How to Determine Your Practice's "Real" Costs
By James B. Albertson III
Oncologists are on the verge of a reimbursement watershed that could easily overwhelm the unprepared. Rumblings about the need for reductions in the Medicare drug fee schedule have been going on for years and are growing louder as time goes by. Since other payers are likely to adopt a variation of any change Medicare makes, the potential impact of drug reimbursement reform is enormous.
Medicare's ongoing attempts to reduce drug reimbursement have met stiff resistance. Although CMS continues to believe that Medicare drug payments are too high, the agency has acknowledged that these payments may offset inadequate reimbursement for chemotherapy administration and has allowed the Medicare drug fee schedule to stand at its current rate of 95 percent of average wholesale price.
With drug reimbursement increasingly under fire, it is time to take a proactive approach and learn to analyze practice costs accurately so CMS will pay for oncology services in an equitable manner. Oncology practices must find ways to determine the real cost of 1) the drugs they use, 2) the resources needed to evaluate and manage patients, and 3) the resources needed to administer chemotherapy.
The Hospital "Step-Down" Model
I often see practices using the relative value unit (RVU) method to determine costs per CPT (procedure) code. Unfortunately, the RVU method does not address the true costs of drugs, nor does it properly assign fixed costs to the revenue-generating divisions of the oncology practice from which they originate.
Adopting the “step-down” cost-reporting mechanism CMS has required hospitals to use since 1966 would be a good idea for private practices as well. Not only will the implementation of this model allow oncology practices to discover their true costs, but CMS’s familiarity with the method will ease negotiations with the agency and provide a solid platform for future contracting.
The hospital step-down cost analysis model that I use begins with the practice’s chart of accounts and their respective balances. I look at these balances, see how costs are distributed among the practice’s revenue centers on a pro rata basis, then assign each account to the most appropriate center, such as E&M visits, the laboratory, radiology, medical supplies, the infusion center, and drugs.
For instance, facility rent is allocated according to how many square feet of space each revenue center uses (including the space needed for management, billing, accounting, scheduling, the drug inventory, examination rooms, reception, storage, and physician offices). When all costs are recorded accurately and assigned to the right accounts and revenue producing centers, the true costs of any one element (such as drugs) can be realistically determined.
If oncology practices throughout the nation adopted and standardized the step-down method, practices would produce accurate cost information that would help CMS develop a proper fee structure for services. The step-down method would also demonstrate to CMS that drug profit margins are not significant and E&M codes are seriously undervalued.
Using this cost model may also encourage commercial payers to reimburse oncology services appropriately. Since some commercial payers are considering lowering drug reimbursements and increasing administration fees, oncology practices should have accurate cost analyses available that indicate what levels of reimbursement would adequately cover patient evaluation and management, and which administration codes should be used to offset any proposed reduction in drug payments.
James B. Albertson III, J.D., M.B.A., F.H.F.M.A., is president of Albertson Healthcare Associates in Panama City, Fla. He can be reached at 850.234.1202.
