RVUs—the common denominator in financial management
In today's economy, tight financial management is more important than ever. Relative Value Units can be used as a powerful tool for financial management in medical practices.
In today's economy, tight financial management is more important than ever. Relative Value Units (RVUs) are no longer just part of the Medicare payment formula but can be used as a powerful tool for financial management in medical practices. By doing a simple cost analysis based on RVUs, practices can establish productivity-based compensation, evaluate and renegotiate payer contracts, evaluate procedures and services, and set practice fees.
To get started, have your most recent year-end expense statement handy. The one from your accountant or from your accounting software will do. Then, using almost any practice management system, for that same time period, run a report of services provided by CPT code. If possible, export it into Excel so you can do some simple modeling.
With these two reports, it is relatively easy to calculate the cost per RVU in your practice. If you multiply the frequency of each service your practice provided (or at least most of the services you provided) by the RVU, you can find out the total RVUs your practice provided. By dividing that total by your total practice expenses (with and without physician expenses), you can determine how much it costs your practice to provide one RVU of service. Apply that to each CPT code to estimate how much it costs to provide each service.
While you could spend a lot more time performing more detailed cost accounting, this is a relatively simple proxy to use for many financial analyses in your practice. Now that you have this information, here are some examples of what you can do with it:
- Set fees. Many insurance companies base their fees on RVUs now, so it follows that practices may want to use RVUs to set fees.
- Physician compensation. Productivity-based income distribution formulas can be tricky using charges or payments because there is too much variation by payer and can depend on how well the billing staff is doing their job or how well the physicians are coding. Using RVUs can level the playing field somewhat since RVUs are (in theory anyway) based on time, expense and risk industry wide.
- Evaluate payers/renegotiate contracts. When you compare your cost per CPT with the reimbursement for each payer, you may find that one payer is simply not covering your cost, either in total or for a particular service. You can use this information to make informed decisions about your insurance contracts.
- Analyze services. Because this method in effect allocates all practice expenses regardless of type to an RVU level, you might use this technique to analyze a service or suite of services that you provide. In that case, this method should be used more as a screening device than the bottom line for a keep or cut decision.
Effective decisions need to be based on information—lots of information. RVU costing is just one tool to help you analyze your practice data in a way that can help your practice survive financially.