When there are too few cases, it typically means that the physician partnership failed. The busiest surgeons either did not join the venture, or they left after several years of utilization. Why would they leave? Perhaps the center was aging, and they wanted a newer facility so that they could serve their patients better. It is possible they were discouraged with the lack of commitment from other surgeons to the facility or they were tired of their partners making bad business decisions. Whatever the cause, their departure leaves a gaping hole in the schedule and an unprofitable, underutilized facility.
Another reason for under performance is created when a large physician partnership pressures the center to do “all” cases. Administrators often sign contracts without calculating the average reimbursement per case under this pressure. We visited a center in Las Vegas a few years ago that was performing 800 cases per month. However, the center only achieved an average reimbursement of $850 and lost over $1 million per year. They performed no out-of-network cases in a market where we achieved a 40 percent out-of-network business. Our center made an excess of $3 million per year with a volume of 250 cases per month. Often working smart is more important than working hard.
In addition to the number of cases, contracting is key to the success of a center. We recommend contracting with every payer who controls more than 10 percent of the commercial patients, if we can contract for more than our costs. This puts us at odds with some large payers, but I have a problem subsidizing CEO salaries and bonuses by treating commercial patients for below our cost. We want to do charity work for people who need it, and these companies don’t need it. This is the only industry I know of that gives wholesale rates no matter how large the customer is.
There are several factors in a contract that we negotiate before recommending it to our partners and signing. First are the rates. Most contracts still trade off of old Medicare rates – 110 percent to 180 percent. These sound good compared to physician reimbursement but when our break-even equals 150 percent of Medicare rates, it can be devastating. Can the payer sell our rates to other payers? If we think we are taking a hit for 10 percent of the patients and the payer sells the contract to 10 two percent players, we just discounted to 30 percent of our patients and have written off the most profitable part of our business – the small out of network payers.
The worst contract I ever saw was in Marietta, Ohio. The prior administrator signed a contract with a national payer representing about 10 percent market share. The term was three years with no opportunity to cancel. The rates were 110 percent of Medicare, and it included anesthesia fees! The doctors just took all of those cases to the hospital until the payer renegotiated.
The third major component that impacts a center’s revenue is the chargemaster. Most centers set their charges at two to three times the old Medicare rates. With break-even at 150 percent of Medicare rates, these centers need to achieve a collection percentage around 50 percent to 70 percent, collection percentages unheard of in our industry. We use the Ingenix database that received so much bad press from the NY physician case. In facility billing, the data is skewed to the high side, not the low side. That is why carriers will not agree to a blanket 50 percentile reimbursement for out-of-network cases. Nevertheless, using Ingenix rates for facility billing does result in actual collections sufficient to provide solid investor returns.
With a reasonable market chargemaster, smart contracting with good business terms, and an adequate number of committed physician partners, we are able to solve most revenue problems.
Mr. Mallon (tmallon@regentsurgicalhealth.com) is CEO of Regent Surgical Health, a manager and developer of surgical centers and a developer of physician-owned hospitals, specializing in turnaround situations. Learn more about Regent Surgical Health.
