Economics and Practice Management

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Chapter 206 Economics and Practice Management

Stanley Pelofsky, James R. Bean, Kevin Blaylock, Edward C. Benzel, Christopher B. Shields, Robert E. Tibbs, Robert J. Wienecke

The practice of spine surgery does not just represent the evaluation of spinal problems and the application of surgical techniques to solve them. Prior to surgery—even prior to seeing the first patient—and after all the spine work is done, a practice needs an infrastructure, a business organization that ensures not just financial solvency but also efficient operations, innovative management, and effective marketing. To enjoy a spine practice, a spine surgeon needs a sound business strategy and reliable administrative support.

Surgery, like medicine in general, is practiced in an economic landscape that changes from year to year. Although relatively resistant to the fluctuating health of the general economy, with its cyclical swings from bull to bear market, medical practice remains subject to many of the same considerations that drive other businesses, such as potential for growth, competition, overhead costs of doing business, demand for and financing of innovation, interest rates, labor market conditions, economies of scale, strategic planning, and a constantly changing political and regulatory environment.

The health-care landscape has seen substantial change over the past decade, some of it predictable, some of it unexpected. The only certain lesson that can be learned from the past 10 years is that medical practice and health care in general are mutable and in the midst of a transformation that has yet to see an end. To thrive or even to survive future change, a spine practice must recognize change as it occurs and adapt to change effectively. This requires an awareness of conditions in the general business and health-care economies that affect the way in which a practice is run (macroeconomics), as well as sound decision making in managing the practice for current stability and future innovation and solvency (microeconomics).

Changing Economic Environment

The economic environment of health care has experienced substantial stress over the past decade, owing to health-care cost increases in the preceding decades.

In the 1980s, the inflation rate in health-care services was 10% to 12% per year, exceeding the growth in the general economy by more than 7% per year.¹ The doubling time for medical costs at this rate is 5 to 7 years, eroding the funds available for other public or private purposes, such as capital investment, business growth, personal amenities, or savings. Employee health benefits as a percentage of corporate profit rose from 8% in 1960 to 29% in 1980 to more than 70% in 1990.² Similarly, health-care spending as measured by percentage of gross domestic profit has increased from 7.1% in 1970 to 16% in 2005.³ The need to bring health-care costs under control was seen not as an option but rather as a business and government necessity.

Factors Leading to the Unrestrained Rise in Medical Costs

To understand the response to costs, one must know the factors that payers believe have led to unrestrained rise in medical costs: (1) fee-for-service reimbursement, (2) traditional indemnity insurance, and (3) the technical complexity basis of high-quality medical care.

Fee-for-Service Reimbursement

Fee for service (FFS) rewards physicians for work on a per-item basis. It provides a strong motivation to work productively, but not necessarily cost efficiently. It is strongly favored by physicians but is viewed by payers as an incentive for physicians to overuse medical services, or at least to remove inhibitions from recommending services.

Indemnity Insurance

Indemnity insurance covers expenses for the medical benefits that are defined in its plan. It allows payment for necessary, often large, and sometimes unexpected medical expenses. It insulates the patient from the true cost of treatment, lowers price sensitivity, and creates a tendency to overuse services. Physicians may order more tests and services because of defensive medicine or because payment is ensured; and patients may accept more because no personal financial consequence is perceived.

Technical Complexity Basis of Quality

Technical complexity is the sine qua non of surgery. Greater benefit is perceived to be associated with instruments and techniques of greater intricacy. Greater perceived benefit is equated with higher quality and thus greater value. From the payer’s perspective, however, greater technical complexity translates simply into greater expense but often without better value as measured by functional outcome.

Methods Used to Control Costs

In response to these factors, payers have attempted to restrain financial exposure. These restraints are the instruments of managed care and, in their most basic form, are price and utilization controls. The simplest price control is a fee discount, and the simplest utilization control is approval of services for reimbursement before the service is performed (preauthorization). These managed care techniques are superimposed on the traditional indemnified FFS mode to balance the cost of recommended medical services by restrictions in permitting these services.

Another form of cost control is to shift a portion of the financial risk for cost increase from third-party payers to physicians by withholding a portion of fees to pay for cost overruns (fee withhold) or by paying for expected services in advance (capitation). Financial risk sharing is perceived as an incentive for physicians to share with the payer a reluctance for creating unnecessary or excessive expense.

