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Spring 2010

Assessing the Impact of the Recession on Anesthesia

Jody Locke, CPC
Vice-President of Anesthesia and Pain Management Services, ABC

The nightly news has brought us an unending litany of sad stories about the impact of the housing crisis, unemployment and the recession on the average American. As bad as CNN and the other networks would have us think things are, the fact is that the impact on the average anesthesia practice has not been all that serious. For many a practice the national news has provided a reason to do some belt-tightening, but no cause for serious concern.

In an effort to better understand the impact of the broader economic situation on anesthesia practices across the country, a review of 20 representative ABC client practices was undertaken. This analysis reveals that surgical volumes and collections have continued to grow despite the dire prognostications of the Sunday morning talk show guests. Fortunately the news is not as bad as one would have expected. What does become clear, though, is that each economic and political cycle brings its own specific set of practice management challenges and the current situation is no exception. This review of practice strengths and weaknesses identifies both threats and opportunities as we all prepare for the implementation of health care reform. Three criteria guided our selection of the practices to be used in this study. First we sought a representative mix of large and small practices providing a full range of anesthesia services. We were fortunate to be able to identify 20 clients in 20 states. We also needed clients with at least 2 full years of data so that reliable comparisons could be made between 2008 levels of activity and 2009 levels without having to annualize data. Finally, our goal was to pick practices that were large enough and diverse enough that they would be representative of their particular markets. Most cover multiple sites, including a primary hospital and at least one surgery center. Collectively, these practices provide more than 500,000 surgical and obstetrics anesthetics a year. These are typical private practices at full-service community hospitals. None is at an academic center, or at an inner-city facility dedicated to the care of Medicaid patients.

Conventional wisdom suggests that a downturn in the economy would affect an anesthesia practice in at least three ways, any one of which would result in a decline in practice income. First to go are the elective cosmetic surgeries that are paid for with discretionary monies usually resulting from bonuses and windfall profits. A general contraction of the household budget might even lead to the deferring of non-essential elective surgeries. Clearly there is evidence of companies restructuring their health insurance options for employees. Theoretically such changes might even impact a practice’s payor mix. Few major companies are not trying to shift more of the burden for health care costs to their employees. Ultimately, the pundits argue, patients will be less able and less willing to pay the portion of the bill that they are responsible for. The reality is there is some truth to each of these theories, just not as much as one might have expected. It would appear that despite some minor shifts, those who need surgery still get it and those who have insurance still find a way to pay for most of it.

A comparison of surgical volume for elective cosmetic cases such as facelifts, blepharoplasties, breast reductions, augmentations and paniculoplasties does indicate that about 9% fewer patients elected to have these procedures done in 2009 than 2008 (6,075 in 2008 versus 5,588 in 2009). Revenue for such elective cosmetic procedures declined correspondingly from $4.7 Million to $4.1 Million or 14 percent. In other words not only did the number decline but also the profitability. This data notwithstanding, the overall financial impact of changes in elective cosmetic procedure activity was relatively insignificant (1.6% of cases to 1.4). This is not to say that the loss of such revenue is immaterial. At an average of $745 per case, cosmetic cases tend to be some of the most profitable services anesthesia groups provide.

Tracking trends across a large sample of practices can reveal surprising and seemingly contradictory patterns. Table 1 is a case in point. Each of the practices surveyed had a different focus with regard to cosmetic surgeries, but the three procedures listed below were performed by all of them. As indicated, the overall volume of breast alterations was down slightly with the notable exception of the increase in breast augmentations with prosthetic implants. This information was not filtered for diagnosis or patients with breast cancer.

Contrary to popular belief and many an anesthesiologist’s perception, surgical volumes have remained relatively strong over the past two years. These 20 practices experienced a consistent rate of growth in total case volume of almost 4.5 %. See Table 2. Billable units increased by a somewhat smaller percentage due to a slight decrease in the acuity of care, as measured in average units per case. The biggest increase was a 10% increase in billable units but five of the practices experienced more than a 5% growth in unit production. Five lost volume but the declines were nominal (1%).

Two theories may explain this stronger than expected growth in anesthetic activity. It is reasonable to assume that there is only so much surgery than can be postponed or avoided. Ultimately, it is not the economy that determines the need for surgery but the patient’s anatomy. ASA and CPT codelevel trend analysis reveal relatively few significant patterns or trends with the notable exception of endoscopies, which for many practices were the one bright spot on the horizon.

