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    MGMA Staff Members

    I need help understanding something. What is the value behind charging, say, 20% over your highest payer’s allowable for a service versus just charging the highest payer’s allowable?

    I’ve been having a discussion with someone about this phenomenon and would like to hear the rationale behind why so many practices do it.

    To clarify, I’m not opposed to and do, in fact, charge what I feel is an appropriate fee for our services. However, the part I’m unclear on is why charge over your highest payer’s allowable when it seems to me that, regardless of how much data I have to support our higher fees, it won’t make a bit of difference in motivating an insurer to actually pay over their current allowable? This lack of willingness on their part to pay the higher charge seems to be especially true since they know my only real leverage is to walk away and terminate a contract, which they also know is not very likely. Therefore, it seems charging higher than their allowable is more of a psychological benefit for ourselves rather than a financial one when it comes to insurance carriers since they can’t be budged to pay higher.
    Micah Dougher, MGMA member, operations manager, Allergy and Asthma Associates of Southern California, Mission Viejo, Calif.,

    A payer who delivers enough volume to warrant a contract probably also deserves a bit of a discount. If I’m in the payer’s shoes, I’m probably not going to accept a contract to pay your full fee the same as an individual patient ... they view the discount as a significant part of their value proposition to their customers.

    Setting the fee a bit above the highest contracted rate gives you some room to provide individual patients with discounts ... for prepayment, for example.

    Having said that, given a choice between setting fees at the highest contracted rate and setting them far above the highest contracted rate (not unusual to see double or more), I would go with the lower amount. It’s really just a question of fine-tuning, and there might be circumstances in your particular situation that might lead you to a different conclusion ... a significant population of self-pay price shoppers, for example.
    David L. Smith, FACMPE, MGMA member, executive director, United Imaging Consultants, LLC, Mission, Kan.,

    As you look at your fee schedule and compare it to your contracts, [you may see] that many times contracts are deeply discounted. Even the highest-paid contract may be very undervalued. It has been my experience that the medical specialties that are not procedurally oriented do not mark up their charges as much as surgical specialties.

    A typical E&M initial visit may be $400, and Medicare pays $200. However, a neurosurgeon does a two-level disc procedure — Medicare pays $3,400 but the charge is $40,000. Believe it or not, someone will pay the $40,000 — or it becomes a starting point to negotiate a rate payment for an out-of-network service. It offers more flexibility to negotiate. Also, it seems consistent that surgeons believe their services are very undervalued based on the RVU conversion factor.

    If you think you will ever get paid “a lot” of money from someone, put the charge as high as you deem appropriate.

    The bottom line is that there are many factors, but have only one rate schedule and figure out your discounts and negotiations from there.
    Paul Berkley, FACMPE, MGMA member, administrator and chief executive officer, president, Healthcare Associates in Medicine PC, Staten Island, N.Y.,

    It’s my opinion and experience that we should never allow payers to dictate our charges. Sure, they pay what they pay but by letting them determine our fees, we are relegating a huge faction of our practice to their control. Charges should reflect the value of the services provided to your patients and should be based on some solid econometric foundation, like cost plus markup. Do you believe that what payers pay is reasonable? If not, then 20% above that is 20% above unreasonable, and we end up as hostages. There seems to be some fear of write-off amounts ... I don’t see how some unpaid amount on the balance sheet can control something as important as charges. So, charge some amount that sends the message to the community and the payers about the value of what you do, and don’t let them make that decision for you.
    Frank Cohen, MGMA member, director of analytics, Doctors Management LLC, Spring Hill, Fla.,

    I am frequently amazed that discussions … do not include how critical it is to base charges on the actual costs of providing service. Any other methodology results in bankruptcy (sooner or later) depending, in part, on how little the staff are willing to accept lower or no salary and benefit increases, and how low the quality of care can go (not replacing outdated machines, computers, medical training, et al.).

