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Anesthesia Alert
How Long Before You Subsidize Anesthesia?
Barry Cranfill
Publish Date: January 18, 2008   |  Tags:   Anesthesia

Faced with increasing costs, shrinking reimbursement and poor payor-mix ratios, more and more anesthesia providers are asking surgical facilities to subsidize them for the requested level of anesthesia service.

If your facility has dodged this bullet and your anesthesia vendor provides the quality coverage you demand without any form of subsidization, consider yourself lucky. But for how long? Recent surveys by the American Society of Anesthesiologists and the Medical Group Management Association found that almost 80 percent of the responding anesthetists were receiving some form of facility subsidization. Nearly 40 percent of the subsidized practices reported an annual subsidy amount between $500,000 and $2 million.

As you'll see in this article, how you design and incentivize subsidization can have a huge impact on your operational efficiency.

Facility-employed non-physician providers
One of the most common arrangements is when a facility employs such members of the anesthesia service team as CRNAs or AAs and independently contracts with the physician anesthesiologists on a fee-for-service basis, individually or as a group, without directly subsidizing the physicians.

Here, the anesthesiologist group often acts protective of its revenue data while insisting that the facility provide, recruit and retain enough personnel to put a provider in each anesthetizing location. The facility foots the bill for highly compensated non-physician providers and offsets the costs with the portion of the professional services revenue that payors allocate to these practitioners.

It seems innocent enough until you realize that how anesthesia professional services are billed and collected provides a disincentive for the best use of available manpower. In the case of Medicare and Medicaid, the anesthesiologist usually tries to ensure that he bills for his services as "medical direction" of up to four CRNAs or AAs. The facility will bill for the non-physician provider's portion of the anesthetic professional service charge. Assuming all the requirements are met and documented, and there were no more than four concurrent cases under the direction of the anesthesiologist, the physician will collect 50 percent of the federal payor fee and the facility will collect 50 percent of the fee on behalf of the employed providers.

In a worst-case financial scenario, the anesthesiologist can medically direct four concurrent cases. He collects 50 percent of four cases to offset the expense of providing that service with one anesthesiologist. The facility collects 50 percent of the four cases as well, but also must offset the cost of four providers with those payments.

Billing for "medical direction" once carried a financial incentive. Before the late 90s, this service was reimbursed at 120 percent of the normal, single provider Medicare rate. But then the federal government removed that premium payment and now reimburses "medical direction" at the same 100 percent rate as a single physician or non-physician provider, which removed the economic enticement of billing separately for the staff's services and the physicians' services.

The revenue trail isn't so clear for commercial carriers. Facilities rarely have trouble negotiating their 50 percent of federal charges from the carriers, but many facilities never see their portion of that revenue from commercial carriers. Since many of these companies don't require anesthesia services to be billed with anesthesia modifiers, they may have no way of allocating the revenue to the facility.

In other cases, the carrier will only pay one provider for the entire portion, regardless of anesthesia modifiers. The anesthesiologist's group submits its bill and often receives 100 percent of the payment for the services, even though the services were provided by the facility-employed non-physician anesthetists. Facilities often have no contractual arrangement to offset this financial disparity.

So the facility gets 50 percent of the Medicare/ Medicaid lowest fee schedule payor, which may not cover the cost of the provider, and usually loses the chance to collect any portion of the higher reimbursement commercial carrier cases even though it covered most of the costs for providing those services. If you have four lucrative concurrent commercial cases, the facility may get nothing and the anesthesiologist may get 100 percent of all four cases. Obviously, some anesthesiologists will do all they can to protect that income stream.

Yet you can argue that this subsidization model actually creates an operational disincentive for anesthesiologists to get the most from the staffers. Anesthesiologists actually lose revenue when they provide the service alone, because they only get paid for 100 percent of one case instead of a percentage of several cases. So if the anesthesiologist demands more anesthetizing locations, the facility is expected to provide an additional anesthetist. But if all of the anesthesia expenses and revenue flow into a single entity, the incentive is to provide that service with the most economically efficient staffing model possible.

