Medical Fee Schedule: Explained

Wednesday, April 20, 2016
David Williams from Health Business Blog has some questions about how the medical world comes up with its fee schedules. Specifically, he was relating a story regarding his wife’s recent visit to an Urgent Care Facility and the resulting charges associated with that visit. Let’s take a look at those questions and see if we can provide some answers for inquiring minds.

If something is billed for $427 but reimbursed at just $22, it seems that BI is overcharging or Blue Cross is underpaying. Or is it both?

Actually it is neither. The only set fee schedule that is relevant is the fee schedule put out by Medicare each year. This is the fee schedule from which all other fee schedules are derived.

To create a fee schedule for a medical office there are several factors to take into account:

1) The reimbursement set by Medicare via the Medicare Fee Schedule,

2) The usual and customary charge for a similar service in your geographical location,

3) The fee schedules of all other insurances of which you are contracted, and

4) How much money the facility/doctor needs to generate to stay in business.
In creating a fee schedule for a medical facility the starting point is 150% of the Medicare fee. Then this number is compared to all other reimbursements from all other in network contracts to ensure that you are billing more than they are paying (if you bill less than the contracted amount, you will be paid the amount billed. If you bill more than the contracted amount you will be paid the contracted amount.) Next, you ascertain how much your competition is charging for the same service and finally you figure out how much money is needed to keep the doors open. From all these factors a fee schedule is created.

A final piece to remember is that in medicine the worth of a practice, hospital, or urgent care is based on its Accounts Receivables. In Medicine, A/R is the charges billed, not the monies received. If charges are high, then the A/R is high. This means that conceivably the A/R amount will be coming into the business.

What happens to the poor schlub who’s out of network, or worse, lacks insurance? Is the $427 from rare patients like that –who pay 20x what Blue Cross pays– accounting for more than 100% of the center’s profits?

In terms of the out-of- network patient or the patient without insurance, their overall patient responsibility will be higher based on the higher charge. However, in today’s high premium/high deductible atmosphere few patients seek out out-of-network or cash payments. Straight out-of-network/cash patients do not financially support a medical facility, unless that facility’s business model is set up as such. In this case, the Urgent Care is set up on an Insurance Reimbursement Model.

If a medical facility so chooses, they can institute a policy where by out-of-network or cash patients pay a discounted rate, as long as the discount is given to each patient.

Is what I see on the EoB actually the economic reality behind the transaction? Or is BI or my wife’s BI practice being paid a capitated amount for her care and is this bill only meaningful for calculating our cost?

The charge listed on the EOB is the fee that the practice has determined is the equitable amount of money it should receive for the service provided. The reimbursement from the Insurance Company is the amount of money that it is willing to pay for the service rendered. Each insurance company has its own fee schedule, so the charge has to be high enough to ensure payment from each company for each service rendered (see answer question 1).

As a matter of practice most medical facilities will have a 30-40% write-off from what was paid to what was billed.

This is not a capitated amount. Capitation is a set amount of money paid lump sum to a provider for the overall care of a patient. An urgent care facility would not receive capitation payments since it caters to emergency one time only patients and does not cover a full episode of care.

What is a patient who’s interested in “transparency” and “cost effectiveness” supposed to think? Did we do the right thing by going to urgent care or not? I think it would have been a lot more useful to see a comparison between the actual urgent care visit cost and a hypothetical visit to the ER or physician office.

You are correct, the information from the EOB does not allow you to compare to any other facility. Transparency is defined as the medical facility notifying the patient of the charge for the procedure. I would not compare my price to my competitor since my goal is to get your business, nor would I give out my fee schedule to any other provider for the same reason.

There is no hypothetical visit as each medical facility would have its own charge and each facility will have its own contracted rate, thus there could never be apples to apples comparison.

I understand that on the surface the difference between the charge and the fee seem in-congruent, but you have to remember you are looking at one small piece of a very large financial picture. Another patient with the same procedure may have an insurance company that reimburses that charge at 66% and yet another patient’s insurance company reimburses at 80%. Fee schedules are created to ensure that all reimbursement possible is captured.