The following article was published by the American Association of Provider Compensation Professionals (AAPCP).

Due to the complexities of the modern healthcare environment, there is a broad range of compensation structures in provider services agreements to facilitate ease of administration while maintaining regulatory compliance. While common compensation structures such as a compensation-per-Work Relative Value Unit (wRVU) model can be effective in reimbursing providers for the value of professional services, independent physicians and physician practices are sometimes compensated based on a per-service rate for each individual unit of service they provide, rather than a rate per wRVU. To ensure arrangements utilizing this structure are commercially reasonable and consistent with fair market value (FMV), hospital administrators should understand the value drivers of the rates that can be paid for per-service fees. In this article, we will discuss potential benefits and drawbacks of the per-service fee structure, as well as explore several key considerations when setting rates and capturing appropriate expenses.

The Per-Service Fee Structure

Similar to the compensation-per-wRVU model, a per-service fee structure determines the total compensation payable to a provider based on the unit volume of services rendered. However, rather than the unit of compensated service being the wRVU, the compensation unit is tied to the volume of each CPT code rendered or a broader service category.

For example, consider a scenario in which a radiology group provides a hospital with X-ray, MRI, CT scan, and ultrasound interpretation services. Rather than receiving fixed compensation-per-wRVU based on the wRVUs associated with each interpretation, each interpretation category (X-ray, MRI, CT scan, and ultrasound in our example) would have its own unique compensation rate. 

Benefits of the Compensation Per-Service Model

  • When compared to fixed monthly compensation structures, tying compensation directly to the specific professional services rendered by the provider can reduce the risk of over or underpayment due to differences in actual and anticipated volumes.
  • The compensation-per-service model may simplify administration of the compensation arrangement when compared to the compensation-per-wRVU model, as the volume of each category may be more easily tracked rather than volume and wRVUs by CPT code.
  • Reimbursement can include provisions for variable overhead expenses incurred by the provider for each unit of services provided. To the extent that different service types have different variable overhead expenses, each fee per service type can be tailored to include custom provisions for those incremental costs.

Drawbacks of the Compensation Per-Service Model

  • The incorporation of expenses that are fixed in nature must be carefully navigated. Since fixed costs do not scale directly with the volume of units of services provided, there is a risk of over or under payment should the actual service volume vary from the forecasted volume. 
  • When compared to the compensation-per-wRVU model, the compensation-per-service model may be less precise and often assumes the CPT code volume mix within each service category will remain materially static.

Considerations When Setting a Per-Service Rate

Value of Professional Services

In general, the primary sources of value for these arrangements are the professional services rendered by the provider. While there are various ways to quantify the value of providers’ professional services, the two most common methods are described below.

Provider Time Requirements

In determining the compensation for professional services per unit of service, one consideration is the clinical provider time required to provide that unit. In general, the more provider time required to perform a certain service, the greater the value of the service rendered. As such, a reasonable method of determining the value of the professional component of compensation for a unit of service would be to assess the average time spent by the clinical provider on said unit.

Professional Reimbursement Rates

Professional reimbursement rates can also be a useful measure of the value of professional compensation on a per-service basis.  In many cases, hospital administration will have data indicating the average professional reimbursement rates realized per unit of service performed. When this data is unavailable, a good starting point for assessing reimbursement for professional services is the Medicare reimbursement for the wRVU associated with the relevant Current Procedural Terminology (CPT) codes as reported by the Center for Medicare and Medicaid Services (CMS). This professional reimbursement should be based on the applicable CPT code or bundle of CPT codes that the provider will use for each unit of service. The reimbursement may quantify professional services more accurately than a solely time-based approach, as the Medicare reimbursement also considers the specific skill, training, and acuity of the subject service.

Payer Mix Considerations

While Medicare reimbursement is a good starting point in understanding professional reimbursement for provider services, actual revenue generated for said services is unlikely to fall directly in line with Medicare reimbursement. Rather, professional reimbursement for a given service is a function of the payer mix of the subject services. While the specific payer mix of an arrangement needs to be understood to accurately determine the professional revenues generated per unit of services provided, there are a few general rules that can inform the directionality of the adjustment.

Commercial Payers

For most professional services, commercial reimbursement is typically greater than Medicare reimbursement. As commercial payers often reimburse at higher rates than Medicare, a service line payer mix primarily comprised of commercial payers will usually generate more revenue per unit than a service line comprised of fewer commercial payers. The higher revenue associated with the subject services may justify an upward adjustment in the per-service rates payable to the provider.

Medicaid/Uninsured Payers

Medicaid and uninsured payers typically reimburse at rates lower than Medicare. As Medicaid and uninsured payers reimburse at lower rates than Medicare, a service line payer mix primarily composed of Medicaid and uninsured payers will generate less revenue per unit than a service line composed of fewer Medicaid and uninsured payers. In this scenario, the relatively lower revenue associated with the subject services may require a downward adjustment in the per-service rates payable to the provider.

