How to set your fee schedule: Experts advise updating it every 3 to 12 months

You know what third parties pay you. But experts say you also need to know what your base charge is for every service you provide.

By — Posted May 4, 2009

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How much do you charge for removing a wart? How about giving travel vaccinations? You might know what health plans or Medicare will pay, but what are your fees? Practice management experts say your fee schedule should be set carefully and updated regularly.

Setting a defensible fee schedule is always good business, but with self-pay patients asking for a break on their bills and health plans publishing charge information and demanding ever-deeper discounts, it's never been more important to know when a discount is too deep, experts say.

"This is what pays your bills," said Susan Childs, a practice management consultant with Evolution Healthcare, based in Rougemont, N.C. "Any other business does this every year, looks at your costs and what you need to charge. It's just that we get so bogged down with chaotic stuff every day."

Even if you end up discounting from your fee schedule in nearly all cases, you should know what your breaking points are -- when a discount means you don't make a profit, and where it would mean you lose money, practice management consultants say.

Frank Cohen, a health care consultant with MIT Solutions, based in Clearwater, Fla., said much of his work involves helping physician practices set fee schedules. "Your No. 1 responsibility is to be profitable. If you're not profitable, you cannot provide quality care," he said. "If you're not willing to do what it takes to make money, you're going to go out of business, and the community is going to suffer as a result."

How to determine your fee schedule

Carefully accounting for costs should be your first step. "The best defensible thing you do for your fee schedule is a cost study," Childs said.

You can do a study yourself or hire a consultant, but the key is to account for every cost and have a reasonable margin to live on and to reinvest in your practice.

Your goal is to break down your costs and your margin into units of work -- typically services and visits, which can be defined by Current Procedural Terminology codes. Breaking down costs into hourly units is another option, Cohen said.

Your end product should be a list of services each assigned a share of your overhead cost as well as your margin and the actual cost of providing the service. For example, your fee for a flu shot includes a fraction of your rent, your nursing staff's pay, the office's electric bill, your liability insurance premium, your own salary and a fraction of the cost of the new x-ray machine you are planning to buy in six months.

Basing your prices on costs plus margin ensures that your fee schedule is built on what you need to stay in business, not on what you think sounds fair. This will make your case stronger when you negotiate with payers.

The American Medical Association Practice Management Center offers a step-by-step guide to one method: using the Centers for Medicare & Medicaid Services' resource-based relative value scale and your own practice costs.

Because they are from a scale and not a fee schedule, relative value units, or RVUs, for every code must be multiplied by some conversion factor based on cost to produce a fee schedule. The AMA's suggested method begins with calculating your total costs. The next step is to list every CPT code your practice bills -- leaving out ones without an RVU. Identify the RVU for each code, including practice expense, practice liability and physician work RVUs.

Figure out how often each code is billed and add up the total RVUs billed each year. Next, using your total costs and total RVUs billed each year, assign a dollar value to every RVU. Once you've done that, multiply that per-RVU cost factor by the RVU for every code, and you have a fee schedule.

Even if you don't use RBRVS and choose to create a fee schedule based on an hourly rate, you should know how much time each service takes, Cohen said. That way you can take those numbers with you in health plan negotiations and justify your fees with a breakdown of your costs.

As you examine your own costs, it's also critical to have an idea of what your counterparts in the region are charging, without breaking antitrust laws by asking them directly. If you are just opening a practice or contracting with a new payer, you should find data that show the common fees charged by doctors in your specialty around your state, Cohen said.

Cohen also warns against paying for data from a source that isn't entirely transparent. Like many smaller health plans, some physician practices relied on data from the UnitedHealth Group subsidiary Ingenix.

Physicians paid Ingenix for the same data as a way to benchmark their own fee schedules. Unfortunately, as New York Attorney General Andrew Cuomo's office found in its investigation, the fees in the Ingenix database tended to be lower than the true "usual and customary" charges. Cuomo alleged that the insurers used a "closed loop" system to shortchange out-of-network physicians, feeding skewed charge data into the database to undercut what the same companies would turn around and cite as the basis for payments to out-of-network doctors.

United and most large national insurers have agreed to abandon that system in favor of a new, independent database. Meanwhile, there are other sources of transparent and reliable data, Cohen said. His consulting firm uses adjusted data from Medicare's Physician/Supplier Procedure Summary Master File -- a database of all submitted charges, not just amounts paid by Medicare -- to help doctors identify a valid comparison group to benchmark.

After you've done all the math, a fee schedule is not something to take out only when health plan negotiations come up. Experts advise updating your fee schedule every three to 12 months.

Liability insurance rates go up, market dynamics change, patient volume changes. You should be keeping up with those things, they said.

The best way to make sure it's up to date is to check what payers, public and private, are paying compared with your charges, Childs said. If Medicare is paying 100% of yours, something is off.

How to use your fee schedule

When you have a defensible, carefully assembled and updated fee schedule, you also have a starting point for health plan negotiations.