For the payer to control expenses, a binding agreement must be made between the payer and the patient, and a binding agreement must be made between the payer and the physician. Under traditional indemnity coverage, the insurer contracted only with the patient to cover incurred expenses. Under managed care contracts, the payer agrees to pay for expenses in exchange for a patient’s agreement to accept restrictions in choice of service, location of service, and choice of physician. The payer and physician must reach contract agreement on price and acceptance of utilization restrictions. The contract between the physician and the payment plan represents a fundamental shift in decision-making authority from the physician-patient relationship to the payment plan. Contract medicine has shifted economic power from physicians to payment plans, granting payers decision-making control over the allocation of resources.

Backlash against Managed Care

Managed care and medical service contracting have been the triggers for a profound and unexpected consumer backlash against health plan restrictions and even against physicians who accept contract conditions that create an incentive to restrict patient access to services.

Within 2 years after the failure of the federal Health Security Act proposed by the Clinton administration in 1994, public denouncements of managed care tactics became widespread. Numerous state legislatures proposed, and a large number passed, “patient protection” statutes restricting health plan management methods. A consistent provision, common among state proposals and included in all federal proposals, is access to specialty care, which seeks to overcome the utilization denials and gatekeeper obstructions that are built into most managed care plans and are intended to reduce the higher costs attributed to specialty referrals.

In addition to federal and state legislative proposals to limit managed care restrictions, the backlash took market and judicial forms. The primary-care gatekeeper health maintenance organization (HMO) products, which grew with such rapidity prior to 1995 and were projected to become the dominant form of health-care plan by 2000, lost popularity and momentum as enrollment shifted to less restrictive preferred provider organization (PPO) plans between 1997 and 2001. Capitation payment to physicians lost ground in a return to traditional FFS. By 2000, large national health plans, such as United Healthcare, began reducing preauthorization restrictions after finding little savings in medical expenses compared with the administrative cost to conduct preauthorization and after loss of enrollment from enrollees who were angered by obstructions to medical services. Additionally, several multimillion-dollar jury awards to plaintiffs against managed health-care plans for injuries caused by denials of care revealed a public sentiment to retaliate against managed care restrictions with heavy punitive damages.

As managed care restrictions lessened at the end of the 1990s, the rate of rise in health-care costs, which had dipped to under 2% of the gross domestic product by 1994, began to rise again, and by 2001, health-care costs had again reached 11%, with the prospect of faster increases in the coming years. The change in rate of growth in costs was due almost purely to a rapid growth in the volume and intensity of services, particularly the number of specialty services and drugs prescribed, rather than to an increase in the fees paid for individual services, which have been fixed or reduced by provider contracts.

The conflict between the cost of care and the demand for care continues to be the source of economic pressure on physician practices, and will be so in the future as the cycle of cost growth in health care again reaches unsustainable highs. Caught between payer budgets and patient needs in this struggle, physicians, including spine surgeons, will have to find new ways to improve the outcome of care without unacceptably expanding the cost of care. More important, the lesson for physicians from the managed care “revolution” is, paradoxically, a recall of traditional physician ethics: Always keep patient interest and welfare foremost in mind.

Practice Organization

Surgeons choose or join a form of practice organization according to personal preference and practice goals. The form of organization that is chosen should conform to the demand in the market. Larger organizations offer the power of collective group influence to negotiations for payer contracts. Larger groups also allow for subspecialization within the practice, which improves the technical expertise of the entire practice and the reputation and marketability of the practice as a whole to the benefit of each of its members.

Any organization is a trade-off. What the member of a larger organization gains in collective power is lost in personal autonomy. For physicians who are accustomed to independent judgment, self-reliance, and personal professional accountability, the exchange may be difficult. What seems to be lost is individual control of practice conditions, professional decisions, and sometimes personal income. What is gained, however, is the security of business economies of scale, cross-fertilization of professional knowledge and experience, division of labor, sharing of administrative expenses, and collective bargaining power in negotiations.

Single-Specialty Group

The simplest form of organization is the single-specialty group practice. The advantages of this form—shared office expenses to reduce overhead, shared service call to increase free time, and shared case information to enlarge on personal experience—make professional life more efficient and productive. Beyond simple office sharing, however, lies a quantum leap in business control opportunity through corporate organization. Corporate integration allows sharing of records, production pools, owned business assets, financial risk, policies, planning, and reputation. More important, corporate integration, such as a professional service corporation or limited liability corporation, allows group decisions about fees, contract participation, services offered, and extent of geographic coverage. In short, it allows, within legal antitrust limitations of group size and market monopoly, the control of price and participation conditions in the market in a way that is unavailable to single practitioners.

