"Is That Plan Worth Signing?"


"Is That Plan Worth Signing?"

Quick and dirty methods for evaluating a plan's proposal

by Gil Weber, MBA

Adapted with permission from Optometric Management
© Copyright, 2000. All rights reserved.
March 2000

HMO_Doc.jpgDo you believe that capitation and other forms of risk contracting are issues that you don't need to deal with at the practice level - that they're matters only for regional and national vision plans?

Well, don't kid yourself. Although risk contracting at the individual O.D. or small group optometric practice level isn't the norm in any part of the country, in one form or another it will impact your practice within the next few years. So it's important that you understand the concepts now, and start learning the skills you'll need for tomorrow's business realities.

Here, I'll give you a mini-tutorial on using weighted average costs to construct an at-risk bid or evaluate a payor's proposal.

Costs - the bottom line in risk contracting

If a vision plan or an HMO says it will pay you $39 for single vision lenses, or $52.35 for FT28s, or $46 for an exam, do you know for certain if this is going to be profitable for you?

If the contract offers $.46 per member per month (PMPM) for an exam, or $2.63 PMPM for frames and lenses or contact lenses, is that above or below what it costs to keep the doors to your practice open?

Sometimes, in an almost mad scramble to capture managed care contracts and retain access to patients, practitioners unwittingly sign deals that make no sense - that actually reimburse them below cost. In these cases, winning that mad scramble actually means losing. And so it's imperative to have a method for evaluating each contract's financial terms. Not understanding your costs relative to proposed reimbursements is an open invitation to disaster.

To make an educated decision when reviewing contracts, you'll need to answer many questions including:

  • What is my time (staff's time) worth per patient, or per service?
  • How low is too low?
Determining overhead costs

Every practice should have its own accounting system to determine fixed and variable costs, and to factor in elements such as depreciation. To begin, it's essential to view your practice as several distinct entities, each with discrete data reflecting unique cost structures and margins.

To accomplish this, you'll use one set of numbers for lens fabrication and optical dispensing, another for contact lenses, another for vision exams and related services, etc. Doing it this way you might discover, for example, that an HMO's proposed reimbursements will make the exam profitable but reduce optical dispensing to a "loss-leader."

Let's look briefly at two traditional, "quick and dirty" methods for determining your bottom line costs for each service. Then we'll see how to convert those costs to weighted averages for risk contracting purposes.

Method #1 - cost per hour. One way to target your break-even point is to calculate an average cost per patient care hour. This figure will not differentiate the case mix or types of services you provide during the course of a day.

Instead, it helps you zero-in on the cost to see an "average" patient regardless of his or her needs. For many of you this will be a new concept, but it ties into the fundamental concept of risk contracting that says you need to consider patients in terms of a continuum of care rather than individual visits.

To calculate cost per patient care hour, determine how many hours you provide patient services over a period of time (typically a year).

Then, with the help of your accountant, calculate your overhead for that same period (rent, utilities, staff wages and benefits, equipment depreciation, etc.). Remember to carefully allocate costs for materials such as spectacle lenses and frames, ophthalmic drops, etc., only to the appropriate department's account. Don't include your salary or the salary of other owners in the practice.

Finally, divide the overhead by the number of patient care hours to get an approximate cost per patient care hour. Now compare this figure against the proposed reimbursement schedule. Will the schedule pay you more per hour (for an "average" patient) than your costs in the appropriate department? If yes, there's money to pay you and any partners. If not, you'll work for free when seeing patients covered by that contract. (Remember, this is only a "quick and dirty" review. You'll need to perform a more detailed analysis later.)

If the proposed reimbursements are at or below your costs, then it's obvious that the only way to make the proposed compensation work is to become more cost efficient by lowering average hourly costs. You can do this by reducing staff time (working faster) or by purchasing at lower prices (reducing cost of goods sold).

Method #2 - cost per RVU. Another way to find the all-important break-even point is to determine cost per Relative Value Unit (RVU). This method is commonly used in ophthalmology practices that provide many surgical and non-surgical services with widely varying RVU values, but it also works well for optometric practices.

To do this, list all the services you provide and determine the RVU for each service (using standard Medicare tables available from the Health Care Financing Administration). Next, determine the number of times you provided each service over a specific time period (a year is standard but for a "quick and dirty" look, you might want to review a few month's worth of data).

Multiply the number of times you provided a service by that service's RVU. Then, sum all the resulting totals for each of those services to compute the total RVUs for all services over the period of time.