    I do disagree with [the idea] that payers “pay what they pay.” Payers pay what the practice allows them to pay. If that’s less than the cost of providing your services, then after your practice is dead the payers will happily distribute their profits to their staff … and to the policyholders/owners, then continue on to progressively bankrupt other practices who make the same mistake.

    There are positive items. Threads like this are a very positive indication that medical practice managers are more actively challenging how to set charges, and those who succeed will find much higher cash flow and much better patient care.

    I strongly encourage everyone to use the path to professional certification as one of the best methods to learn about the financial operations of medical practices. It is not coincidence that many, perhaps most of contributors are certified or working on gaining professional certification.
    Lawrence Lievense, FACMPE, FHFMA, FHIAS, MGMA member, principal, HFE Inc., Camarillo, Calif.,

    There is no question … the basics of setting a price is the cost. Also, we all know that the market determines what we can really charge, the basic laws of supply and demand. We all agree that we only want one fee schedule, if possible. And we all agree we don’t want to leave any potential money on the table.

    Now comes all the exceptions. In New York state, for workers’ comp you must bill “their” fee schedule or they don’t pay. So we have a second fee schedule. In New Jersey, the plaintiff bar has created a circumstance where the award to their client and to them is a reflection of how much the doctor charges. A couple of years ago, at a Christmas party, a member of the plaintiff bar approached one of our surgeons and told him that our charges were much too low and he wouldn’t refer to him unless he raised his charges. (Our charges were set at 10 times Medicare.) The physician was irate about how foolish we were for not setting our charges higher. It didn’t matter that no one had paid the charge, but if the plaintiff bar wanted higher rates, why not?

    I felt that increasing the charges to please a plaintiff attorney was not a good policy. The argument was that if you start high you can always negotiate.
    Paul Berkley

    Your observations about variability in all those areas are correct. But we have two things going for us. First, the law of large numbers allows us to use these databases to more approximate the central tendency of the data. Second, by including variability (i.e., standard deviation and confidence intervals), the end user has the ability to better understand the reasonableness of the data (i.e., smaller ranges and less variability are good; larger ranges and more variability are bad). So, in a sense, while it doesn’t define or rate the logic (or lack thereof) of how other docs establish their charges, it does account for that.

    Having said that, I have always been an opponent of these types of benchmark databases, which creates quite a conflict for me. I don’t think any other industries use this type of a model but there is still a huge demand. Look at the attention that Fair Health is garnering now and the data is opaque and questionable. And I do not think that a practice should ever establish its charges based on benchmark data, but it is a way to at least gauge the market dynamics.
    Frank Cohen

    There is also a need to read all of your contracts. It is not unheard of for a contract to state that the allowable is based on a percentage of the charge. Therefore, just because payer X is paying $80, it may be that they are paying you that because they are paying 80% of a $100 charge (to use simple numbers as an example). 
    Shaila James, MGMA member, administrator, The Eye Center, Fayetteville, Ark.,

    My reason for not considering what payers pay (except that you don’t want to be less than that) is that we can’t assume this payer model will continue as it is ... I live by the motto “semper paratus”: always prepared. The question I think should be asked is who cares if I charge more than payers are willing to pay? It’s not like there’s some kind of penalty, unless you charge ridiculously high amounts, which can be prevented using solid logic.
    Frank Cohen

    There are a remarkable number of folks who believe and have stated that “no one pays full charges.” This inaccurate belief can cause a downgrading, almost a fear, of setting charges that actually represent the full cost of providing services. It’s also important to note that a full charge can always be reduced, whereas a low charge cannot be increased. Thus, it’s best to start high.
    Lawrence Lievense

    Charge data is relevant when insurers pay by charges. If they do not, as largely they do not, then they are, if not meaningless, at best, quaint relics. (A little hyperbole there.)
    As to (knowing your) costs, that is different from comparative charge data usage. If one does not set their charges above their costs and sign insurer contracts that pay their costs (except where they need to accept fees below their costs — it happens), then worrying about what others charge is a waste of time.

