Q1: Problem 7.1 and the chapter-ending practice problem accompanying it discuss the RVU method. Read through these examples and understand (without concentrating on the math) what these examples are
TEXTBOOK CHAPTER 7
Nowicki, M. (2017). Introduction to the Financial Management of Healthcare Organizations. Health Administration Press, Chicago, Illinois.
A patient will often ask the provider to accept what insurance pays and write-off the balance (and many providers do this) with the expectation that the request will be approved as if this is an entitlement for them. These same people will take their pet to the vet, get shots, shampoo, flea treatments, nails done, and other services, and they will never take their pet home without paying in full for these services.
They may complain about the price, but they will pay it.
Every healthcare provider has worked hard to get their education, training, residencies, and internships completed. They rent or purchase space, lease or purchase equipment, and hire staff. This costs money, and they should be compensated for their services.
The same is true for facilities. A company builds a facility, equips it, hires staff, purchases supplies, purchase malpractice insurance, and money is spent on many other items. A facility needs to make money to be able to continue to provide services to the community.
There are three historic charging practices to learn about: consensus-driven charging, financial expediency-driven charging, and competition-driven charging.
Consensus-driven. Charges were set consistent with other providers in the community. No one wanted to lose patients to lower priced providers. This practice resulted in cost shifting. A new provider would have higher per unit costs due to lower volumes. They would shift costs to procedures and payers that would make up some of the difference for them.
Financial expediency-driven. With the advent of Medicare and Medicaid, charges became less relevant and costs became more important. The financial expediency-based charges were based on the needs of the provider. Medicare changing reimbursement to DRG did not change the way providers set charges, but it did provide the impetus for sophisticated cost accounting systems to be developed. See Appendix 7.1 for the example of this model.
Competition-driven. This practice began in the middle 80s and continues today. Providers set charges on what the market will bear (or what charged-based patients and their insurance would pay). Managed care has impacted this by negotiating the amounts they will pay for services, resulting in lower effective charges.
Methods of setting charges
RVU method
The Relative Value Unit (RVU) method is used in departments that have an established RVU schedule. Laboratory and Radiology are excellent examples. RVU schedules are recalculated every three to five years and rates are adjusted annually.
Hourly rate method
These charges are set by using procedures that are time based. Respiratory therapy, physical therapy, psychiatry, and surgery are common examples. Just as when you take your car in for repairs, the mechanic looks in the book to set the charge for the amount of time it takes on average to complete the repair. In medicine we have those standards as well. An appendectomy without complications should take a certain amount of time, and if a facility goes over that time, it will not receive a greater reimbursement.
Surcharge method
The surcharge method is used in departments with a known cost, and the cost is allowed with a surcharge to cover the overhead expenses and profit.
