Practice Assessment Area: Are You Tracking The Patient Responsibility Portion for Your Practice???

High unemployment along with the ever increasing number of employers raising the deductibles for health plans offered to their employees has resulted in a major shift in where a practice’s collections are coming from.  A shift that many practices that are not managing their finances closely may not be aware of.  And a shift that could have a huge negative impact on a practice’s bottom line if changes are not made in the billing and collections process and in the strategy for negotiating with managed care companies.  The shift I am referring to is the shift in the percentage of a practice’s charges that is paid by patients compared to the percentage paid by third party payors.

Many practices have seen the percentage of charges that become the patient’s responsibility increase over the past few years.  Ultimately, this means that more and more of a practice’s charges fall into the self/patient pay category which is typically harder to collect than the money that is due from third party payors, and typically requires a different approach to effectively collect.  Practices should be monitoring the trend of the patient responsibility portion.  If it is on an upward trend, then efforts should be made to increase the amount of collections from the patients before service is provided.  These efforts can take place in a practice’s billing operation by calling patients before the day of the procedure (when practical), and they can also take place at the facility where the service is going to be delivered.  Facilities are experiencing the same trend and many are beefing up front-end collection efforts.  If possible, your practice should request to piggyback on the efforts the facility is putting in place.  The post-service collection process should also be looked at to possibly modify how charges that are the responsibility of patients with insurance are handled by the billing operation.  More aggressive phone call policies and sending fewer statements before turning a patient with insurance over to collections may be in order.  The bottom line is that practices should consider adopting separate policies for collecting from patients depending on whether or not they have insurance if practices wish to minimize the decline in reimbursement due to the shift towards the higher patient responsibility percentage.

Practices should also use the trend of increasing patient responsibility percentages in negotiations with third party payors.  If the patient responsibility percentage has risen for Payor X patients, then that means that Payor X is actually paying your practice less out of their pocket per widget.  Therefore, unless Payor X is increasing their fee schedule for your practice, they are paying less per widget to you and you are probably making less per widget due to the higher degree of difficulty of collecting from the patient.  Practices should use this trending data to argue that Payor X should actually be increasing its fee schedule in order to maintain the historical reimbursement per widget amount to your practice.

If your practice has not tracked the trend for the patient responsibility percentage it should begin the process in the very near future.  All signs point to the trend of more of the billed charge falling to the patient for the foreseeable future.  Practices that do not change their behavior to deal with this challenge may find themselves experiencing a long-term reduction in per widget revenue that possibly could have been avoided.

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Revenue Maximization Area: When Was The Last Time…An EOB Audit Was Performed?

Everyone familiar with medical billing knows that it is very complex.  The billing personnel are typically dealing with multiple payors, multiple fee schedules, and inconsistend rules from the payors regarding what procedures get paid and how claims for those procedures are to be filed.  Needless to say, all of this complexity creates an environment where incorrect payment and improper denials of claims by payors is very common.  Whether those incorrect payments/denials by payors are on accident or not, they still need to be identified and followed up on by the billing staff to ensure that the practice is maximizing its revenue from the services it provides. 

There are many software programs on the market today that can assist practices in identifying incorrect payments and denials that are flagged according to the parameters established by the practice within the software package.  While these programs can be very effective and can make the process of identifying these occurences of improper payments/denials much more efficient than it used to be, these programs are only as effective as the information contained within them is complete.  Also, these programs typically only are able to do their job for payors that return an electronic payment file to the practice.  If a practice has not loaded all of its current fee schedules, or if a practice provides a significant portion of its services to patients covered by a payor that does not provide the practice with an electronic file containing claims payment information, there is a hole in the practice’s process of identifying underpayments/incorrect denials that needs to be plugged.  One way to plug this hole is to perform good, old fashoined, manual audits of Explanation of Benefits (EOBs) from the carriers.  While EOB audits are a manual process, they can help a practice identify problems with a payor that may have never been flagged through the software program because the program did not have the complete fee schedule loaded, or the latest fee schedule has not been loaded, or any other reason that might result in the most complete, up to date data not being loaded in the software program (that your practice is relying on to make sure the payors are paying your practice according to contract).

Even if you feel that your underpayment/denial software package may be up to date with complete information, it is still a good idea to pull a few EOBs from each payor once or twice a year just to do a check by hand.  Getting in a routine of doing manual EOB audit will either be a time investment that allows you to have the piece of mind that your automated systems are working properly, or will identify potential lost revenue that might have never been found otherwise.  In either event, performing manual EOB audits every now and then is well worth the time.

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Are You Creating a Future Tax Nightmare Through Your Current Expense Reimbursement Policy?