Finally, divide your overhead by that grand total to get a (ballpark) cost per RVU.

Next, multiply your cost per RVU by the RVU for each service you provide. For example, if your cost is $26 per RVU and contact lens fitting (CPT 92310) is 2.49 RVUs, then your approximate break-even cost to provide that service is $64.74 (2.49 x $26). Your cost to provide a comprehensive exam (CPT 92014 @ 1.66 RVUs) would be roughly $43.16.

Compare the numbers you calculate against the proposed payment schedule. If the reimbursement for the contact lens fitting is more than $64.74, you'll have money to pay yourself at the end of the day. But how much more than break even is enough? If the health plan offers $45 for the exam, that's only $1.84 more than your ballpark cost figure. Will that be worthwhile given your practice's unique situation?

Do this type of assessment for each service on the proposed fee schedule. Identify which pay less than your cost and which pay only marginally more. Obviously, you need to deal with each of these during negotiations if your contract is fee-for-service.

If the contract is capitated (at-risk), you must go a few steps further to determine if the cap rate works, on average, for the total set of services you'll be delivering. These steps follow.

Weighted average costs

Under fee-for-service you're probably paid different fees for related services. For example, you get "$X" for single vision lenses, "$Y" for bifocals, and "$Z" for frames. However, under capitation you generally don't negotiate individual fees for closely related services. You'll be contracted for a flat amount regardless of the type of service you provided.

Therefore, to assess the viability of any at-risk contract, you need to refine your calculated costs and apply them to an "average" patient. That is, what does it cost you to dispense eyewear to a patient regardless of whether she or he gets contact lenses, or single vision, bifocal or trifocal spectacle lenses of any prescription, with or without a frame?

To accomplish this task you must find the "weighted average cost." Here's how: (Note: these examples and calculations are for explanatory purposes only. Your numbers will vary.)

Assume your records for the past year show that materials were dispensed in the following proportions:

  • single vision lenses: 50%
  • bifocals: 30%
  • trifocals: 5%
  • contact lenses: 15%

Let's assume your fully-allocated costs are:

  • single vision lenses: $22.00
  • bifocals: $42.50
  • trifocals: $54.75
  • cosmetic contact lenses: $76.00.

To determine a weighted average cost on lenses you would multiply the cost of each item by its relative dispensing percentage. The calculation would be:

  • single vision lenses: $22.00 x .50 = $11.00
  • bifocals: $42.50 x .30 = $12.75
  • trifocals: $54.75 x .05 = $ 2.73
  • contact lenses $76.00 x .15 = $11.40.

Adding these figures together would give you a weighted average cost on lenses of $37.88.

Note: as you probably just realized, to find an "average" cost for each category of covered lenses (e.g., bifocals) used in this calculation you'd create individual weighted average costs. So, for example, assuming an HMO did not cover progressive lenses, you might find that FT28s represent 60% of your bifocal costs, FT35s 22%, and Executives 18%. Plugging in lab costs for each lens type would lead you to the $42.50 average bifocal cost used in this example. The weighted averages for each category would then be re-combined into an overall weighted average cost for any type of lens.

You will then use this overall weighted average cost in a formula to determine a PMPM capitation rate for lenses. (The full scope of that calculation, including figuring margins for risk, profit and administration, goes well beyond this discussion.) Of course, you also have to factor in the cost for a frame for those getting spectacles and factor out the cost of a frame for those getting contact lenses. And, you must also calculate a weighted average cost for the exam services.

Case-rates: rare but very attractive if done right

Let's say you were being paid fee-for-service. One day the payor announces it wants to simplify reimbursements and reduce its work adjudicating a lot of small dollar claims for a variety of eyewear services. The HMO proposes paying you a flat fee per submitted claim regardless of what kind of eyewear the patient receives from you.

It's a risk contract, but instead of PMPM capitation it uses a fee per encounter (per claim). You can enter in this kind of agreement very easily if you understand how to determine an equitable, weighted average reimbursement.

Let's say you'd been receiving the following as payment in full for your dispensing services. Again, keep in mind these are made-up numbers:

  • single vision lenses: $38
  • bifocals: $55
  • trifocals: $76
  • cosmetic contact lenses: $95.

If you calculated using the same dispensing percentages shown previously, the historical weighted average reimbursement for your claims has been $53.55.

