dr. Solomon emphasizes that knowing your costs is the key. “If you don’t know your costs, you have no basis for analyzing a contract or negotiating changes.”

Of course, managed care firms often will not negotiate contracts. In that case, it’s still important to know your costs so you can judge whether to simply walk away.

“There are a few exceptions, of course, but in most markets you don’t need to take every contract that’s offered to keep your practice going,” Dr. Solomon says. “Keep in mind that working harder does not necessarily mean more money. And it is not necessarily a successful long-term strategy.”