Physician practices incur business expenses just like any other businesses.  And, just like any other businesses, physician practices are eligible to deduct legitimate business expenses for tax purposes.  While some of those business expenses are paid by the practice entity itself, oftentimes expenses are paid by the individual physician members of the group and then submitted to the practice entity for reimbursement.  All of the business expenses that are run through the physician entity, whether paid directly by the entity or reimbursed to the individual physicians by the entity, are recoded on the entity’s tax return, thereby making the entity the party responsible for determining the legitimacy of the reported expenses in the eyes of the IRS and state tax enforcement agencies.  As these deductions are being claimed by the entity and as the entity will be held responsible for any items that may be disallowed upon audit, physician practices would be wise to have in place an expense reimbursement policy covering not only what types and amount of expenses will be allowed to flow through the entity, but also how any non-deductible expenses submitted for reimbursement should be handled.  A practice taxed as a C-corporation that fails to address the issue of non-deductible expenses flowing through the entity (which results in taxable income) as they occur can create a nightmare when the tax bill comes due.

For various business reasons, many practices will elect to allow certain non-deductible expenses to flow through the entity with the understanding that a deduction will not be claimed for those expenses on the entity’s tax return.  Examples of these expenses are the non-deductible portion of meals & entertainment and combined gifts to an individual within the tax year exceeding a value of $25.  If the group taxed as a C-corporation is not keeping track of these items as they occur and taking steps to either 1) pay the taxes on the allowed non-deductible expenses in the tax year they occur, or 2) making sure the individual(s) who benefited from the non-deductible expenses are charged with their accrued tax liability at some point in the future (typically through recognizing taxable income while the individual(s) are still part of the practice or factoring their share of built-up tax liabilities into the individual’s buy-out calculation), then in later years the physicians who are owners of the entity (and may have not benefited at all from those allowed non-deductible expenses) may be very surprised (and not to happy) to find themselves having to pay the tax liability that has been built-up over the years by their predecessors.

Many groups taxed as C-corporations that have recognized this issue have made the determination that the tax liability related any future non-deductible expenses that are run through the entity should be borne by the individual(s) who benefited from the expense in the year the expense was incurred.  Thereby eliminating the buildup of taxable income within the entity for future generations to deal with.  One way to accomplish this goal is to simply have the entity recognize taxable income each year in an amount equal to the non-deductible expenses that were incurred during the year.  This would create a tax bill for the entity that could be allocated to the individual(s) who benefited from the expenses.  I believe easier methods of eliminating the buildup of taxable income are to either 1) not reimburse an indidividual for the non-deductible portion of expenses, or 2) reclassify the non-deductible portion of expenses as taxable copmensation for the benefitting individuals.  Reclassifying non-deductible expenses as taxable compensation allows the entity to deduct the dollars spent and makes the individual responsible for the tax liability.

The preceding paragraph talked about how to stop the buildup of taxable income within the physician practice entity taxed as a C-corporation, but many times a practice becomes aware of this issues after a tax liability has already been built up within the entity.  Sometimes after a significant liability has been built up.  The question at that point becomes how to address the payment for the tax bill that will ultimately come due.  Some practices will elect to pay off, or at least begin the process of paying off, the liability so that it can be resolved before future generations of owners come in.  Other practices may decide to keep the liability rolling along.  Whichever method a practice selects, it should be sure that it is calculating its built up tax liability and is taking that into account in the buy-out formula when a physician leaves the practice.  Basically, a physician’s buy-out amount should be reduced by their share of the tax liability that exists at the time of their departure.  Likewise, I would argue that an incoming physician’s buy-in formula should also take into account the existing tax liability, even though it is most likely not on the entity’s books if it is using cash basis accounting.

Many practices taxed as C-corporations that I have seen have worked with have been under the impression that even if there is a built up tax liability, that the payment of the taxes can be delayed to future years if the entity creates a net operating loss (NOL) for the current year.  The thinking here is that since the entity did not pay taxes this year that no taxes were paid on the bulit up taxable income within the entity.  In reality, the taxes on the built up taxable income are not being delayed, they are just being paid by the individual physician owners of the group due to the way that the NOLs are usually created.  Most NOLs for physician practices taxed as C-corporations are generated by either deferring retirement plan contributions into the next year, or by borrowing funds that are then used to pay (deductible) salaries to employees.  The net effect of both of these methods is to increase the taxable income paid to and reported by the practice’s owners/employees.  Therefore, there really is no delay in the payment of the taxes related to the non-deductible expenses run through the corporation.  The only thing really being delayed is the payment of the taxes at the corporate level (as opposed to the owner/employee level) and the resolving of an issue that can be more and more contensious the longer it lingers.

