Physiatry Practice Management Resources

Discounted contracts, whether fee-for-service, capitated or other fixed price arrangement, can be an effective way to build your practice. But you need to know how much you can discount, when you should discount, and how discounting affects your practice, says Robert Solomon, Ph.D., author of The Physician-Manager’s Handbook and Clinical Practice Management. Here are some tips on what you need to know to effectively evaluate and negotiate discounted contracts. Click on any of the items below for a response that addresses your specific interests.

What are my costs?
Understanding what it costs you to provide a service is critical to making educated decisions about discounting and other managed care contracting issues, says practice management expert Robert J. Solomon, Ph.D. Knowing your costs may even put you in a position to negotiate better deals with managed care plans, he adds.

The best way to determine your costs is through a process known as activity-based costing, or ABC. It involves looking at every cost and input — including rent, consumable medical supplies, nurses’ and physicians’ time, and overhead and billing — that is required to deliver a service.

Your cost analysis should also tell you what your fixed costs and variable costs are for each service. Fixed costs include rent, malpractice insurance, full-time staffing costs and other costs that you will pay no matter how many patients you see. Variable costs include consumable medical supplies and flexible staffing, or services that you pay for only when you see additional patients.

If doing activity-based costing sounds complex, that’s because it is. It requires extensive surveys of your office procedures by a CPA knowledgeable in medical practice operations and cost accounting, Solomon says. “Trying to do it yourself would be like expecting an accountant to be able to do brain surgery." Because it tends to be expensive, it may make sense to have the process done only for the handful of procedures that make up the bulk of your practice.

However, Solomon emphasizes the importance of doing a custom analysis for your practice. The cost of the same service can vary significantly between practices depending on how they are staffed, where they are located and how work is divided among various staff members. Costs may even vary significantly at the same practice from year to year as procedures develop and change.

Solomon also warns against substituting aggregate data on procedure costs for custom-generated cost data. “When you are trying to figure out if you can make money on a contract, it doesn’t help you to know what the national average cost is. You need to know what your cost is.”

How cost relates to profits is easy to see in a straight fee-for-service discounting situation. If the price offered exceeds the cost of providing the service, you make a profit. If it doesn’t, you lose money.

But it is possible to make money on a contract that pays less than your full cost of delivering a service. If a contract covers your variable costs of providing services, it’s profitable as long as your fixed costs are covered by existing business.

So if your practice is making money, but you and your staff have downtime to fill, you may want to consider contracts that pay less than your full cost of service. Keep in mind, though, that you cannot allow such contracts to become such a large part of your business that your fixed costs are no longer covered.

Knowing your costs is also crucial in negotiating capitated contracts. In this case you need to make sure that the capitation fee covers the equivalent fee-for-service costs of the volume you expect from the contract. In other words, if you expect a panel of 5,000 patients to generate 100 office visits per month at a fee-for-service equivalent cost of $50 each, you need to get a capitation rate of at least $1 ($50 x 100 visits / 5,000 capitated patients = $1) per patient to cover your costs.

Knowing your costs can give you leverage in negotiations, Dr. Solomon says. If an insurer offers you a contract at a certain price and you say you need more, you will only be able to show why if you have cost data available.

While many insurers have a reputation for being inflexible in physician negotiations, particularly in markets they believe have an oversupply of doctors, many will listen to reason, Dr. Solomon says. “Ultimately, it’s not in the insurance company’s interest to put providers out of business. They know at some point they will have to pay enough to cover the costs of services."

What are my risks?
Managed care contracts often contain an element of risk. Withholds, fixed fees for managing complex cases, carve-outs and fully capitated arrangements all introduce uncertainty into your revenue stream and the volume of services you provide. To keep your practice financially strong, you must identify those risks and negotiate to protect yourself from them as best you can, says practice management consultant Robert J. Solomon, Ph.D.

For withholds, the key question is under what circumstances, if ever, are they paid out. If you are signing a contract with a firm that has a history of never paying out withholds, you may want to exclude withhold revenues from your calculation of whether you can afford to deliver services under the contract. On the other hand, if withholds are generally paid and you feel you can influence their payment, you may want to include them in your revenue projections, although at a discounted rate to reflect the uncertainty of receiving them.

You may be able to increase your chances of earning withholds by negotiating for holding smaller units accountable for costs. That can give you an opportunity to work closely with a few other physicians to hold down costs, while giving each one a bigger stake in cooperating.

Of course, if you can reduce the percentage of the withhold, cut out hard-to-control areas such as pharmacy costs or eliminate these areas altogether, it is in your interest to do so.