Plain and simple, a fee schedule is your facility's price list. Here's how to develop a fee schedule that covers costs, competitively prices your services, avoids alienating patients, investors and third-party payers, maximizes third-party payer reimbursements and covers future write-offs.

What goes into setting your price?
Many factors determine your base fee schedule. These include cost per case, reasonable and customary charges in your area, Medicare and third-party payer reimbursements, patient mix and patient demographics.

• Your costs. Base your fee schedule on a combination of these factors, as well as aspects that are unique to your facility. If you have a doctor who performs cutting-edge procedures and you don't have past reimbursements to develop a reasonable and customary fee, you'll need to determine what your direct, indirect and fixed costs are to perform this procedure.
• Medicare and third-party payer reimbursements. Your fee schedule obviously must charge more than Medicare allows. In some cases, Medicare reimbursement is below the cost to perform a case. You also want to charge more than the Medicare allowable because some insurance contracts could be based on whichever is lower: a percentage of billed charges or Medicare. For example, some insurance companies allow 55 percent of billed charges. If you're billing $415 (Medicare allowable) for a procedure, you'll receive only $228.25 for this procedure, probably not enough to cover your direct costs, much less your indirect and fixed costs.

Some centers choose to use the Medicare allowable and multiply by a standard percentage to develop their fee schedules. This formula is a good starting point, but it can get you into trouble. For some procedure codes, this formula will cause your procedure fee to be far above the reasonable and customary charge, thus creating a bad image for your facility. For example, if you choose a multiplier of 4.75 percent of the Medicare allowable, you could be charging $4,500 for a cataract and the reasonable and customary charge in your area only averages $3,200 for a cataract.

What's reasonable and customary?
Don't confuse reasonable and customary charges with how insurance carriers determine reasonable and customary charges (this is an article for another day).

I consider reasonable and customary charges to be the fee range of the other facilities in your area. For example, if the hospitals in your area are charging $5,000 to $7,000 for a procedure, you want your procedure charge to be within this range. Obviously, you don't want to charge $1,500, as you probably won't cover costs. On the other hand, if you were to charge $10,000, patients could perceive you as greedy.

Your fees should be in accordance with your facility's philosophy. Does your facility want to be the low-cost provider, the most competitive or the highest-priced facility in the area?

You'll know you have a well-designed fee schedule if you don't alienate anyone. You don't want your fees to be off the charts when comparing your fees to the surrounding facilities. Unfortunately, most facilities don't hand out their fee schedules, so your research may take some time and energy. Many good resources can aid in your search, including the Medical Group Management Association, the American Association of Ambulatory Surgery Centers, the Federated Ambulatory Surgery Association and some local health departments.

I suggest you determine your fee schedule first (list each procedure and its fee), research what area facilities are charging (on an individual procedure basis), then perform a fee comparison between your fee and the average area facility fee. This analysis will highlight areas you may need to modify your pricing for individual procedures. Keep in mind that your Medicare allowable may be different from the surrounding facilities (especially when surgery centers compare themselves to hospitals). Finally, and most importantly, you not only want to keep your charges reasonable for your area, but you also want to cover costs for your facility.

Determining costs per case
In order to price your services, you must know the costs required to provide each service - in other words, your total costs for each procedure. If you're just opening, determining costs per case may be difficult. However, there are ways to estimate these costs. Obtain the surgeon's preference cards from a facility where the physician operates. Review each item cost on the preference cards and obtain the unit cost of each item from your inventory system. This will give you a good idea of the estimated supply cost. In addition, you'll need to determine the equipment, instrument and room needs for each procedure to estimate your indirect costs for each procedure. And finally, you need to know your fixed costs per case (for example, building and occupancy costs, utilities, management fees, repair and maintenance, and insurance).

One way to calculate fixed costs per case is to divide your total annual fixed costs by your total annual cases. After your facility is operating, and assuming you're fully utilizing your management system, you can easily obtain an itemized breakdown of each cost per case for individual procedure performed as well as a more accurate calculation of your fixed costs per case. Make certain that you and your staff fully implement the case costing and inventory modules of your management system. You'll be able to easily access and control costs, as well as maintain a well-designed fee schedule.

To provide an example of a case costing report, here's a summary breakdown of costs per case for a T&A procedure. This report was generated directly from a facility's management system. As you can see, fixed and supply costs are significant.

• Equipment $ 0.33
• Instruments $ 0.28
• Direct labor $ 50.39
• Fixed costs $321.54
• Supply costs $281.03
• Total costs/case $653.57

Your software must be equipped with this capability. This feature will also let you easily identify any rising costs within your facility. One of the main goals of surgery centers is to maximize profits and minimize costs. The fastest way to a profitable center is to check, check, check your costs, search, search, search for a lower price and review, review, review your fee schedule.

It's common in the beginning for your supply costs to fluctuate, but after the doctors have performed cases in your facility a few times, you'll understand the supplies they use and the brands they prefer. You can then focus your efforts on finding lower costs and maximizing profits.

A work in progress
A well-designed fee schedule uses a combination of techniques to develop its charges. Fee schedules are the foundation for successful facilities. Just as a facility must change over time, so must a fee schedule. A good rule of thumb: Evaluate your fee schedule every three months the first year after opening a center and at least annually thereafter.