If your practice is taxed as a C-corporation, I urge you to measure your practice’s built up tax liability if you have not done so recently.  I also urge you to examine your practice’s expense reimbursement policy to make sure it is in line with your practice’s goals related to the future

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Tax Reduction Area: Are You Maximizing Tax Free Reimbursement of Medical Expenses?

As the cost of health insurance coverage continues to increase, more and more employers have made the decision to offer health insurance plans to their employees that contain higher deductibles and co-pays than in the past in order to keep the policy costs in line with previous years.  As physician groups are employers and are not immune to these insurance premium increases, and as the physician members of the group are usually covered by the employer-sponsored health insurance policy, the odds are that owners in physician groups will also be faced with higher out of pocket amounts for medical care as well.  Depending on the tax status of your practice (i.e., c-corporation, s-corporation, partnership), there are various ways in which your group can 1) provide to employees tax free reimbursement of qualified medical expenses that are paid out of pocket, or 2) allow employees (including physicians) to put away money out of their salary on a pre-tax basis to pay for qualified out of pocket medical expenses.  With out of pocket medical expenses on the rise, your practice should at least consider the following vehichles for tax free payment of qualified out of pocket medical expenses:

Section 105 Health Reimbursement Arrangement (HRA):  This is a very simple benefit plan that allows an entity to reimburse its qualifying employees for out of pocket medical expenses on a tax free basis up to an annual level set by the employer.  This plan is a “pay as you go” plan where payments are made out of the practice’s operating funds and no monies are withheld from employee paychecks.  Usually all full time employees over age 21 will need to participate in an HRA and there should be a written plan document.  Therefore, a practice would need to be sure to consider the out of pocket expenses of any non-physician employees and non-owner physicians when evaluating this plan as any benefits provided to those employees will be funded by the owner physicians.  However, this may still be determined to be the best option after comparing the premiums of health policies with higher and lower deductibles.   A limitation of the HRA is that the benefit of tax free reimbursements is not available to partners or shareholders in an s-corporation (c-corporation are elibilge for the benefit).  Therefore, if your professional entity is not structured as a c-corporation, an HRA is probably not the best vehicle to provide physician owners with tax free reimbursements of medical expenses.

Health Savings Account (HSA):  A health savings account is basically an individually owned savings account that can be funded with pre-tax dollars by individuals who are also covered by a qualfied high deductible health insurance plan.  The HSA can be funded by the employer, the employee, or a combination of both employee and employer contributions.  The 2011 limits on contributions to HSA accounts by individuals covered by a qualified high deductible plan are $3,050 for individuals and $6,150 for families.  The ability to combine employer and employee contributions allows flexibility in how a physician practice might help fund out of pocket medical expensese for its employees.  The practice could fund zero for the employees thereby requiring the employees to make any pre-tax contributions to the HSA account out of their own paychecks.  Or, the practice could fund somewhere between $0 and the annual contribution maximums, thereby subsidizing a portion of the employee’s annual exposure but leaving it to the employee to fund any additional amount.  If the practice funds $0 as the employer, the employees (including the physicians) can still fund their HSA out of their paychecks and take the deduction on their individual tax return.  Therefore a physician practice has a lot of flexibility in how it might contribute to funding the employees’ increased out of pocket exposure on a pre-tax basis if it decides to offer a qualified high deductible plan to its employees .  One thing to note is that employees cannot participate in both an HRA and make or receive contributions to an HSA account.  HSA contributions are only allowed for individuals who do not have “other insurance” covering their out of pocket exposure.  However, A group could implement a qualified high deductible plan and an HRA and just not fund anything into an HSA account and instruct their employees that they would not be eligible to fund an HSA either.

Simple Cafeteria Plan:  A cafeteria plan allows an employee to take money out of their paycheck on a pre-tax basis and set it aside for reimbursement of qualified expenses after those expenses are incurred.  In the past, many cafeteria plans put in place by physician groups have not provided much in the way of benefits for the physicians because the discrimination rules oftentimes limited the physicians to what they can put away based on what the non-physician employees put away.  If the non-physician employees put away very little for reimbursement, then the physicians will be limited to putting away very little as well.  The healthcare reform legislation has created a provision for a “simple cafeteria plan” that loosens the traditional discrimation testing parameters and may make the concept of a cafeteria plan more valuable to those physician groups where HRAs and HSAs do not make sense.  If members of your physician group are looking for a vehicle to allow flexible amounts for tax free reimbursement of medical expenses, your group might want to look into the newly created simple cafeteria plan.

The best vehicle for your practice to help its employees and owners fund out of pocket medical expenses on a pre-tax basis will depend on multiple factors and my require the assistance of a qualified consultant.  If your practice has seen the out of pocket medical expenses for its employees and owners rise over the past years and has not gone through the process of evaluating the most effective way to address the issue from a tax standpoint, I would suggest appointing someone from your practice to take on this project.  This is a project that does not have to take a lot of time (if knowlegeable advisors are involved) and can yield results very quickly.

