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How to develop a strategic pricing methodology

Setting your practice’s internal fee schedule (also known as your specific billed prices, CPT input codes or chargemaster) is one of the biggest challenges in being a profitable physician practice. No matter what you do, there’s always an incredible amount of maintenance in setting charge prices for your services. 

In this post you’ll learn about two common chargemaster approaches, the pros and cons of these approaches and tips to creating a profitable chargemaster. 

Two common price setting approaches 

#1: Percent above Medicare Pricing

It’s common to use a flat rate percentage above Medicare (CMS) to set a practice’s charge prices. The percent above Medicare pricing structure is simple, considering CMS prices are easy to find. CMS.gov is Medicare’s website where practices can get fee schedules to their resource-based relative value scale (RBRVS) for ASP drug schedules, durable medical equipment (DME), lab schedules, etc. CMS even produces ambulatory surgical center (ASC) fee schedules. 

Pros to percent above Medicare pricing

1. You use readily available information and can make minor adjustments for other payers.

2. It’s really easy to standardize, see changes in baseline and adjust prices accordingly. 

Cons to percent above Medicare pricing

1. You’re using one of your lowest fee schedules as a baseline. Medicare should be one of the lowest payers amidst all other payers (e.g., Medicare Advantage or commercial payers).

2. This approach typically results in large contractual adjustments and a poor cash-to-gross collection rate.

When to use percent above Medicare pricing

Use the percent above Medicare pricing strategy when other options are unavailable or no fee schedule is relevant to set your prices. As a general rule, you shouldn’t use your lowest rates with a high markup to set charge prices. 

#2: Cost-based pricing

Cost-based pricing, also known as cost accounting, refers to aggregating all costs of running and maintaining a practice (e.g., physician compensation, facility overhead and supplies) and allocating charge prices above that. 

Pros to cost-based pricing

1. Practices can identify if they’re essentially underwater in their revenue management on a specific procedure or code. You’ll know if insurance is paying you a profitable amount.

2. Practice cost-to-charge assessments are easily defensible since your costs are itemized, making negotiating rates fairly simple. 

Cons to cost-based pricing

1. Cost accounting is very difficult to sustainably keep up with. If a practice bills each provider at a different rate per RVU or different compensation models there’s so many determining factors and attributing costs to each and every procedure your practice is involved in. 

2. You may not know what to charge for relative capital expenses such as practice overhead or physician compensation. For example, here are some questions a practice administrator might ask. How much does it cost for 15 minutes in an exam room? Is there a direct or indirect cost? How does our property’s rent or taxes play into cost? 

3. Practices will need to change pricing often. Since drug manufacturers submit a pricing file to CMS every quarter, and your practice uses drugs on their cost itemization you’ll need to revisit those specific charge prices quarterly to make sure they have the correct markup. 

4. You might be unknowingly leaving money on the table. Your fee schedules aren’t your primary concern in this pricing structure, so you may end up with the risk of lesser-of clause hits.

Lesser-of clause hits occur when you charge, say, $80 for a service but the insurance company you billed would’ve contractually allowed up to $100 for that service.

Under a lesser-of clause in your contract, the insurance company will pay you the billed amount instead of the contracted amount because they can pay the lesser of the two and not obligated to give you the amount you could’ve received (in this case $20).

By using the cost-based pricing structure it’s not likely you’ll have the time nor the manpower to adequately avoid these underpaid claims. 

When to use cost-based charges

Cost-based charges can be used  in a very small practice where a practice administrator can determine a more definitive itemized cost list, though you may feel overwhelmed in the amount of work it’ll take to keep everything up-to-date. 

Approaches such as cost-based charges and percent above Medicare offer more cons than pros, but changing the way you set your prices can be difficult and uncomfortable. The journey isn’t easy, but the destination is well worth the effort. 

How do you start creating a good chargemaster?

Establish a baseline.

First and foremost you should start with your fee schedules. Once you’ve collected your fee schedules you’ll be able to comprehensively understand your contracted rates and begin making an impact on your revenue. 

Why collect your fee schedules?

Knowing where you stand will make it easier to see growth. 

The more fee schedules you have, the more robust your pricing strategy will be to actually go about getting better rates. 

How do you collect your fee schedules? 

Start with your payers.

There are certain payer portals, provider websites and payer representatives that can help you begin collecting your fee schedules. 

Availity.com is a great internet resource that helps you access fee schedules for multiple payers such as Blue Cross, Humana, Aetna, and others. 

Use cignaforhcp.com to request for PPO and POS fee schedules for Cigna. Cigna typically responds within 48 business hours. 

Payer representatives can be difficult to track down since their central email is often named “provider relations” or “psu inquiry,” but you can still identify who the right payer representative you need to contact is or what the central phone number you should be contacting is for your fee schedules. 

When reaching out to providers you should remember that your contracts probably have a built-in clause that will help you obtain the documents you need. There’s usually a clause with a service-level agreement (SLA) that states a certain amount of time insurance providers have to send you copies of fee schedules. Don’t be afraid to use contractual language to get a hold of your fee schedules!

You've collected your fee schedules. What's next? 

Set pricing based on fee schedules and costs.

Essentially, you’ll want to take your highest contracted rate, add a modest buffer and validate that it covers hard costs. Here’s the steps you could take to create a profitable chargemaster.

1. Aggregate all of your fee schedules. 

2. Find your highest contracted rate by looking through all contracted rates. 

3. Add a modest buffer to that contracted rate. This means to rein in your            expectations. Three hundred percent of Medicare is probably not a great pricing structure, but 120% of your highest contracted rate might be the modest fit that you could profit from.

4. Make sure it covers your hard costs so that you’re not losing money. You can go back to the payer to renegotiate if you’re in an underwater situation.

What if software could help you solve your chargemaster problems?

Time to try Rivet.

Rivet is a claims analytics software that gives you the big picture of what’s going on in your practice with payer contracts, fee schedules, denials and underpayments. You can also check eligibility and provide accurate upfront patient cost estimates with Rivet. The Rivet team will help you aggregate your fee schedules and input your claims data to enable you to increase revenue and decrease AR days.  

For more information about the tools Rivet provides schedule a Rivet demo.