Lab Test Revenue (part 2):
Mastering The New Math Of Capitated Payments
(Part 2 of a 2-part series)
>> Go to Part 1: What Must You Know About The Economics Of Capitation?
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
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
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
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 contracts.
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 3)!
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
- 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
- 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