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Visible Effect of Healthcare Reform: Increased Health Insurance Premiums and Patient Balances

While many of the effects of healthcare reform on physician practices are yet to be seen, one that has become visible is the increase in premiums for group health plans offered by employers (including physician group employers).  The removal of lifetime maximum benefits, extension of age requirement for dependent coverage, and requirement to cover many wellness exams at 100% have increased the health insurance companies exposure which has resulted in higher premium.  These premium increases will affect physician groups both in their capacity as employers that offer benefits to employees, and as medical service providers that seek reimbursement from insurance companies and patients for services.

As employers that provide health insurance benefits to employees, physician groups will need to determine if the the premium increases to renew the current policy benefits can be absorbed (thereby reducing practice profit), or if a change in policy is needed to keep premiums at or near their current level.  Such a change typically results in lowering the benefits provided through the health insurance policy.  With reimbursement (and for some specialties volume) dropping, a practice may find it necessary to select a policy that is less expensive and provides lower benefits.  Or, alternatively, to ask the employees to pay a higher portion of the premium than before.  There are various ways that a physician group can lower the benefits offered through a group health insurance plan while maintaining a comparable level of health benefits overall for the employees by the practice self-insuring some of the medical expense exposure through the funding of HSA accounts or the establishment of a Health Reimbursement Arrangement (HRA).  The next time your practice’s group health insurance policy is up for renewal, it would be wise to look at these types of mini self-insurance options that may allow your practice to minimize the cost of the health benefits provided to employees.

As medical service providers that are seeking reimbursement from patients and health insurance companies, the increase in premium will most certainly continue the trend of employers offering health plans with increased deductibles.  This will mean that a higher and higher percentage of your charges will fall to the patient responsibility.  If you have not done so already, your practice should be looking at implementing a more robust method of 1) determining the patient portion prior to delivery of service, and 2) collecting most, if not all, of that expected patient responsibility amount prior to delivery of service.  With more and more of the bill becoming the patient’s responsibility, practices have to allocate more resources to the up front collection process or face the problems of declining reimbursements for the same amount of work and a billing operation that is spending more and more time trying to collect money from patients (who may not have understood how their HSA plan works and not expected such a large out of pocket expense) after the service has been performed.

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Physician Groups, It Would Be Wise To At Least Evaluate Merger Possibilities Right Now

Has your practice evaluated the concept of merging with other practices lately?  If not, you would be wise to at least begin looking at what local (and possibly non-local) group or groups might make sense as a candidate for joining with to form a larger, stronger entity that might be better positioned in the future world of ACOs than your current practice.  Who knows how, or even if, ACOs will ultimately operate.  But, it would stand to reason that a larger group of physicians will have a greater ability to negotiate with hospital led ACOs and to have more influence with, or possibly drive, a physician led ACO. 

Many practices are wary of even exploring mergers because they are fearful that merging would mean losing part of their identity or would mean a reduction in certain benefits.  While there is a certain level of integration that must take place, mergers can be done in a way that allows flexibility for practices to retain many of the things they identified with and valued in their separate practices. 

Even if you believe odds are low that a successful merger could be achieved with any known candidates in the near future, it would be prudent to at least start evaluating options to build the pipeline of merger candidates in the event that market forces do make it unsustainable to remain at your current size, range of specialties, geographic coverage, etc.  An experienced merger facilitator can make this process much smoother by helping to identify the big hurdles up front and helping identify the options to clear those hurdles, and by doing it in a way that is least threatening to all parties.

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Physician Groups, Don’t Wait for The ACO Battle to Come to You Before Acting

No one knows how the ACO concept will ultimately play out.  But one thing is for sure, many hospitals are positioning themselves to be the default leaders of the ACO charge.  And, in a world where a single payment is made to a single entity for an episode of care, he who receives the payment will most likely hold the power to determine how the payment is spread around.  While the landscape may pave the easiest path for hospitals to form and lead ACO’s, there are no regulations preventing physician led ACOs.  At a minimium, physicians (groups and individuals) who are not employed by the hospital (and wish to remain that way) should be talking to the hospitals they service AND other physicians in their community to find out what plans are currently being considered and to take part in those discussions.  While the ACOs may not ultimately materialize in the currently envisioned form, independent physician groups would be wise to make sure they have a seat at one, if not more than one, table when the ACO development discussions are going on.  Especially when the discussion of revenue distribution is taking place.  Physician groups who sit back and wait for the ACO to come to them may find that the important battles have already been fought, and no one was there fighting for them.

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