Thus, over time, and assuming the dispensing percentages did not change significantly, if you accepted $53.55 for every patient regardless of lenses dispensed, you'd come out the same as if you submitted a bunch of individually priced claims. But why do this?

The answer is simple. Health plans are looking for ways to reduce overhead, particularly administrative. If they can quickly process simple, small-dollar claims on which there isn't much to be saved individually, that leaves more time to deal with complicated, big-dollar surgical and hospitalization claims on which money can be saved by close inspection. Thus, a case-rate system for vision care should be attractive.

And for you it can mean simpler billing and less time reconciling reimbursements. It's a true risk-sharing agreement but, perhaps, something a little more palatable to the O.D. unprepared to shoulder the more complex risk of full-blown capitation. If you have good data it certainly can be a win-win scenario.

Gathering good data

Be very careful with your underlying assumptions when running weighted average figures. It's easy to end up with incorrect answers if you start with misleading assumptions. (See "Collecting Data for Risk-Contracting Opportunities.")

For example, the sample dispensing distributions used in the calculations I've presented might be typical for a "commercial" population - under age 65. However, if you used commercial dispensing splits for a Medicare-age population, you'd underbid the contract and take a financial bath on either traditional capitation or case-rate payments.

Why? Because the eyewear needs of seniors are quite different, as are the costs of their eyewear. Compared to a commercial population you'd have much higher utilization of multifocals (and, with higher adds, more expensive ones), lower utilization of less expensive single vision lenses, and statistically insignificant utilization of cosmetic contact lenses.

Be proactive

Though large-scale vision care risk contracting (for routine exams with refractions and eyewear) has been the near-exclusive domain of well capitalized third party plans such as VSP, that shouldn't keep you from thinking ahead and planning how to pursue local opportunities.

Keep in mind, however, that risk contracting is more complex than I've described here. Therefore, I strongly caution you to seek the assistance of qualified business and legal advisors.

Collecting Data for Risk-Contracting Opportunities

Anticipating future change requires that you start collecting key data today. If you're computerized, the task should be relatively simple. If you're not, it will be labor intensive. Here's what I suggest.

Retrospective review

Do a computer records inquiry going back at least 2 years. Produce a count of all examinations differentiating by spectacle and contact lens exams. Why separate counts? If you participate in a vision plan that pays a differential for contact lens exams you'll need to know this split in order to calculate a weighted average exam fee or cost. If your computer programming has the capability to extract the data by patient age, then differentiate under and over age 65.

Do additional inquiries to track the number of dispensing services you've provided (at a minimum, differentiating aggregate spectacles from aggregate contact lenses but, preferably, differentiating the count by single vision, bifocal, trifocal, disposables, daily wear, etc.). You'll also want to determine the number of frames you provided to those patients and, additionally, the number of times complete eyeglasses were provided as opposed to lenses only.

Why? Remember that some vision plans provide lenses every year but frames only every 2 years, so you need to know this information to build the most reliable weighted averages. Again, extract by age if your computer programming allows it.

Prospective planning

Going forward, set up your computer to track and extract utilization data on the following, differentiated by age (over and under 65).

Exam services:

  1. spectacles
  2. contact lenses

Materials services:

  1. single vision lenses
  2. bifocal lenses (FT 25 * FT 28 * FT 35 * executive)
  3. trifocal lenses (FT 25 * FT 28 * FT 35 * executive)
  4. progressives (distance-near * intermediate-near)
  5. cosmetic contact lenses (disposables * daily wear * bifocal * torics * RGPs)

You should also start collecting data on other services you provide outside traditional, routine vision care - particularly if they represent a significant income center or practice specialty. For example, if you do a lot of hard-to-fit contact lenses for conditions such as keratoconus, that's important data to track and have available when marketing your practice to payors or primary care groups; or to integrated, optometry-ophthalmology networks. If you're going to contract for the toughest cases, then you need to be ready!


Cost Containment

Start thinking now about ways to leverage your buying power to reduce cost of goods sold. Bid out your spectacle lens purchasing, whether uncuts or finished jobs. Other than specialty lenses available only from limited sources, concentrate your purchasing on two vendors. This should get you the best prices and, in return, generate maximum volume for your selected suppliers.

Review and rebid that business every year. And think about similar ways to reduce per unit cost on frames by reducing the number of frame suppliers you use.

Gil Weber, Optometric Management's consulting editor, is a nationally recognized author, lecturer and practice management consultant to the managed care and ophthalmic industries, and served as managed care director for the American Academy of Ophthalmology.

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