Bottom line: If your facility has independent anesthesiologists, but employs the CRNAs or AAs who actually do the anesthesia, you're subsidizing the anesthesia department and possibly creating a disincentive to maximally efficient staffing. It's in your best interest to be sure your facility gets full credit for all services that the employed practitioners provide by auditing the facility anesthesia case collection data of both federal and commercial payors. You may be surprised when you see what you're not collecting for your facility-employed providers.

Other forms of subsidization
Subsidization comes in many shapes and sizes. Another form of subsidization occurs when the anesthesia vendor simply asks for facility payment or co-payment for specific less profitable services or coverage. The vendor may demand a stipend for these services in isolation without letting the facility view the economics of the practice environment as a whole. When dealing with an anesthesia vendor who claims that he's providing any service at a loss, you must ensure that these losses aren't isolated issues that could be financially covered by other, more profitable services that the vendor has access to within the contracted services arrangement with your facility.

Income guarantees are another form of subsidization. These come in many forms, but the goal is for you to promise that the group will collect an agreed-upon amount for a specific level of coverage. In most income guarantee models, the anesthesia vendor provides details of the total cost of providing the requested services (with appropriate allocation for billing management and overhead costs), which is offset by a full disclosure of anesthesia service revenue from all sources. The facility covers financial shortfalls. Again, the anesthesia provider should give the facility open access to its revenue sources and expense so that you can be sure that the subsidization is warranted.

The right model for you
You need to think about anesthesia subsidization objectively and intelligently because it's becoming a reality in the market. Anesthesia providers understand that facilities often have to make operational strategic decisions, such as opening extra anesthetizing locations with an inadequate caseload, that will have a negative financial impact on the anesthesia vendors' bottom line. Quite naturally, they want protection from losses.

If you're moving into a subsidization situation, examine your anesthesia vendor's staffing and practice model to determine if you can make adjustments to cut the facility's exposure to expenses and align the economic drivers to maximize efficiency. Here are some ways to do that:

  • Work with your vendor to find any global operational issues that could be adjusted so they won't need — or at least need less — subsidization.
  • To prevent confusion in professional service fee allocation, be sure all anesthesia professional service revenue is directed into a single entity and that expenses are paid first, with the remainder covered by the facility. This removes the difficulties associated with fair fee distribution and lets the facility get the full benefit of all payment for professional anesthesia services.
  • Insist on access to all anesthesia service revenue data so you can justify the expense of subsidization. Anesthesia requests for supplementation should mandate transparency.
  • Consider and explore the option of billing for the CRNAs as "non-medically directed." This removes the problems associated with meeting the restrictive guidelines for "medical direction" reimbursement requirements and may let the facility increase the CRNA-to-anesthesiologist ratios to more than 4:1 without losing revenue. This could leave you needing fewer anesthesiologists and possibly reduce how much subsidization the anesthesia group needs. Remember to check with commercial carriers, state regulations and facility bylaws to be sure this is a viable option for your facility.
  • Ask the anesthesia vendor to provide value-added services that can add additional revenue to the equation, such as post-operative pain management peripheral nerve blocks and consultant chronic pain management services.
  • Consider negotiating a specific financial cap for anesthesia expenses for the term of the agreement with your anesthesia vendor. With all the anesthesia professional service revenue and expenses directed to the vendor, an expense cap will give vendors a reason to be economically efficient when working in your facility.

Economic realities
Unlike many other specialties, anesthesia service providers are typically subject to market vagaries over which they have little, if any, control. The typical anesthesia vendor is a facility-based practitioner with no material control over the type and number of cases, the payor mix, the required scheduling of cases or the appropriate use of operating suites. Most providers attempt to influence some of these variables in an effort to minimize costs and maximize revenue, but facilities and surgeons often demand anesthesia coverage that is financially unsustainable.