The advantages of single-specialty group practice persist into more complex arrangements, such as multispecialty network or multispecialty group arrangements. The organizational potentials of practice should be considered as multiple tiers of organization, the larger arrangements being dependent on the sound structure and function of the smaller units. The basic unit is the individual, with thorough training, reliable practice habits, and cooperative group behavior. The next level is the foundational organization: the single-specialty corporate unit, with the specialty expertise on which each large unit builds and capitalizes. The last level is multispecialty affiliation, such as the independent practice association (IPA) contracting networks, which serve as the common contractor (similar to the general contractor in construction) for its individually autonomous functional specialty units. An alternative to loose affiliation is the higher integrative level of an incorporated multispecialty medical group, which involves central governance and shared financial risk yet is still dependent on the competence and effective functioning of its component single-specialty units.

The key to single-specialty groups is the efficient use of individual resources. Internal competition should be minimized, and differences in individual interests and experience should be exploited and individual strengths maximized. To do so, effort and production should be fairly rewarded (however, the group collectively defines the term fairly).

The tendency toward subspecialty differentiation within specialty groups can be expected to grow. The 1995 Comprehensive Neurosurgical Practice Survey found that 23% of respondents had completed a fellowship, but only 11% listed the spine as the area of special training. Of the 16% who practiced only a subspecialty, over one third were spine surgeons.⁴ About two thirds of neurosurgical practice involves spine work, traditionally by neurosurgeons in a general neurosurgical practice.⁵ As the size of neurosurgical groups grows, an increase in subspecialization may be expected, with a larger number of neurosurgeons limiting practice exclusively to spine disorders.

Subspecialization creates higher levels of efficiency for three reasons: (1) It allows concentration of experience in a few individuals, which improves technical ability, tends to reduce both operative time and complications, and creates local expertise; (2) it allows concentration of interest, particularly for learning, researching, and designing innovative techniques; and (3) it improves marketability of the practice in a competitive market, in which expertise, especially if cost efficient, holds a high premium.

Contracting Network

An intermediate form of integration of independent practices is the IPA, which is an affiliation of otherwise independent physicians or groups organized for the purpose of entering into contracts for medical service with one or more payers.

The IPA is a corporate entity whose physician members have signed a participation agreement with the IPA. The IPA members remain independent and enter individual participation contracts negotiated by the IPA with insurers. An IPA may be a single-specialty network but more often includes a complete multispecialty panel, which conforms to the contracting need of the health plan. Depending upon the IPA’s agreement with its members, the IPA may either include all its physician members in any medical services contract it negotiates and signs or reserve the right of each physician group to accept or reject each payer contract. The former arrangement, IPA single-signature contracting authority, gives the IPA greater negotiating power and generally the potential for better contract terms. However, physician groups often balk at giving blanket contracting authority to an IPA and sometimes prefer to reserve the right to refuse, despite the weakened bargaining position created for the IPA.

The advantage of an IPA to the physician is the opportunity to participate in contracts attracted by the organized physician panel and to benefit from what negotiating clout the network may have. The disadvantage is the network’s inability to collectively set fees or refuse to deal with an insurer, because antitrust restrictions limit the concerted action of independent physicians affiliated in a network. The advantage of an IPA to an insurer is the simplicity of network building, particularly when entering a new market. The disadvantage to an insurer is the possible cost inefficiency and noncoordination of a loosely affiliated physician network and the weakened control the insurer has over contract conditions with individual physicians.

For physicians outside of multispecialty group practice, in which the administrative arm of the group serves as the negotiating agent for its member physicians, the IPA provides access to group contract-negotiating power while preserving an independent practice. It does not provide all the available practice for its members but serves as a useful supplemental source of managed care contracts.

Multispecialty Group

The most integrated medical practice organization is a multispecialty group practice. Its organizational features are similar to those of single-specialty groups except that many or all specialties are represented. Independence is traded for group financial and practice security. Individual autonomy is traded for group market power. Practice freedoms are traded for practice stability. The defining features of an integrated multispecialty group are a single corporate billing identity and shared financial business risk.

Several advantages accrue to a multispecialty group, compared with networks. The group has greater latitude to set fees and deal collectively with managed care payers and to collectively refuse unfavorable terms. It can pool capital resources for business investment. It can share overhead expenses, information systems, management, and marketing. It can plan collectively and wield significant influence over local market conditions by group price and participation decisions.

Several disadvantages must be borne by multispecialty groups. Income from higher-paid specialties may be shifted to lower-paid primary-care physicians to attract a needed primary-care base. Personal control of practice hours, time off, and vacation time are reduced or lost. Influence over management decisions is diminished in proportion to the size and variety of the group.