First, Cohen said, you don't have to contract with anyone -- you should see patient volume that offsets the discounts you give to each plan. If you don't, it's your choice to cut the cord.

Some physicians assume that they are beholden to the payer who brings the most patients. Not so, he said. After all, your biggest source of patients is also probably your largest source of costs.

Childs recommended always having a face-to-face meeting with a payer's network representative.

"You can either be a folder or you can be a personality and a presence," she said. The more they understand about your practice, the better they will listen in negotiations.

With your cost study and comparison information in your pocket, you should be able to tell if your fee schedule is about average, or higher than average. If it's high, be ready to defend that with arguments about demand for your services, cost savings you offer or quality you bring that your competitors do not, Cohen said.

If you are renegotiating a contract, identify codes for which you are paid on the low end of what your peer group is reimbursed. Make those the focus of negotiations rather than asking for an across-the-board increase.

If you meet with resistance, Cohen said, walk away. "Most payers don't listen until you walk away and cancel the contract," he said.

Even if you aren't ready to do that, Childs and Cohen said, do not take an insurer's proposed contract off the fax machine, sign it and send it back. "It's like saying, 'If the payer says that's the value of our services, then it must be true,' " Cohen said.

Your fee schedule also can be the starting point for discounting care for uninsured patients who don't have the luxury of a prenegotiated health plan discount, so it should be up to date.

Finally, both Cohen and Childs recommended some degree of openness with patients about how you price your care. Cohen suggested publicly posting your fee schedule methodology -- something he said the Mayo Clinic has done.

Childs recommended simply telling patients that you value their business, and you are always open to talking about what you charge and why, and what discounts are available. "If patients are forewarned, they will be prepared," she said.

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AMA resources on setting a fee schedule

Experts say setting a cost-based, defensible fee schedule makes for a healthier business and leverage in negotiations with payers. The American Medical Association offers a host of resources for physicians just getting started or updating their fee schedules.

  • The AMA's Practice Management Center offers a worksheet and step-by-step guide on how to use your practice cost as a basis for a fee schedule (link
  • The guide, a sample fee schedule and a customizable worksheet are available on the AMA's Web site (link).
  • The AMA's example method relies on the Medicare Resource-Based Relative Value Scale (RBRVS). More information about the RBRVS is available online (link).
  • For more help, AMA members and practice staff can contact the AMA Practice Management Center at 800-621-8335, link ([email protected]) or fax 312-464-5541.

Source: AMA Practice Management Center

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What not to do when setting a fee schedule

Though experts say it's the basis for a successful practice, setting a defensible, useful fee schedule is not a quick fix. It's a complicated and time-consuming one.

To make the task even less attractive, there is no one accepted best practice for establishing a fee schedule. There are, however, many bad ways to do it.

The most common mistake, experts say, is charging a percentage of what Medicare pays you. "Medicare is an unreasonable fee schedule. Two hundred percent of Medicare is 200% of unreasonable," said Frank Cohen, practice management consultant with MIT Solutions Inc., based in Clearwater, Fla.

Another method Cohen warned against is using what your top insurer pays, then either using those rates to create a fee schedule, or tacking on a percentage of what that insurer pays.

Worst is devising an entirely arbitrary fee schedule -- it's uncommon, but not unheard of. "Better even to say '200% of Medicare' than to pick a number out of the air," said Susan Childs, of Evolution Healthcare, based in Rougemont, N.C.

In most cases it's illegal to ask other practices what they charge. "You can't go to another [primary care physician] who is not part of your office and say, 'What are you charging for this code or that code?' That's a per se antitrust violation," said James Christopherson, a health care attorney with Dingeman, Dancer & Christopherson PLC in Traverse City, Mich.

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New database could show fee schedule benchmarks

The same agreement that has multiple health plans scrapping the controversial Ingenix database also is creating a resource for physicians to learn what the so-called usual and customary charges are for his or her area, by procedure.

Though the database is still in planning stages, the settlements that plans made with New York Attorney General Andrew Cuomo are expected to create one that will, for example, allow an ophthalmologist in Omaha, Neb., to look online and see rates for cataract surgery throughout the state -- without breaking the law and without paying a consulting firm or data-mining company to find the information.

"It's going to be big," said Susan Childs, practice management consultant with Evolution Healthcare in Rougemont, N.C.

Patients, too, will be able to access the database and compare their own physicians' charges with the usual, customary and reasonable fees. "Patients are shopping around now," she said.

Experts caution that doctors shouldn't look to the new database as a way to avoid putting together their own fee schedules. Rather, the new independent database could provide a good set of benchmarks, said Frank Cohen, consultant with MIT solutions in Clearwater, Fla.

Once a new database is established, UnitedHealth Group, Aetna, Cigna and WellPoint Inc., among others, have agreed to stop using the Ingenix database, owned by United, and to contribute their raw claims data to the new entity. Insurers' settlements with the attorney general's office require that the new database be public and accessible online.

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External links

Medicare's Physician/Supplier Procedure Summary Master File (link)

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