Endoscopy has been the hot topic of anesthesia practice management for the past few years. The details of the discussion, the fascinating politics of anesthesia coverage for endoscopy and the long term potential will be the subject of an article in a future issue of the Communiqué. Suffice it to say that any review of performance for the past two years must identify and exclude the endoscopy numbers, because they tend to skew the picture. As indicated in Table 3, only a few of the sample practices actually saw a drop in endoscopic anesthesia business from 2008 to 2009.

Since endoscopy tends to be a diagnostic service targeting Americans in their 50s and 60s who are still working and healthy, the growth in this line of business may be masking another subtle but distinct trend in the data: a change in acuity of patients presenting for anesthesia. A classification of the overall case data by ASA physical status reveals a subtle but distinct shift in average patient physical status. As the chart in Figure 1 indicates, more than half of all patients who present for surgery and obstetric services are quite healthy. What is not quite so clear is the subtle increase in ASA physical status III, IV and V patients. ASA IV and V patient populations increased from 25,126 to 27,017, an increase of 7.5%. Given the aging of the American population this is not an unexpected development, but clearly one that could have significant implications over time.

Providing the care and getting paid for it can be two entirely different matters. Despite the political focus on the number of uninsured Americans, the number of patients without insurance who presented for surgery does not appear to have changed materially. What the data and our analysis does show are three distinct phenomena at work. The numbers of patients covered by public plans (Medicare, Medicaid, Tricare and Workers’ Compensation) continue to inch up due to an aging American population. This growth is eroding the managed care population ever so slightly. Of note, however, is that a number of these practices had historically opted out of participation with major payors in their respective areas, but in 2009, a number of them felt strong pressure to opt in. In every case such a change had a negative impact on practice revenues in the short term.

This high level summary payor mix information is based on total ASA units billed for each of the calendar years, 2008 and 2009. See Figure 2. A corresponding graph of actual payments posted would reveal that almost 72% of practice revenues come from PPO and HMO plans with which the practices participate (versus about 19% from public payors). As has been the case for the past few decades, getting paid for anesthesia continues to be a matter of getting paid by the patient’s insurance. The single most notable finding of our analysis is that the percentage of total practice revenue that was received from patients has dropped 8.16% from 2008 to 2009, as shown in Table 4. This is not a surprising finding, but rather a new challenge that anesthesia practices must come to terms with. As expected, if companies shift more of the burden for the cost of health care to patients, then practices will have to develop new methods and strategies to get patients to pay what they owe. But this has always been a challenge and the current state of the economy only exacerbates a long-term problem. Such insights only underscore the importance of negotiating aggressively with payors. As indicated, the majority of a practice’s “fee for service” revenue is received from patients’ insurance. What might seem ironic is that at the same time companies are pushing back on employees and asking them to pay a larger share of the cost of health care, insurance companies have not resisted renegotiating favorable contract renewals.

Aggressive practices have been very focused on their contracting strategies to maintain their cash flow. So far the strategy seems to be paying off. It is not uncommon for commercial payors to exceed renewal rate increases of 3 or more percent. Given the fact that 20% of a practice’s payors typically accounts for about 80% of a practice’s revenue, a few good contracts can make or break a practice. The rewards of effective payor negotiations are not only material, they may be essential in light of the other downward pressures on practice income. Payor mix has always been a significant barometer of financial strength for a medical practice. What the payor mix tells us is how many of the practice’s patients are “locked in” based on governmental rates set in Washington or state capitols and how much the practice can actually negotiate. The Public Payor Percentage (PPP) is a useful measure of the degree of freedom and flexibility of a practice financially. Typically, if the PPP is greater than 50% the practice will not only realize average yields per unit billed that are below the national average but will probably find itself needing substantial support from the facility to survive. The most desirable practices will always be those with the greatest flexibility to not only negotiate with payors for a substantial portion of their income but also balance bill patients. Perhaps the most interesting dimension of payor mix, however, is its ability to change based on a variety of factors that may have less to do with the demographics of a service area than with the nature and mix of services provided. There was a period of time when many anesthesia practices felt they could afford to departicipate with major payors and bill the patients directly. This was a reasonable strategy so long as the net impact on revenue was positive.