While payer mix does have an impact on the revenue generated for the services provided, the actual services rendered by the provider are not dependent on the payer mix and, in many scenarios, the provider has little to no control over the payer mix. These dynamics should be considered when utilizing mix data to determine the per-service compensation payable to a provider.

Market-Based Measures of Professional Compensation

Another method of quantifying the value of the professional compensation applicable to a unit of services provided is market survey data. For example, compensation-per-wRVU data for a wide array of provider specialties is readily available through healthcare compensation survey reports. This data may be applied to the average wRVUs that the provider would generate per unit of service to determine an estimate of the market professional compensation payable per unit.

As opposed to the use of actual professional reimbursement to determine professional compensation rates (which consider the actual funds available to compensate the providers), the use of market-based compensation data can provide an indication of value that reflects actual compensation rates paid in the market for similar services. However, the use of market survey data is limited by the reliability of the reported survey data and the data’s applicability to the subject services. It is important that organizations understand the survey data they are utilizing and how the specific details of an arrangement may impact the applicability of market survey data.

Provisions for Non-Professional Variable Expenses

As previously mentioned, one benefit to the per-service compensation model is the ability to include provisions for certain variable overhead expenses incurred by the provider per unit of service. There are several ways to determine the value of these variable expenses.

Actual, Non-Professional Variable Costs

One way to determine a provision for additional variable expenses is by assessing the actual incremental variable expense incurred by the provider. Should the provision for non-professional variable cost per unit be based on the actual costs incurred by the provider, the reimbursement for variable expenses is effectively a direct pass-through from the provider to the contracting entity. While this method reduces the risk of over- or underpayment for non-professional services, it is important that the contracting entity ensures the following assumptions are true: 

  1. The provider’s incremental variable expenses are necessary for the provision of the subject clinical services.
  2. The provider’s incremental expenses per unit are generally consistent with market norms.
  3. Any profit mark-up applied to the incremental variable expenses incurred does not exceed market norms.

Practice Expense Medicare Reimbursement

In the absence of actual incremental expense data, Medicare reimbursement associated with practice expense (PE) RVUs can also be useful in determining a provision for overhead associated with a unit of services provided. Specifically, reimbursement associated with the PE RVUs for the CPT code, or bundle of CPT codes, for a given service indicates reimbursement for non-professional expenses incurred, consistent with guidelines from CMS.

When utilizing PE RVU data, it is important to recognize the site of services in which the subject services are provided. CMS illustrates PE RVU data for services provided in a facility setting (e.g., hospitals, ASCs, SNFs, etc.) and a non-facility setting (e.g., outpatient clinics, urgent care centers, etc.). PE reimbursement is higher for services provided in the non-facility setting because the provider is assumed to bear the responsibility of all overhead (i.e., space, equipment, etc.) while the facility is assumed to bear these costs in the facility setting. Therefore, identifying the correct site of service is imperative for accurate application of this method.

Other Factors in Determining Per-Service Compensation Rates

Billing and Collecting Rights

Another consideration in deciding the payment rate for each service provided by a provider is who has the authority to bill and receive payment for the services provided. If the provider is unable to bill patients for any of the services provided, compensating the provider with a fully loaded rate, inclusive of provisions for professional and any technical services provided, may be appropriate.

Should the provider bill and collect for services rendered under an arrangement and retain those collections, the collections earned by the provider should offset the fully loaded rate that would otherwise be payable to the provider. For example, if the provider’s collections per unit were sufficient to cover their expenses incurred to provide the service, it may not be appropriate to provide any additional compensation to the provider. However, a payment subsidizing provider services in addition to the collections retained by the provider may be appropriate if the provider’s collections per unit are not enough to cover their expenses (e.g., if the provider has expenses of $30 per unit but can collect only $20 per unit, a payment covering this disparity may be reasonable). Because reasonable payment to providers who can bill and collect is dependent on their actual collections per unit (which varies dependent on the payer of the service), organizations should be diligent when determining rates per service in these scenarios.

In addition to the actual collections generated by the provider in the provision of the services, the cost of billing and collecting should be considered when determining a reasonable per-service compensation rate. For example, professional reimbursement from payers typically includes a provision for the costs associated with billing and collecting. However, market provider compensation data does not typically include a provision for billing and collection costs. As such, make appropriate adjustments depending on the valuation method used and the billing and collection responsibilities of the subject arrangement.

Urgency of Service

When a service is requested on an urgent basis, an increase in the compensation payable to a provider may be justified. For example, per-service compensation for services ordered emergently (e.g., STAT cases) could potentially earn more compensation than the same services that do not require an expedited turnaround time to account for the on-call availability of the provider. Typically, additional compensation based on the urgency of a service is only contemplated if the expedited turnaround time is deemed medically necessary.

Conclusion

Per-service compensation structures can be an effective way to compensate providers for services that include additional variable expenses above and beyond the providers’ professional services. However, hospital administrators must understand the value drivers behind per-service compensation rates and the risks associated with the structure to ensure arrangements are commercially reasonable and compliant with healthcare regulations.