Specialty Capitation

Using Performance Measures and Defining Benchmarks To Understand Physician Costs and Charges

High quality medical care provided at the most appropriate provider is the best way to control health care costs. Quality health care may be defined as the continuous effort by all health care providers to meet the needs and expectations of all health care consumers.

Integration is fundamental to achieving high quality health care services. The need to integrate quality of care indicator with accurate, instantaneous information has never been greater. Today's health care providers demand statistically accurate clinical and cost criteria to compare with the information supplied by health maintenance organizations (HMOs), independent practice associations (IPAs) and hospital systems. Reimbursement structures, withholds and reinsurance rates all depend on the accurate provision and delineation of this information.

Several methodologies can be used to extract and benchmark information. Although this article focuses on a sampling of the type of information that can be gathered by a particular diagnosis related group (DRG) (in this case, DRG 148), which encompasses a group of current procedural terminology (CPT) codes for major large and small bowel procedures, methodologies that rely on other information such as patient/physician demographics, frequency of utilization and place/type of services also can be used.

Locating Specialty specific Data

To begin compiling data for your facility, first evaluate you own current information systems and capacity to capture outcome data. In a perfect world, specialty care physicians have the capacity to capture clinical profiles at the point of care through a variety of reliable software products.

Outsourcing compilation of clinical data is another efficient method for gathering these statistics. Physicians should require that data be provided in predetermined, regular monthly clinical and financial reports.

Second, you should require your hospital systems and payers to provide you with clinical data. Many HMOs, IPAs, hospitals and integrated health care delivery systems can now capture, and are willing to provide, clinical profiles for clinical providers gathered at each health care point of delivery. Although payers are a good resource for comparison purposes.

The method you use to capture this information must be capable of "parameter reporting", that is, providing information based on certain variable costs. The following are some parameters you should request:

• average length of stay (ALOS)
• reinfection rates or complications affecting ALOS
• admissions per 1,000 patients
• average case mix
• cost per patient by physician, ICD-9 diagnosis, DRG or CPT, and
• other costs (ancillary services, such as pharmacy, lab, radiology or respiratory therapy)

Determining Clinical Benchmarks

An information management system is crucial to health care delivery. Its major component should be the ability to provide clinical indicators for comparison. In effect, it should provide comparisons with clinical norms for specific diagnosis and procedure related events, including a goal for length of stay. These are considered "clinical expectations for outcome", as derived from practice patterns.

Once information systems are in place, focus on efficiency of care delivery through process management, including error elimination, establishment of clinical pathways and disease management. Each specialty care provider involved in rendering care should contribute his or her own clinical judgment, range of experience and knowledge of available technology to maximize available resources. Variables that affect costs and outcomes data should be considered.

The next step is benchmarking. In essence, benchmarking analyzes quality standards against costs. Data benchmarking uses statistically based performance criteria (information management) modified through process management. This information is then compared to other predetermined norms.

Determining Clinical Costs

Once you have an understanding of clinical outcomes, you can determine the actual costs of providing those outcomes. Cost consciousness has come to play an important role in modern health care administration. Unfortunately for specialty care providers, the term "cost" has numerous meanings. This ambiguity requires that providers be aware of the many different ways the term is used.

Total per-unit costs of providing a service (in this case, DRG 148) consist of direct and indirect costs. In turn, direct and indirect costs include both fixed and variable expenses.

Total direct costs are those costs that can be traced to a specific unit of activity. Examples include traceable labor and supply costs associated with performing a particular procedure. Total indirect costs are costs that cannot be traced to a specific unit of activity. Examples include overall office administration associated with procedures derived from other cost centers.

Once you have determined how a cost is attributed to a specific unit of activity, costs can then be further broken down as they relate to changes in volume of rendered services. Total fixed costs are defined as costs that do not vary in total with changes in volume. For instance, regardless of how many patients are seen, costs such as rent, insurance, taxes and the salaries of basic nursing and administrative staff generally do not change with volume.

However, total variable costs do change with a change in volume. Examples include the cost of materials associated with supplies, pharmaceuticals, radiology, laboratory and other ancillary services.

An example of the cost per unit for DRG 148 is shown in Table 1 below.

Determining Clinical Charges

For traditional fee for service rates, the standard break even point is when total costs equal total revenues. The standard break even point also applies to health care organizations in which revenues must cover costs and be sufficient to generate profit as well. The standard formula also can be used to calculate rates, units of services, fixed costs and variable costs.

When dealing with capitation and per member per month (PMPM) rates, the calculations are somewhat different. Along with risk adjusters, other variables, such as historical utilization and unit pricing can be difficult to determine. Several factors can cause fluctuations in the data and widely skew your utilization picture. These factors may include:

• incurred but not reported expenses, which are defined as the liability of unpaid costs of services already provided to a patient outside of a clinical providers facility.
• improperly coded CPT codes
• incorrect ICD-9 modifiers; and
• incorrect patient identifiers

An example of a Medicare PMPM calculation for DRG 148 taking into account several variables is shown in Table 2 below.

Data Comparison Resources

Benchmarking can be considered a circular process. You should begin by capturing data from your own practice patterns, then compare them to:

• you local peers
• your chosen geographic area
• your payer plans statistics
• outcomes in your state; and
• national specialty norms

Remember, that this additional data should be used only for comparison purposes - that is, rely primarily on your own data. In particular, comparing local demographic and outcomes data to national statistical norms has been cause for some concern because each US geographical area has its special outlets, such as resource based relative value scale malpractice and geographical adjusters. Even Medicare has realized that only by understanding the intricacies of a local patient population can physicians render effective care at a cost effective price.

Seven-Step Process

Today's changing health care environment increases the need to "be close to the customer". Because care is organized locally, providers must develop strategies appropriate to geographically distinct market areas. Services offered must be right for local constituents and delivered through an organization familiar with local needs.

Competitive pricing can be achieved through accumulating outcomes, quality and costs of service information. The results of competitive pricing can be apparent almost immediately, with long term efforts resulting in decreased costs and increased clinical efficiencies and overall market share.

To control health care costs, take the following steps:

1. Decide on the system you will use and how you will use it to capture confidential data independent from that provided by other providers and payers.


2. Narrow the focus on more comparable patient groups with parameters such as:


• ALOS
• number of admissions
• average case mix
• cost per patient by diagnosis, DRG or CPT codes involved
• cost per patient by physician
• cost per patient for health care providers other than physicians
• ancillary services
• reinfection rates, complications or other variables that affect ALOS
3. Focus on clinical outcome expectations as derived from local practice patterns.


4. Develop criteria to modify these clinical outcomes through error elimination, clinical pathways, disease management and data benchmarking to increase the ability to predict trends and summarize treatment.


5. Determine fixed and variable service costs.


6. Determine baseline charges for clinical services


7. Maximize payer reimbursement for services through local clinical outcomes, costs and charges for these services cross referenced with other local, state and national statistics.



Susan E. Charkin, MPH, is executive director of Healthcents, a full-service consulting group that specializes in managed care contracting and reimbursement analysis. Charkin can be reached via email at charkin@healthcents.com