The advantage of a multispecialty group to a spine surgeon depends on the local market. Academic practices are generally large multispecialty groups, though commonly with departmental autonomy, so a desire for academic practice usually implies the choice of a multispecialty group. Outside of academic practice, the choice of multispecialty group practice is commonly determined by financial factors, such as ease in start-up, and practice factors, such as ensured referrals. Two considerations make multispecialty group practice attractive. The first is the power of group influence in medical service contract negotiation. The second is shared overhead expenses, which increase under managed care conditions and require heightened efficiency and access to pooled resources.

Reimbursement

With managed care came both fee reductions and alternative forms of payment to shift financial risk for the cost of care to physicians. Both changes create challenges for the spine practice. The management strategies for the practice depend highly on the forms and levels of payment.

Fee-for-Service System

The traditional form of reimbursement for medical and surgical services has been an FFS system. The concept is simple, but the problems are legion. As an incentive system, it has worked only too well. It satisfies the physician’s desire for compensation for the amount of work done. However, it is a major contributing factor to cost increases and is subject to assault and modification in the market.

One must understand the economic quandary in FFS to understand the changes offered in reimbursement from payer sources: (1) FFS is a cost-based additive unit pricing system without a budget, which encourages the addition of more units, thus increasing the total charge; (2) FFS discourages the bundling of unit charges into package prices and, in fact, encourages the unbundling of previously packaged prices, such as global surgical charges; (3) FFS developed as individual pricing strategies without a rational or consistent basis for the charges related either to overhead (production) costs or to other physicians (competition) in the market; and (4) the lack of competitive market restraint on fees gave rise to the odd economic response wherein the buyer (insurer) established market fee limits (usual, customary, and reasonable [UCR]) rather than relying on seller (physician) competition.

The payer response to the FFS quandary has been to either modify fee pricing among physicians by contracting with physicians for modified fees or offer alternative payment schedules, such as financial risk sharing or salary. The successive modifications to fee pricing levels in FFS reimbursement have been (1) comparative community average rates (e.g., UCR), (2) discounted fee levels (e.g., 80% of charges), (3) private relative value fee schedules (e.g., California relative value scale [RVS], McGraw-Hill RVS), and (4) a public resource-based RVS (e.g., resource-based RVS [RBRVS], Medicare Fee Schedule [MFS]).

Resource-Based Relative Value Scale

The trend in market pricing has been movement from modification 1 (UCR) to modification 4 (RBRVS). One of the goals of development of the Medicare RBRVS was to establish a fee schedule that could be adopted throughout the health-care system by both public and private payers in order to establish uniformity and rationality in the system’s reimbursement methodology.⁶ By paying on the basis of the resources (time, effort, practice expenses) used to provide a service, a rational basis for relating one service to another was introduced. By using a common basic RVS, the variability among different payers is reduced to a simple difference in conversion factor. Many, if not most, PPO and HMO fee schedules currently use the MFS as a benchmark for their own pricing, setting fees as a percentage of Medicare. Depending on the region, the private payer conversion factor may be higher or lower than Medicare’s annually adjusted conversion factor.

Two changes in specialists’ practice accounting can be made to convert from payer reimbursement to the Medicare RBRVS. The first and more radical change is the conversion of current fees to the Medicare RVS. A benchmark code, such as 63030 (lumbar disc excision), is used to establish the conversion factor equating current fees to the Medicare RVS values. This conversion factor is then applied to all other current procedural terminology (CPT) code relative values, and a new RVS fee is derived for each CPT code. The new fee is compared with the practice’s older fee, and the degree of disparity is noted. The problem for physicians is that the disparity between existing practice fees and fees derived from MFS relative values using a single conversion factor may be quite large, throwing the practice’s billing temporarily into disequilibrium. The effect of disparities between current charges and RVS charges can be softened by converting current charges to the RVS incrementally over time, similar to the 4-year transition period adopted by Medicare in converting to the MFS between 1992 and 1996. The value of such a transition may be quickly realized as the relative weighting of CPT code values becomes the same in the practice’s billing system as in payers’ fee schedules. For spine procedures with multiple CPT codes per procedure, this means an ability to consistently prioritize the order of the CPT codes submitted to be sure the primary code, or base code, is the highest-valued code.

The other, less radical option is to continue to use current fees but determine the conversion factor for each fee that would equate it to the Medicare relative value. The result is a confusing array of different conversion factors for each individual CPT code that may range from $35 or less at the low end to over $75 at the high end. This calculation can be useful in equating current fees to a proposed conversion factor using the Medicare RVS and estimating the effect the offered or negotiated conversion factor would have on current fees for individual codes. To simplify the process, the 20 most commonly billed codes should be selected and analyzed to examine the bulk of revenue-producing services without getting lost in detail.