These days it is not uncommon to hear doctors complain about managed care.  The reasons are significant and wide-ranging.  Managed care plans decide which doctors will be on their panel, they dictate the care patients can receive, they decide where that care can be provided, what drugs can be prescribed, and, as we all know, managed care plans make it very difficult to get paid for the services doctors do provide.  Worst of all, they seem to deny payment for the most unintelligible reasons.  Doctors often tell me that they have gotten out of one plan or another because of these difficulties, or because a plan did not pay well as compared to other plans.  When I ask if they were losing money on the plan they dropped, I rarely hear the response I am looking for: “We did the analysis and the plan was not covering our marginal costs.”

Most practices will address this by comparing all managed care plans on a few common CPT codes to identify the plan(s) that reimburse at a particularly low rate.  If the plan is also a slow and difficult payer, the decision may be made to drop out of the offending plan.  Sometimes even if empty appointment slots are the result.

If you are an established physician with an office, employees, insurance costs and all of the other overhead items that go with practicing medicine, than your cost just to open your door in the morning is formidable.  As a general rule of business, you need to cover all of your costs: your fixed costs (the items mentioned above that do not vary over the short term no matter how many patients you see) and your variable or marginal costs.  Variable costs include medical supplies, office supplies, billing costs and some other minor items that are consumed or incurred in the process of providing care to a patient or servicing a patient account.  These variable costs are also referred to as marginal costs, the costs you would incur to see the next patient. Again, to further illustrate the difference between fixed costs and variable costs: your office rent will not be impacted by the next patient you book for an appointment, nor will you be forced to hire another receptionist. These costs are all fixed over the short term. If you did the analysis, your marginal costs to see the next, uncomplicated patient typically average (e.g. primary care) in the range of ten to thirteen dollars or so. 

Of course the reason to go to the office every day is to earn a living, to cover all of your costs and earn a profit as well.  Profit in this case is your compensation.  Try to think of this issue from another perspective.  Fixed costs have to be covered no matter what happens.  These are the costs that confront you when you open the door in the morning.  It may seem obvious, but consider that an empty appointment slot provides absolutely no revenue to your practice (except capitation, of course). But, more importantly, the empty slot also yields no revenue to cover your fixed costs.  Now consider the hypothetical alternative of filling that empty slot with a poorly paying, managed care patient. The reimbursement you receive would probably cover your marginal costs to see the patient (given how modest these costs really are) with at least some surplus to cover your fixed costs.  This is a better state of affairs than receiving no revenue at all for that appointment slot, and here’s why.  In this example, seeing the patient did not result in uncovered marginal costs; that would be a disaster.  The proverbial “lose money on every patient and make it up on volume.”  The surplus revenue went to cover those ever-present fixed costs.  Think about what happens to your compensation if your practice is slow.  You take less compensation because you must leave money in the practice to cover those uncovered fixed costs.  Therefore, any patient care revenues that contribute to your fixed costs also directly support your compensation goals dollar for dollar. 

You certainly could not run your entire practice on this strategy because your compensation would plummet dramatically.  Certainly the small surplus per patient would yield an unacceptable level of compensation, but filling empty appointment slots with patients that at least cover their own costs and, in addition, make a modest contribution to fixed overhead can make all the difference in a struggling practice.

I ran the numbers for a large practice that had dropped a managed care plan because the payments were “too low.”  The staff told me that this big plan was actually a fast payer and, more importantly, when the plan was dropped the phones and the practice slowed down appreciably.  These physicians were surprised to learn the results of my practice cost-reimbursement analysis.  The cost of care in their practice was actually much lower than they thought.  The plan they dropped was yielding a sizeable surplus when compared to the cost of care in the practice.   Even worse, another plan that they maintained actually was paying less then the plan they dropped.

I recently met with a physician because her practice had crashed over the past few years and she wanted to understand what she could do about it.  Her appointment schedule had more empty slots than filled ones.  Why?  I asked a number of questions to explore this.  She had reduced her office hours.  This had the effect of making it harder for patients to make appointments at their convenience.   She had withdrawn from all of her social and community activities.  Her visibility as a professional (self-promotion) was nil.  She had also dropped several popular managed care plans that paid “poorly” and were difficult to deal with.  The result:  empty appointment slots, declining practice revenues, uncovered fixed overhead and plummeting compensation.  After taking this doctor through the logic presented here, she caught on to the key business issues:  1) The marginal cost to see the next patient, one more patient today, is actually peanuts.  2) An empty appointment slot yields no revenue at all.  3) A full slot, even paying bad money, usually contributes at least something against fixed overhead.  4) Any contributions to fixed overhead will directly support physician compensation in an established practice.  As long as you don’t lose money on the next patient, opening your practice to that patient is a wise decision. 

I advised the physician to re-enroll in the plans she dropped.  I also advised her to monitor her practice in the future.  When the practice is once again full and she is fortunate enough to be able to turn away less desirable patients (payers), she can then consider, by repeating the practice analysis I refer to here, dropping the worst payers from her practice.  Until then, any money is good money.  (Some plans may not cover practice costs for individual CPTs, such as the cost of a vaccine, but when all services are taken together most plans will probably turn out to be acceptable.)