Today’s Anesthesia Economics: Coping with New Realities

Jody Locke, MA
Vice President of Anesthesia and Pain Practice Management Services
Anesthesia Business Consultants, LLC, Jackson, MI

Navigating an anesthesia practice through the turbulent and murky waters of American healthcare has never been easy, but the unique challenges of today’s market have dramatically raised the bar, and many practices are simply opting out. It used to be that the key to success was quality care. If a team of qualified providers consistently provided reliable care that enhanced the patient’s surgical or obstetric experience, most practices enjoyed stable and long-term relationships with the facilities they served. The only thing that most anesthesia providers really had to worry about was what happened in the operating room or delivery suite. Now that is no longer the case. What happens outside the operating room and how providers respond to it is far more likely to determine the future of the practice. This gives new meaning to thinking outside the box.

Today’s anesthesia challenges fall into three broad categories: getting adequately paid, maintaining a qualified team of providers and dealing with facility service expectations. It has never been so difficult to get adequately paid for the valuable services anesthesia providers administer. Recruiting and retaining an adequate team of qualified providers is becoming not only more expensive but more challenging.

Getting Paid for Anesthesia and Pain Management Services

Because of its complex method of calculating charges, anesthesia is unique among medical specialties. It is the only specialty where providers are paid for their time and the risks associated with the surgical procedure performed. While the complexity of anesthesia billing has historically served the specialty well, it is now inspiring payers to dissect its elements and write their own rules for payment. We consistently capture all the potentially billable elements of an anesthesia service only to have many of them modified during the adjudication of the claim. Let’s consider some of the clearest examples. The ASA suggests that the base value for a procedure should be modified based on unique patient and operative factors using the physical status and emergency modifiers, but Medicare has long since decided that these are needlessly discretionary and does not recognize them for payment. Anesthesia providers have been getting paid for the use of ultrasonic guidance (USG) to perform nerve blocks, but now these USG payments will soon be eliminated in many cases. The whole concept of billable anesthesia time is coming under ever greater scrutiny ever since the Centers for Medicare & Medicaid Services (CMS) decided to pay for time by the minute.

Unlike most other countries across the globe, in the United States, a practice’s payer mix is its key to revenue potential. While five or six insurance plans tend to generate 80 percent of a practice’s revenue, the overall list of revenue sources can be very extensive, and each plan may have its own payment rules. We tend to focus on the distinction between public payers (Medicare, Medicaid, Workers Compensation, Tricare and Champus) and commercial PPO plans because the public plans tend to be the most severely discounted. Historically, practices have been able to make up for declining public payer rates through aggressive negotiation of commercial contracts. The problem is that, as the percentage of patients covered by the public payers continues to increase inexorably, commercial plans are becoming more intransigent in their willingness to increase their rates. The net impact of an aging population and its impact on payer mix is resulting in declining net yields per billed unit.

When it comes to collecting everything that is collectible for the valuable services anesthesia providers administer, there are three primary challenges that every practice must come to terms with. First, there is the fact that, as compared to office-based providers, anesthesiologists and certified registered nurse anesthetist (CRNAs) have no ongoing relationship with their patients; they rely on hospital staff to gather the critical demographic information necessary to submit claims and receive payment. Second, we live in a society where the expectation is that patients have insurance to cover their medical expenses; patient balances tend to be looked at as incidental and of lower priority to the patient than other bills such as mortgage or rent, utilities, cable, car payment and groceries. Third, while there are numerous effective strategies to collect the allowable from insurance, there are relatively few approaches that result in consistent collections from the patients themselves. It is these factors that explain why collecting the patient’s balance is often the Achilles heel of accounts receivable management.

The problem is further compounded by the challenge of defining patient responsibility, which falls into three distinct categories, each of which poses its own challenges. Usually, the largest category consists of patient balances after insurance. Most insurance plans will pay at least 80 percent of their allowable payment for a given service. Some patients will have secondary insurance or a plan that covers the 20 percent, but many do not. Obviously, collecting this patient portion is significant to the practice as no one wants to accept a 20 percent discount. Conscientious patients with the means will usually pay their portion. The reality is that, for many patients, the 20 percent due for the anesthesia bill is in addition to the 20 percent due for all the other specialists and the hospital. Even a relatively minor surgery can result in significant balances due from the patient. The number one reason for bankruptcy in the United States is medical bills.

