Examining Profit Margin with Your Payer Contracts

There was a time when all contracts were relatively profitable and HME providers spent little time analyzing the profit margin of contracts. As our industry continues to compress, it’s become more important to understand the numbers.

Determining True Revenue Model

You first need to understand your contracted rate, examine network fees, assess the viability of your contracts and consider equipment, service and billing costs that impact your true revenue.

Is your contracted reimbursement rate a flat fee schedule, a percentage of Medicare (if so, for which year?), or a percentage of billed charges?

Contract or Network Fees

If you belong to a network or work with a company who negotiates contracts on your behalf, it is also important to understand what fees are being paid up front. As mentioned in last month’s article (“Engaging New Payer Types: Paths to Success in a Tough Market”), some companies charge a flat rate, while others may charge an hourly rate for their services. Still others will take a percentage of your claims—and there are some companies that do all three. All of these fees reduce your overall reimbursement and profit. Understanding what you are truly being reimbursed will help you determine the viability of your contracts.

Viability of Contracts

• To determine the viability of your contracts, answer the following questions.
   
• How does your company decide in what payer contracts to participate?
   
• Do you accept certain ones because of competitive pressure?
   
• Are your payer contracts viable for your company?
   
• Do the contracts pay 100 percent, or are they paying below cost?
   
• If the payer is not profitable, do you want to continue to contract with them?
   
• If the answer to any of these is yes, really examine why. Do the contracts give you access to networks you would not be able to access on your own, and does this give you good reason to stay?
   

Regularly audit your Explanations of Benefits (EOBs). EOBs show the contracted allowed amount and the PPO network through which the claim is re-priced, and changes in billed amounts due to missing or incorrect modifiers. In order to maximize your contracts, make sure that your payer contracts are billing the correct amounts as listed in their fee schedules. Understand and revisit your Usual and Customary (U&C) rates to ensure they are current according to industry standards. Implement protocols and procedures for auditing your EOBs and updating your U&C rates.

Equipment, Labor and Billing

Consider cost of equipment and true labor and billing costs. For equipment, this includes the basic equipment cost, as well as shipping rates, provision of customer service and home assessments on rehab equipment such as wheelchairs, delivery costs, etc. How much do you pay to store equipment until it is purchased and delivered? How many Assistive Technology Professionals (ATPs) do you have on staff to help service chairs? What about delivery drivers, office support or billing and reimbursement specialists? You will only want to analyze your profit margins based on what is actually collected. Add up all of these expenses to determine your payer contract costs.

Collecting Co-Pays

HME providers are not the only ones adjusting to the changes in health care—your patients are as well. Most patients with insurance plans are used to paying a co-pay for services provided and products purchased outside of the HME industry. What percentage of co-pays do you collect? Some HME providers are hesitant to collect the co-pays owed because it is a change from how business was conducted in the past; but it is part of the patient’s responsibility with their insurance plan. Upfront communication between your team and your patients is key. Patients may be expecting higher out-of-pocket expenses.

Remember: these may not be Medicare patients; they chose their own plans and co-pay levels. You may want to revisit financial hardship cases; however, you should not feel bad about collecting co-pays from your patients, especially if it comes down to your business profitability and could impact whether you will be there for that same customer the next time they need your services.

Assessing Your Profit

Until you have determined your revenue by way of the questions covered up to this point, it is guesswork what payer contracts are profitable. However, with these questions answered, you have a good understanding of your revenue. The next step is to review your contracts to determine your profit margin. If the true cost of the equipment is $100, and your reimbursement rate is $125, can you service and bill that equipment for less than $25? If you can, what is your profit on that item? Is it enough to run a successful business and continue to provide the high level of service to your customers? If you find that you can’t, there are steps to consider to increase your profits.

One way is to diversify your payer portfolio. In last month’s article, we discussed how to discover new payer opportunities. There are many payers that do not fall under what the industry considers to be traditional payers. By diversifying your payer portfolio, you will have less reliance on less profitable payers.

Consider selling cash items to your customers. Some people will pay for what is important to them, and if that is an item not covered by their insurance, they are willing to pay cash.

You might also want to look at utilizing the benefits a network can offer. Many networks or Group Purchasing Organizations (GPOs) have sales and marketing tools available for marketing in service areas. Many of these tools can help you learn how to market contracts, how to sell patients on retail items and help you research covered patients and clients. Additionally, members of GPOs are often able to access payer contracts and networks at little to no cost. If you find that your profit is being reduced due to network or contract fees, looking at a GPO might be a good option.

As the HME industry continues to compress, it is more important than ever to know your revenue and expenses in order to stay profitable. The independent HME provider provides an important service with a personal touch for customers in their community. By examining payer contracts and costs and maximizing reimbursements, you will have a true picture of where your revenue is coming from and what your profit is. From there, you can determine if you need to make changes to your business model or identify new revenue sources or other ways to increase profits so you are available to serve your community in the future.

Next month’s article will focus on best practices to expand your payer portfolio. Read other articles in this series here.