Many of these same anesthesia groups are now reconsidering their previous strategies for both political and economic reasons. Often such shifts result in shortterm income hits. Another factor is the correlation between lines of business and payor mix. A decrease in patients with commercial indemnity insurance at a practice’s outpatient surgery centers may cause the overall percentage of Medicare patients to increase dramatically even though the absolute number of seniors being treated did not increase. It is often said that if you have seen one anesthesia practice, you have seen one anesthesia practice. So many factors determine the level of activity and the revenue potential for anesthesia services that it is misleading to draw too many assumptions from a limited study. The variety of factors that impact practice “fee for service” collections notwithstanding, one thing is very clear. There is a fundamental divide between what gets paid per ASA unit billed to public payors versus what gets paid by private, commercial payors. As Table 5 clearly demonstrates, all anesthesia practices need their commercial revenue to offset the impact of Medicare and Medicaid. What ultimately distinguishes the financial strength of a practice is just how much of an offset the commercial income provides. The laws of physics and economics being what they are, it is safe to assume that over time all practices will trend towards the average. Those at the high end may experience significant erosion in the revenue they receive from their best contracts. If there is any good news in all of this, it is that there does appear to be some upside for the practices at the low end of the spectrum.

Most anesthesia consultants now agree that it is essential not only to track payor mix trends for the practice as a whole but by line of business. While it is true that sometimes such information may not shed much light on new strategic or financial opportunities, it is essential to good planning. Given the dramatic developments unfolding with health care reform, few practices can afford to overlook any potential sources of additional revenue, no matter how small. The discussion thus far has focused on revenue generated directly based on work performed and units billed but there is one more piece to this rather complicated puzzle. It is the piece that has more to do with diplomacy and finesse than hours spent caring for patients. The last decade has seem an unprecedented level of data sharing with hospitals in an effort to forge financial partnerships the likes of which would have been considered unthinkable just a few years earlier. MGMA surveys indicate that more than 75% of anesthesia practices receive some form of financial support or income guarantee from their primary facilities.

While the terms and the amount of support vary considerably from hospital to hospital, the impact has been dramatic: most practices can no longer survive on the revenue they generate through their billing operations. The economics of coverage and call, recruitment and retention have completely changed the nature and focus of anesthesia practice management. Anecdotal evidence supports the perception that hospitals are becoming ever more reluctant to subsidize anesthesia, at least at historical levels. The loss or reduction of such revenue could lead to a whole new set of challenges for many.

Historically, anesthesia practices have been primarily focused on the revenue side of their balance sheet but this is starting to change. As has been the case in other industries, the need to cut costs has led to a rethinking of basic service requirements and assumptions. Many an anesthesia practice has already started to grapple with the question, what if we did not get support from the hospital. Hospitals are looking very closely at operating room efficiency and asking if they can really afford to continue to offer such capacity. Meanwhile anesthesia practices are also having to look at their own cost structures and the configuration of the care team. There is a resurgence in interest in mergers as another possible avenue for lowering overhead and minimizing expensive manpower redundancy. Not only has customer service taken on a new significance in an era of increasing competition for scarce health care dollars, but the more creative practices are starting to take a page from the airlines to reset customer expectations in an effort to make them more attainable.

It was not the intent or scope of this review to assess the impact of health care reform on anesthesia practices, but rather to identify the issues that have been flushed up by the current state of the economy. Political developments in Washington have their own way of unfolding and complicating the economic cycles we all experience regularly. Irrespective of one’s perspective on or concerns about the potential impact of providing insurance for an additional 32 million Americans, one thing is clear: the key to survival is financial. Good care and effective customer service are essential, but the bottom line must be positive. The good news is that anesthesia has survived the nation’s recession with a minimum of permanent damage. Most anesthesia providers’ incomes actually went up each of the past two years. Most group practices still enjoy strong relationships with their hospitals and surgery centers. For most, the prospect of continued success is bright. As always, caution must be the byword. Economics is not a discipline that respects one’s wishes. Just as powerful economic and political forces are slowly changing the face of American health care, so too, are they changing the face of anesthesia. Victory will ultimately only be awarded to those which are astute and diligent enough to divine the underlying trends and make the most of them.

Jody Locke, CPC serves as Vice President of Anesthesia and Pain Management Services for ABc and is thus responsible for the scope and focus of services provided to ABC’s largest clients. He is also responsible for oversight and management of the company’s pain management billing team. He will be a key executive contact for the group should it enter into a contract for services with ABC. He may be reached at