And then there is the growing number of patients who do not have any insurance coverage at all or for whom there is no insurance of record. These are optimistically listed as self-pay patients. When there is valid insurance coverage, the provider at least gets something. When there is no insurance coverage, all bets are off, and the practice has no leverage to collect anything. Depending on the location of the practice, self-pay may mean no pay or discounted pay. The reality is that the cost of healthcare has gotten so expensive that the bills sent to them are cruel reminders of their desperate status. It should be noted that, in this era of cell phones with caller ID, most people do not answer calls associated with unrecognized numbers.

A third subset of patients fall into a category called pre-paid, typically associated with cosmetic services. This is usually a small percentage of practice patients, but it should be a model for the management of self-pay patients across the board. The ideal scenario would be to obtain payment up front before the services are provided. However, this is an option not available to most anesthesia practices. Unfortunately, most practices simply do not have a mechanism to get even a prepayment. There have been some limited experiments by a few practices to have hospital employees ask for a pre-payment for anesthesia, but such experiments have been largely unsuccessful, except in the ambulatory environment.

Because so many charges do not get paid in full, accounts receivable management requires attention. Knowing when to continue to pursue and when to write off an unpaid balance is an aspect of practice management too few providers have come to understand and appreciate. It is no longer enough to just know your performance metrics; the key is to know what is changing and why.

Managing the Cost of Anesthesia Services

Determining a reasonable and appropriate cost for the provision of anesthesia services is a multi-factorial exercise with numerous variables. What makes the calculation especially challenging are the diverse variables: the size and configuration of the team and how it may need to be assessed and modified based on provider defection. Dynamic market factors make it especially difficult to structure a plan that will continue to meet the expectations of the customer today and into the future. In fact, more often than not, the real challenge is trying to meet customer expectations today, much less tomorrow. While many anesthesia practices used to present very stable organizations with loyal and committed members, such practices are now the exception rather than the rule. Never have so many practices decided to either merge or sell out in order to avoid the challenges of staying competitive and profitable. The days of the independent private anesthesia practice serving one facility, or a small collection of facilities, are waning.

The biggest single cost for anesthesia is the cost of providers, physician anesthesiologists, CRNAs and physician assistants (PAs). Unlike other specialties where physicians typically have extensive office and overhead expenses, the overhead burden for anesthesia practices rarely exceeds 10 percent. What this means is that there needs to be enough revenue generated from collections to cover the cost of the salaries and benefits of the providers plus any overhead costs such as billing fees, accounting charges and legal expenses. Because provider salaries are so high, a minor miscalculation with regard to the number of providers needed can prove disastrous.

There is no greater challenge today than knowing what is a fair and reasonable compensation package for a physician anesthesiologist, a CRNA or a PA. There are a number of national survey organizations that provide market data, but none is without its shortcomings or flaws. The fundamental problem is that most surveys show W2 salary data. Because benefits packages vary considerably it is never clear how to compare and evaluate different packages. It is also true that no two anesthesia providers work the same or have an equally challenging or demanding schedule. When trying to assess the competitiveness of its CRNA package, the managers soon noticed that each of the practices they were trying to compare their package to had different call burdens and very different types of cases. Diverse market factors can have a significant impact. It is not always just the value of a compensation package that determines whether a given provider will decide to join a particular practice. It would be nice if determining the appropriate compensation package was as clear-cut as determining the profitability of a business, but it is not, and there is always a certain amount of wishful thinking.

A typical benchmark for anesthesia provider compensation is the MGMA survey. Sullivan Cotter also provides benchmark data. Many consultants prefer the MGMA data, but both surveys have their limitations. They are only conducted annually, and the sample sizes are limited. Typically, MGMA data comes from private anesthesia practices while Sullivan Cotter data comes from hospitals. Ideally, one should always use reference data from a variety of sources, but this is not always reasonable given unique practice circumstances. Also, the real point is if a practice cannot attract providers with compensation based on national survey data, then the survey data is basically useless.

