Lab Test Revenue (part 2):
Mastering The New Math Of Capitated Payments
(Part 2 of a 2-part series)
by Sheila Dunn, D.A.
Reprinted with Permission from Washington G-2 Reports,
Physician Office Testing, September 1997
Last month, in the first
of this series, we looked at differing financial arrangements--fee-for-service
and capitation--that physician office laboratories (POLs) have with
managed care organizations (MCOs), and you learned how capitation impacts
your bottom-line. Capitated payments are a fixed dollar amount per health
plan member per month (PMPM), requiring that you track service utilization
and carefully manage risk.
This month, you'll learn how to calculate fair managed
care payments for your POL. Most medical practices can successfully
negotiate fee-for-service (FFS) payments for lab tests (for related
tips, see POT, Dec. 1996, Jan. 1997, pp. 2-3). But sometimes, an
MCO will take a tough stance with a POL, especially in areas of physician
oversupply and high managed care penetration. Consider approaching MCOs
proactively to learn their business goals and their expectations of
providers. Often you can gain a competitive advantage by offering to
be the first medical practice to work with an MCO that intends to transition
physician payments to capitation.
What if the best you could accomplish in negotiations
was this: "If you're willing to accept the capitated payment we've
negotiated with ABC mega-lab, then you can do the tests in your POL"?
How can you tell if a particular capitated rate will be profitable,
allow you to break even, or be a sure road to the poor house? Will $0.50
PMPM suffice or does your POL need as much as $3 PMPM?
The four steps that follow will
help you answer such questions. Table 1 illustrates
the process. Use it as a guide in devising your own POL's calculations.
List the POL tests you wish to perform in Column
1. In Column 2, list their reimbursement. Select your usual and customary
fees, the Medicare fee caps, or your actual average receipts for each
test as a benchmark to compare to the calculated capitated rate. In
Column 3, list the number of times each test is performed annually.
Determine your average test reimbursement by
dividing the total income for all codes (Column 4 total) by the total
number of times the tests were performed per year (Column 3 total):
Avg. Reimb./Test: $71,962.50 9,050 = $7.95
Request the annual lab test utilization rate
(usually expressed by MCOs as the rate per 1,000 members) for the tests
you've listed in Column 1. Utilization of lab services by plan members
is the most important number in this equation and may only be available
for total lab services.
Annual Lab Utilization Rate Per 1,000 Members = 1,500 (data provided by MCO)
This indicates that the average patient in this managed
care plan utilizes 1.5 lab tests/year. Remember, this number may be
falsely high if it includes all lab tests, not just those your POL performs.
Multiply your average test reimbursement (Step
2) by the managed care plan's average utilization rate per 1,000 members
(Step 3) and divide by 1,000 to find the per member per year (PMPY)
average. Then divide by 12 for the per member per month (PMPM) rate.
Average Charge PMPM: $7.95
x 1,500 =$11,925 1,000 12 = $0.99 PMPM capitated rate
Assuming that MCO utilization statistics are accurate
and that utilization does not change appreciably, a $0.99 PMPM capitated
rate should be an approximate equivalent to current receivables (or
whichever benchmark you chose for Column 2).
Utilization: The Most Critical Variable
The reason capitation is risky is that if only a few
patients are tested, profit ensues; if many are tested, losses may be
incurred. Patient health, i.e., how often patients seek medical
attention, and whether the physicians in your practice rely heavily
on lab results for patient diagnosis and treatment, are big factors
in the capitation equation.
Examine utilization statistics provided by the MCO carefully
because they could underestimate actual utilization. Can one successfully
predict how often patients will undergo testing? Is there a difference
if the patient copay is $2 vs. $25? What about college-age males vs.
women of childbearing age vs. Medicare beneficiaries? Finally, what
about healthcare professionals vs. business executives vs. asbestos
plant workers? Access to healthcare services, age, gender, and occupation
all influence lab test utilization.
As lab utilization rises, the payment
per test from a capitated plan decreases (Table 2).
What Capitated Payments To Negotiate
Once you've determined a reasonable capitated
payment for your POL, try to negotiate at least two times what you are
willing to accept. How can you negotiate $2 or $3 PMPM for just a few
tests when mega-labs often accept less than $1 PMPM for all lab tests?
One reason is because mega-labs may be tacking on hefty fees for STAT
tests or transportation costs for remote specimen pickups. A POL can
often perform certain tests for much less than referral labs because
specimen handling/transport costs are not a factor.
Keep Track Of Capitated Payments
Since utilization fluctuates as new groups
of people join health plans, it's essential to monitor capitated payments
against actual test utilization as well as against a benchmark. Many
practices use the Medicare fee caps for this purpose. A good tracking
system allows POL managers to determine which managed care plans are
profitable and which are not, and provides solid documentation for renegotiating
Changing The Shape Of Money
Avoid the temptation to take a parochial
view of your POL's bottom-line without realizing the importance of testing
to the entire episode of patient care. Maybe a managed care plan only
pays $5 for a rapid strep test (it may cost $3.50 and many POLs are
accustomed to a reimbursement of about $20), but if a nurse saves 10
minutes, a doctor saves 5 minutes, and a patient is spared hours of
hassles and time away from work, the savings generated for the practice
by doing the test in-house is worth a bundle (Table
Consider how much the following are worth to your practice
and attempt to quantify where possible:
- A dissatisfied patient switches to a health plan to
which your practice does not belong because he or she must go elsewhere
to have blood drawn.
- A more accurate diagnosis is made when some test results
are available at the time of the patient visit (define which tests/which
type of patients).
- For capitated plans where each patient visit costs
money, can in-house testing help avoid a second visit? An extra visit
to the pharmacy?
- The time it takes your staff to choose the correct
blood tubes, log, package, store, and locate the proper container
for referred tests.
- A patient's condition worsens because lab tests were
delayed (define which tests and the circumstances).
- An unnecessary emergency department visit, a hospital
admission, or an expensive, unnecessary procedure is performed.
- Rescheduling patients or changing their treatment
plans after learning of lab results days after the patient visit.
Do More With Less
Total POL revenue is derived from a mix of
FFS, discounted FFS, and capitated payments. When determining POL profitability,
don't forget to include test revenue from sources outside managed care,
such as Medicare, Medicaid, and private payers. Calculate the exact
percentage of each type of payment by examining each payer agreement
and determining the percentage of total revenue derived from each source.
To increase POL profitability, consider the following
- Encourage efficient test ordering (redesign requisition
slips, develop reflex testing protocol, etc.) in order to better control
- Reduce the cost to perform each test (consolidate
vendors, purchase in bulk for lower prices).
- Carve out as many tests as possible from the capitated
payment. Negotiate FFS payment for expensive POL tests and those that
can be justified on a STAT basis.
- Be sure the capitated payment for POL tests lists
the tests included by CPT code.
- Minimize risk by adding a stop-loss/safety net clause
to capitated contracts to guard against overutilization. Specify the
maximum expenditure per individual member (stop-loss) or for the group
(safety net). If utilization is exceeded, specify that capitated payment
defaults to FFS.