How to evaluate your payer relationships

Over the years, as your practice has established relationships with third-party payers, you’ve likely also experienced an increase in administrative tasks and complexity. As a result, the path to getting paid has become more inefficient, frustrating, and costly.

Believe it or not, practices spend 10 to 14 percent of their revenue to collect 95 percent of what they are owed from payers—a staggering statistic for any business to face. From an industry perspective, the American Medical Association (AMA) estimates that $12 billion a year could be saved if insurers eliminated unnecessary administrative tasks through the use of automated systems.

The good news: you can take a stand and increase your profitability in the process. Evaluating your payer relationships is the first step.

National Health Insurer Report Card

The AMA’s National Health Insurer Report Card is a good place to start. This report examines the nation’s top health insurers on an annual basis, analyzing their claims processing performance in areas such as accuracy, timeliness, denial rate, and transparency. By taking a look at this data, you’ll gain a higher-level perspective of various payers in the industry.

However, to make a difference for your practice, it is important to take your evaluation one step further and analyze the cost of doing business for each payer you currently have a contract with.

Cost Analysis

1. Average cost per RVU * RVUs billed to payer = total base cost
One way to perform a cost analysis involves comparing the profit ratios of your payers based on costs, revenue, and RVUs. Start by calculating your average cost-per-relative value unit (RVU). To get the total base cost of doing business with a specific payer, multiply that average cost per RVU by the number of RVUs billed to that payer.

2. Base cost of payer * claims ratio = adjusted base cost
If you’d like to adjust the base cost to reflect administrative inefficiencies, multiply the base cost by a claims ratio. For example, if your staff has to resubmit 5 percent of claims for a certain payer, you would multiple that payer’s base cost by a factor of 1.05, resulting in an adjusted base cost.

3. Revenue collected from payer – payer’s total base cost = profit earned
You’ll then want to compare the payer’s total base cost to the revenue you collected from that payer. The difference between the two numbers is the profit you earned.

4. Profit earned / number of RVUs for each payer = profit ratio
Finally, divide the profit earned by the number of RVUs for each payer. This profit ratio will allow you to see how different payers compare to one another.

Another way to evaluate your payer relationships is by examining the percentage of revenue versus the percentage of patient encounters. A simple spreadsheet tool can help you calculate these figures and conduct your analysis.

Keeping your practice’s current capacity in mind, you can use your analysis to determine which third-party payer relationships to continue and which to terminate. If you’re at an optimal capacity or over capacity, you are in a position where you can be pickier about which payers you work with. Dropping payers with a negative profit ratio—or ones that yield the lowest profit ratios for your practice—frees up your time to see patients associated with one of the more profitable payers.

It can be an overwhelming task to evaluate your payers and decide whether or not to move forward with each relationship. Of course, you’ll want to consider the needs of your patients in the process, but ultimately, remember that your practice is a business. In order to keep providing quality care, you’ll need to stay profitable.


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