Leveling the Playing Field

Jody Locke, MA
Vice President of Anesthesia and Pain Practice Management Services,
Anesthesia Business Consultants, LLC, Jackson, MI

Traditionally, three factors have determined the value and profitability of an anesthesia practice: case volume, payer mix and appropriateness of staffing. Because case volume and payer mix are essentially determined by the location and reputation of the facility, the only factor in which the practice actually had any influence was staffing; but, even here, culture, tradition and the coverage expectations of the facility tend to be the effective determinants of staffing model and number of providers.

Each practice is unique in its case volume and mix of surgical and obstetric procedures. Each is also unique in the percentage of patients whose insurance pays at significantly discounted rates set by federal and state regulators. Then there is the question of coverage requirements and the facility’s willingness to subsidize the practice’s financial loss in providing the necessary services. All of this indicates the potential for great disparity in the financial viability and ongoing potential for success of American anesthesia practices. Some practices claim to have more leverage in negotiating contract rates with commercial insurance plans, and this may result in a strategic advantage. This is certainly the claim of some of the nation’s largest practices and staffing companies; but the reality is that, for a variety of reasons, this advantage is diminishing. The fact is that while many smaller practices have felt somewhat disadvantaged in the past, this may be changing. One might even argue that we are seeing a leveling of the playing field. In other words, when we take a close look at the impact of the recent surprise billing rules, they may actually be good news for small and moderate practices.

Those of us who have been monitoring public policy changes impacting anesthesia over the years can clearly document a consistent theme: the advanced press of most policy changes has always been more concerning than the actual implementation. When the Health Care Finance Administration (HCFA) changed the way payment would be divided between medically directing physicians and medically directed CRNAs in the 1980s, many anesthesiologists expressed concern that this would result in a loss of control and revenue when, in fact, the revised Medicare payment rules actually made billing simpler. It is true that the implementation of Resource-Based Relative Value System (RBRVS) in the 1990s did impact anesthesia more profoundly than other specialties, but most compensated for the drop in revenue by cost-shifting to commercial plans and by requesting higher subsidies from hospitals. The implementation of ICD-10 had the potential to increase claim denials and disrupt practice cash flow, but it turned out to be a non-event. And so, it may well prove to be with the No Surprises Act. The reality is that the economics of anesthesia are increasingly complex, and the impact of changes to one variable in the equation becomes less and less impactful.

Anesthesia Economics 101

Let us first assess the potential financial impact of the proposed changes on the typical anesthesia practice. Public payers—Medicare, Medicaid and workers compensation—are not affected by the new rules, and they represent 40 to 60 percent of the units billed by the average practice. The commercial insurance plans with which practices contract are also not affected, and they may represent another 30 percent of billed units. When a practice contracts with an insurance plan, the contract defines the patient responsibility, which is usually about 20 percent of the allowable payment amount. Let us be clear here: the No Surprises Act applies only to patient situations where there is no contractually defined allowable payment. For example, if the contract rate with a particular plan is $60, then this amount, multiplied by the billable units, determines the allowable amount, and there is no surprise. Some patients may not understand the impact on actual insurance payments of deductibles and co-insurance, but this is not what the legislation was intended to address.

The No Surprises Act only affects two categories of charges: charges for out-of-network patients and those who have no insurance. The data used for Chart 1 is a composite of that from all Anesthesia Business Consultants (ABC) clients across the country. It demonstrates the number of cases and units billed in 2021 to each category of patient. In 2021, the percentage of the average practice impacted by the No Surprises law is relatively small, at about three percent. While it is unknown how much the percentage may increase in the years to come, this has to be our point of reference for now.

There is an important distinction demonstrated here. In 2021, the average practice collected fairly well for out-of-network patients (1.5 percent of charges resulted in 1.6 percent of payments), whereas they have collected less for patients with no insurance (1.8 percent of charges resulted in 1.4 percent of payments), which should come as no surprise. For most practices, when a patient has no insurance, there is no expectation of a meaningful payment. There are very few practices that collect more per unit for out-of-network cases than their average yield per unit. Based on this analysis, two things are clear. First, no practice is collecting an unusual or exorbitant amount per unit for out-of-network cases. Second, the implementation of the new law should not have a material impact on any ABC anesthesia practice.

The Impact on Contracting

Let us suppose that a client has a contract with an insurance plan that the client wants to renegotiate to a higher rate per unit. Typically, this process involves submitting a request for a higher rate. When the plan pushes back, there ensues a negotiation, the outcome of which depends on two factors: the value of the group’s participation in the insurance plan’s network and the provider group’s market leverage. Insurance plans need to be able to demonstrate their subscribers can access key specialists; that is an important aspect of their marketing plan. The fact is that, depending on the particular market, some practices are more valuable than others. Consider for example, Blue Cross of California. Being able to offer its subscribers access to any of the University of California hospitals is considered very important, which is why the anesthesia practices get a favorable rate. Market leverage is usually a function of market share. This is where size matters. A practice with a large share of a given market can usually use this leverage to their advantage and there are definitely examples of mega anesthesia groups that have negotiated higher unit rates than those given to smaller practices. It is important to understand, however, that their leverage was often based on their threat to opt out and bill patients as out-of-network providers. The reality is that No Surprises Act provisions essentially eliminate this leverage. Under the new rules, an out-of-network provider would only be paid at an average rate for the geographic area.

The Long View

The net effect of most market developments over the past few years has been to constrain practice revenue, and the No Surprises Act is entirely consistent with this trend. The average practice is seeing its Medicare population grow at a rate of about one percent, per year. This means that an ever-higher percentage of units gets paid at Medicare rates, over which providers have no control. As the cost of healthcare continues to rise, insurance plans are pushing back and limiting rate increases. Many plans have not agreed to contractual rate increases for a number of years. Since the ability to cost shift has been the advantage of many large practices, the impact of this act will constrain revenue options. In other words, only two factors will determine the revenue potential of a practice: volume and payer mix. What this also means is that anesthesia practices will have to shift gears and change their focus from revenue generation to cost management.

Most providers are aware of a basic reality, which is that it is easier to get paid by insurance plans than patients. This has been especially true during the pandemic. Collecting money from patients has always been a particular challenge for which there is no good solution. Collection agencies used to rely on a “dialing for dollars” approach to encourage patients to pay, but caller ID has effectively undermined that strategy. Many providers may have been concerned that the No Surprises Act would further erode the ability to collect from patients, but this is not true. As demonstrated above, only a small percentage of practice revenue has ever come from patients affected by this act.

The reality of managing a practice in the United States is that things never get simpler; they only get more complicated over time. We tend to get excited and focus on each new policy change or payer development. Each new development is just one more factor in the overall challenge of getting paid. This is why practices need timely and reliable data so that they can assess and respond to the evolution of the market.

Jody Locke, MA serves as Vice President of Anesthesia and Pain Practice Management Services for Anesthesia Business Consultants. Mr. Locke is responsible for the scope and focus of services provided to ABC’s largest clients. He is also responsible for oversight and management of the company’s pain management billing team. He is a key executive contact for groups that enter into contracts with ABC. Mr. Locke can be reached at Jody.Locke@ AnesthesiaLLC.com.