The variety of anesthesia staffing options available to individual anesthesia practices is another unique challenge, especially given the fact that determining the optimum ratio of physicians to CRNAs involves a careful analysis of how each category of provider is actually used by the practice. Many assume that, since physician compensation is higher than CRNA compensation, they might assume that using more CRNAs will save money; but this is definitely not the case unless CRNAs are going to practice independently without any physician medical direction. The fact is that CRNA compensation has been rising, a fact that greatly changes the relative cost advantage. It might seem obvious that having one physician medically direct four CRNAs (each managing a busy operating room in a surgi-center with a favorable payer mix) is less expensive and more profitable than having four physicians provide the same services. This is an extreme example, however, and a detailed assessment of staffing options by surgical venue can reveal a variety of profitability levels. Determining a staffing model is inevitably a function of three factors: how staffing has been historically provided, how easy it is to change staffing ratios and current compensation expectations for each category of provider. It is quite common to hear hospital administrators suggest that the practice needs to leverage its physicians with more CRNAs, but this is often not the most cost-effective option.

Anesthesia compensation models can be another confounding factor in determining the cost of the anesthesia team. Many physicians in physician-only practices in the western United States believe that it is possible to incentivize providers to be more productive. For some physicians, the mode of compensation may also be a form of incentive if there is sufficient flexibility to generate more income by being more productive. A well-known MGMA speaker once explained that, if you have seen one anesthesia compensation plan, you have seen one anesthesia compensation plan. Many practices will go to great lengths to provide unique incentives for their members.

There is no question about it: we are seeing increasing numbers of provider defections among anesthesia practices. One of our client practices recently shared that it had experienced more than a dozen years with only minimal providers leaving only to be overwhelmed by providers leaving in the past year. They are not alone. If a single provider retires or leaves the practice, it is generally not unexpected or disruptive. But when multiple providers leave in a short period of time, it can be very disruptive on a number of levels. There is always the question of why they are leaving and what it says about the level of confidence providers have in the future of the practice. Stressful hospital contract negotiations can have a particularly disruptive impact, especially when there is concern about the potential outcome of contract negotiations. The worst possible scenario is when members of a group practice start to see the defections as a precursor of things to come. The real problem is that it is typically the most qualified providers who leave first, because they have the best options. There is nothing worse than the death spiral inspired by provider defections, but it is all too common a phenomenon.

There is clearly a manpower shortage for both anesthesiologists and CRNAs today. Provider training programs are simply not keeping up with the increasing number of anesthetizing locations that need to be covered. The result is a buyer’s market for anesthesia providers. Any provider unhappy with his or her work situation can easily find other options. This moving around has created a whole new set of recruiting challenges for many anesthesia practices.

Where does all this leave us now? For many of today’s anesthesia practices, the greatest challenge is to recruit and retain enough qualified providers to meet the service expectations of the various clients. This is proving to be a challenge that requires an entirely new set of skills and resources. It used to be that, whatever level of coverage was requested, anesthesia practices would attempt to deliver, but the time has come where anesthesia practices must focus more on resetting customer expectations. Every service has a cost, and this is what hospital administrators must come to understand and appreciate.

Negotiating an Anesthesia Subsidy

The traditional anesthesia practice model was based on a private group contracting with a facility for the exclusive right to provide anesthesia services. There was even a time when fee for service revenue from professional services provided would generate sufficient collections to cover the cost of providing the service. Those were the good old days before service expectations began to outstrip revenue potential. Today’s practices are having to develop an entirely new practice model based on today’s realities. Hospital subsidy revenue is ever more important to practice budgets. While many practices chose to outsource their billing to maximize collections, they are now having to hire outside consultants to negotiate reasonable contracts with adequate subsidies. This, however, means that anesthesia groups are having to deal with the flipside of the coin. The more hospitals have to pay for anesthesia services, the more they want accountability and collaboration. The key to the future of today’s practices is partnership with its customers. As a quintessential service organization, each anesthesia practice must focus on a value proposition that not only enhances its relationship with its facilities, but which enhances their value in the competitive healthcare market.