    As to litigation, I have very little confidence in the U.S. judiciary getting economics correct. If in today’s environment the judge looks at comparative charge data, then most likely that judge will be wandering in the wilderness as to finding an equitable ruling.
    Peter Mertzanis, MGMA member, Langhorne, Pa.,

    Determining what to charge requires knowing costs, what other folks charge, what payers will pay and marketing knowledge. It is not a “charges or payer payments” issue, which this thread veered into.

    One item not clarified: “Charges” also includes what practices charge payers, not just the (hopefully) cost-based amounts ... practices “charge” payers, however that is calculated. 

    Anyone who does not do a market analysis of what competing practices charge is losing some valuable input to the practice’s financial operations.

    I respectfully point out that the automatic idea that payers will pay less than charges, even less than cost is simply wrong. The reality is that in well-negotiated agreements and with rigorous clinical controls the payments will exceed charges – think capitation contracts. That particular point is a jaw-dropper: “paid more than charges” causes tremendous angst among those who, with respect, believe they must discount to payers.
    Lawrence Lievense

    I feel it is beneficial for physician practices to have a methodology for setting charges a bit more strategic than using 15% or 20% above your highest allowable. While there are a few of us who still have 1% or 2% of charge-based arrangements, this is only a minor part of the rationale. We do get asked about the rationale for our fees, particularly by patients paying on a self-pay basis, or those who choose to pay out of pocket for a noncovered service. What I normally like to do is assess our general reimbursement level as a percentage of Medicare, and I do this based on procedure code range. As an example, I will look at average [preferred provider organization] product reimbursement for E&M codes, surgical procedure codes for a given specialty, or for medical imaging codes. 

    If I determine that we are generally getting paid 200% of Medicare for a given code range, I will set our charge at a fair increment above this, such as 240% to 250% of Medicare. I then use the same approach for our other code ranges and this provides a baseline charge schedule I can explain/defend to anyone. The discounts below our charge are based on payer volumes, accepting assignment, etc. 

    After this step, I run all of my insurance allowables (using VLOOKUP in Excel) against these charges and identify those where I have allowables that are anywhere from 10% below to right at or above the charge. I then consider each of these on an individual basis. If I have only one payer that is anywhere close and they are 5% below my charge, I will probably bump the charge up by 10%. If I have a number of payers right at my charge, I will probably move it up by 15% to 20%. I try to be sensitive, however, to codes that often get paid by patients, with an example being ordinary refraction of the eyes. In these cases, I am normally comfortable having my charge be the same as the allowable. And, if it is only occasionally paid by insurers, I may set my charge based on local market pricing so as not to keep patients from coming to my practice because of noncompetitive pricing. While this can be tedious the first time around, once you have completed the process initially, it is easy to periodically check and update. 
    Louis Imbrogno, , MGMA member, chief executive officer, Center for Primary Care, Augusta, Ga.,

    Some payer contracts are written so that they pay either the allowed amount or XX% of billed charges, whichever is lowest. That allows them to take a percentage discount on all claims, regardless how much below allowable amount the fee may be. The only way for the provider to receive the full amount is to set fees at least that percentage higher to offset the automatic discount..
    Beth Fuller, CMPE, MGMA member, practice manager, Scott P. Hoopes, MD PA, Meridian, Idaho,

    With regards to the contracts with payers, you will never get what you want, only what you are willing to leverage. As previously stated, most payers want contracts with providers that give them a favorable discount off the provider’s billed charges. This is how they are able to distinguish themselves in the marketplace with potential clients. It is incumbent upon us as providers to negotiate rates that are in the best interest of our organizations, keeping in mind that we are not only producers of a product ... we are consumers of that same product from the same source. So before you go to a payer and negotiate 300% of Medicare for your practice, ask yourself if you or your employees could afford to patronize a practice whose aggregate discounted rate with a payer would equate to 20% off billed charges. At the same time, we should not be in the practice of leaving money on the table when negotiating with payers.
    Karl Gyden, MGMA member, director, payer contracts, Harbin Clinic LLC, Rome, Ga.,

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