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Assessing Managed Care Reimbursement Adequacy

by Patrick C. Alguire, MD, FACP
Director, Education and Career Development, ACP

One of the problems that vexes physicians is determining if a capitated rate for managed care patients is adequate to meet all the office expenses and generate a profit. This determination is inherently difficult because of the process of receiving payment before the services are actually delivered. Please read our article, Understanding Capitation. Nevertheless, the physician must make an educated guess if the payment is likely to be adequate before signing the contract, then follow up with this analysis after the contract has been implemented in order to verify (or correct) his or her decision. This article will review three relatively simple methods for determining the adequacy of a managed care contract.

The first method is to track fee-for-service charges that would have been posted for services provided to capitated patients. Ask your staff to record what would have been charged if the patients were fee-for-service (rather than capitated) and keep this account sheet for future reference. Obviously, separate lists need to be maintained for each of the managed care plans you participate in. At an appropriate time, these fee-for-service charges are compared to the total managed care reimbursement actually received from the plan or plans for the same time period. Most experts agree that primary care physicians should receive between 75% and 110% of their customary fee-for-service charge from the managed care plan. The variation is dependent upon the managed care plan, the fee-for-service schedule, and your practice style.

Example: The capitated payment for patients covered by plan "A" for the past fiscal year = $10,000. Charges that would have been recorded for capitated patients (patients who actually made an office visit) covered by plan "A" if they were fee-for-service patients = $12,000. Ratio of capitated rate over fee-for-service rate = $10,000/$12,000 = 83%.

The second measure is similarly straightforward and easy to calculate. It is based upon the estimated reimbursement per encounter. Divide the total managed care reimbursement for the fiscal year by the total number of actual patient encounters for that managed care plan during the same time period. Call this your "routine" capitated office visit charge. Now calculate your "routine" fee-for-service office visit charge. In order to do this, you must assume that the number of extended and comprehensive visits balances out the number of brief and limited visits. One way you can accomplish this is to take a sample of consecutive billing cards and divide the receipts by the number of encounters. Alternatively, if the data is available, the annual gross income under fee-for-service is divided by the total annual office visits under that system. Any of these methods can be used to calculate the hypothetical "routine" fee-for-service office visit charge, which then can be compared to the "routine" capitated office visit charge. The managed care charge should be comparable to the calculated fee-for-service charge.

Example: The capitated reimbursement from managed care company "A" for the fiscal year = $10,000. Actual number of visits with patients covered by plan "A" during that time period = 150. Calculated "routine" capitated office visit charge = $10,000/150 = $67. The year's revenues under fee-for-service = $250,000. The number of fee-for-service encounters = 3571. The average "routine" fee-for-service office visit charge = $250,000/3571 = $70.

The final, simple method is to measure the gross full-time equivalent office practice reimbursement. This may be the best model because it avoids the necessity of making assumptions about the intensity of the service provided for each encounter. This analysis assumes that a full-time physician can care for a panel of 2000 patients, this number varying depending upon age mix, office efficiency, and personal productivity. Therefore the total reimbursement from a managed care company divided by the actual number of managed care members in the panel will provide the reimbursement rate for one member per year. This number is multiplied by 2000 to estimate what the gross annual income would be if your entire patient panel were capitated under this program. The comparison of this total against what you can make under fee-for-service, or what you wish to make, is relatively easy.

Example: The capitated reimbursement from managed care company "A" for the fiscal year = $10,000. Actual number of patients covered (not visits) by plan "A" for this time period = 80. The calculated income for one covered patient under plan A during this time period = $10,000/80 = $125. Income for a full panel of patients covered by plan "A" for the fiscal year = $125 x 2000 = $250,000.

The examples in this article assumed that you would collect data over one year. While this is ideal, since it provides enough data to increase its reliability, it is not always practical. Provided the patient volume is large enough, reviewing data collected over a month might provide sufficient reliability to support decision making.

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