There was a time when private anesthesia practices were reluctant to open their books to administration. Transparency is now an essential prerequisite for a meaningful negotiation. The only way to convince administration that you need financial support is to show exactly why you need support. Financial disclosure involves a complete review of assumptions. What are the coverage and call requirements, and how many providers are needed? What is the status of the current team? How many providers have recently left; how many are considering leaving; and how many will it take to meet the specific coverage and call expectations of the facility? Every practice must be able to justify its assumptions with regard to staffing and manpower. As a practice makes its case for continuing the relationship, the administration will inevitably push back. Is the practice well managed? Are there substandard providers? Can the practice clearly demonstrate it is the best anesthesia solution for the facility?

Once the lawyers get involved, agreements evolve from simple letters of intent to complex documents with lots of legalese and fine print. If you compare today’s anesthesia service agreements to those of 20 years ago, it becomes obvious how many layers of government regulation and legal precautions have been added in. Among the most interesting and often challenging aspects of today’s agreements are the performance metrics. Somehow, anesthesia providers have become saddled with the efficient and effective management of the operating rooms as measured in such things as first case start times, average turnover times and case cancelations for ambulatory facilities. The introduction of automated anesthesia records provides considerably more data that is easier to obtain, but it also raises expectations with regard to what is available. Yes, it is true that anesthesia practices have more and better data about what actually happens in the operating room and delivery suite, but managing the database and mining it effectively opens a whole new world of opportunity for most practices that they are not prepared for. It used to be that documenting the care provided was the least of a provider’s concerns, and yet many now complain that the documentation requirements of anesthesia are more challenging than providing the care. It is almost like playing a game where no one really knows the rules or what it takes to win.

Virtually every contract renegotiation today involves a detailed financial pro forma. In theory, these should not be so complicated. The basic idea is to project the cost of the services requested and the revenue potential for the billable services rendered and show the variance, which is what the facility is being asked to pay. In reality, there is nothing simple about these pro formas, and most practices recognize the need to bring in consultants to guide them through the process. Not only are there many assumptions that have to be tested, especially with regard to the revenue potential of the practice, but the pro forma actually needs to reflect the dynamic nature of the market. Failure to factor in the major risk factors can result in disaster. As the old saying goes, anyone can get the numbers right today, but will they be right tomorrow?

Anesthesia practices tended to be haunted by these three-letter acronyms: RFP and FMV. The first, the request for proposal, is the facility’s attempt to validate the group’s practice model against the market. Their fair market valuation may also be an attempt to have an independent third party confirm a reasonable pro forma. It is not always clear at the onset if the purpose of the exercise is to confirm that the current practice is the best solution or whether it should be replaced. These are just a couple examples of today’s practice management vocabulary that providers must master in order to remain current and viable.

And so, at the end of the day, what really makes a difference? It is all about the relationship between the practice and its customers. If the relationship is strong and if there is respect and trust on the part of administration, there is a good chance that the relationship will continue. The administration must have confidence that the relationship represents an alignment of incentives and holds the best prospect for a win-win scenario. We used to hear from clients that they only met with administration to renegotiate the contract and therein lay the challenge for the practice: they were little more than a line item in the hospital budget. The name of the game today is partnership. Administration must believe that yours is the best option, that you provide the best service and that you can help them navigate the future.

Final Thoughts

Strategic planning consultants love to remind their clients that the beliefs and strategies that got the practice to where it is today will most likely not get it to where it needs to be tomorrow. The best managers are aggressive students of the business. There is a tool consultants often use called a SWOT analysis, standing for strength, weaknesses, opportunities and threats. It is an invaluable tool that practices would be well advised to apply and monitor continuously.

Jody Locke, MA serves as Vice President of Anesthesia and Pain Practice Management Services for Anesthesia Business Consultants, LLC. Mr. Locke is 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 is a key executive contact for groups that enter into contracts with ABC. Mr. Locke can be reached at Jody.Locke@ AnesthesiaLLC.com.