Using Performance-Based Part A Hospital Path Contracts

Creating a Win-Win Outcome for Pathologists and the Hospital

CEO Summary: One of pathology’s greatest challenges is adequate reimbursement for hospital Part A Pathology Services. Over the past two decades, ever more hospitals took steps to reduce or eliminate payment to pathologists for these services. Now several innovative pathology groups are using a performance-based strategy to negotiate win-win Part A Pathology Service contracts with their hospitals and health systems. Properly structured, these Part A agreements do increase reimbursement to pathologists.

ONE OF THE PATHOLOGY PROFESSION’S most pernicious unresolved issues is inadequate payment by hospitals and health systems for Part A Pathology Professional Services.

“Almost every pathologist knows what it feels like to have the administrators of the hospital or the health system sit down at Part A contract renewal time and insist that the hospital should pay less—or even nothing—for Part A pathology services!” declared Robert H. Tessier, Senior Reimbursement Consultant for HBP Financial Services Group, Ltd., in Woodbridge, Connecticut.

Tessier believes that the time has come for pathologists to turn the tables on hospital administrators during pathology Part A contract renewal negotiations. “There’s a cluster of pathology groups that made a commitment to reverse this situation. These pathologists decided that they could deal from a position of strength.

“In recent years, these pathology groups have established a value proposition that was recognized by the hospital administrators and resulted in equitable levels of reimbursement for Part A Pathology Professional Services,” said Tessier. “We have developed a strategy for pathology Part A contract renewals which is proving consistently successful. But this strategy is not for the faint-of-heart. It requires a determination and diligence. Anything less and the outcome tends to be that the hospital prevails in its position that the pathologists should be paid less for Part A services when the contract renews.”

Tessier was sharing these experiences during a recent audio conference produced by THE DARK REPORT and titled: “Negotiating Pathology Part A Reimbursement with Hospitals: Why the Performance-Based Approach Opens the Door to Increased Value.”

What Tessier and several innovative pathology groups in New England have done is to create a pathology Part A strategy anchored around a performance-based approach. One contract renewal cycle at a time, these collaborators are demonstrating that hospital administrators will adequately reimburse for Part A Pathology Professional ment is an increase in value that the hospital can measure.

“Performance-based pathology Part A contracts are the future,” stated Tessier. “Hospital administrators understand the concept of paying more for added value. For example, they see payers offering them pay-for-performance incentives, generally linked to objectively-measured improvements in patient outcomes.

“What we’ve done with our performance-based strategy is go to hospital administrators and lay out the compelling reasons why it is in their best interest to pay more for Part A clinical pathology services—in return for the pathologists achieving mutually- agreed targets that are valuable to the hospital,” offered Tessier.

For pathologists interested in turning the tables on hospital administrators during pathology Part A contract renewal talks, Tessier recommends a three-step process. “Step one is to collect relevant data. Step two is to educate the administrators and align goals. Step three is to work with the hospital or health system finance department to analyze and quantify the results.

Performance-Based Services

“This is a simple business strategy, but it requires the right level of detail to succeed,” he said. “To make performance-based pathology Part A reimbursement work for both parties, hospital-based pathologists need data in order to tell a persuasive story about the value they add to the hospital.

“Upon demonstrating this value, they can work with hospital administrators to set performance-based goals for the coming year and years,” continued Tessier. “Then, as these goals are achieved, increased pathology Part A reimbursement results—and the hospital administrators are willing to pay these additional sums to pathologists in exchange for that additional value.

“Most pathologists have a great story to tell about the work they do,” he stated. “Performance-based negotiations create the opportunity for pathologists to formally discuss results with administration, on a basis that provides a reward for those who can demonstrate accomplishments.

“This requires developing consistent goals and objectives between the hospital and the pathologists, along with formulas that reward specific benchmarks,” stated Tessier. “It also requires developing a methodology that evolves as circumstances change—even as the methodology ensures that both the hospital and the pathologists will mutually benefit from improved results.

A Need to Collect Data

“To make this work, pathologists need to look at data the same way that the hospital finance department looks at data,” he explained. “This includes such elements as cost-to-charge ratios, the direct cost and indirect cost allocation, and the difference between revenue (or charges) and income (or cash).

“Pathologists also need to carefully review all existing third-party contracts for anatomic pathology (AP) services and clinical pathology (CP) services and note the current actual payments under these contracts,” he added. “It is important to reconcile billing for AP technical services versus the AP professional services.

“Another highly valuable action item is to conduct a market study for the amounts of Part A compensation that is paid by hospitals in the surrounding region,” Tessier advised. “This informa- tion should be gathered from two sources.

“First, contact pathologists at local hospitals and get information about their pathology Part A contracts,” he said. “Make sure to identify the payment amount and any specific services and targets covered by these Part A contracts. Often pathology groups will provide this information in exchange for receiving a copy of your completed Part A reimbursement survey for the region.

“Second, mine the public reports which have information about pathology Part A payments made by hospitals in the same state,” Tessier noted. “Use the Freedom of Information Act (FOIA) and request Part A data that hospitals have filed in their Medicare Cost Report, Schedule A-8-2.

What Other Hospitals Pay

“In particular, capture the number of full-time pathologists and the number of PAs [pathology assistants] on staff who are employed by the hospital or by the pathologists; the number and type of personnel being supervised; and the number of lab tests by lab section,” he recommended. “Also capture the number of direct patient care accessions for surgical, clinical, non-gynecology, and gynecology-cytology.

“In addition, it’s important to collect data on the gross revenue for inpatient, outpatients, and referrals,” continued Tessier. “For autopsies, include the total paid for autopsy volume under Part A or as a separate fee per autopsy.

Develop An Hourly Rate

“Consider using the published Medicare reasonable compensation equivalent (RCE) calculation for pathology and adjust it for inflation, CME, and actual malpractice cost,” he said. “Multiply this hourly rate by the time pathologists spend on Part A pathology services.

“Present administration with detailed time studies, customized to each hospital, during contract negotiations,” noted Tessier. “Make sure they are accurate, based on defendable data, and well under- stood by the hospital administrators.

“In our negotiations, the RCE is a reasonable amount of money per hour which we use. (See the table, Educating Your Administration—RCE, on page 13.) These numbers provide a basis for a per-hour rate to use in determining reimbursement for Part A pathology services. This rate is likely to be in the range of $129 to $136 per hour, depending on the region,” said Tessier.

“Once the data is ready, it should be used to educate administrators about the Part A value,” he noted. “We do that for our pathology clients by preparing a detailed fact book.

“This fact book is not the annual pathology department report,” he continued. “Instead, it is a supplement that would quantify all of the pathologists’ accomplishments for the year. This report should outline any programmatic expansion that occurred and explain the specific involvement of the pathologists in each of these endeavors.

“This fact book should be the basis of a formal meeting of at least 90 minutes with the hospital administrators,” noted Tessier. “Use this time to establish the pathology group’s goals and objectives for the next hospital fiscal year, which should be the same fiscal period that finance and administration uses when making presentations to the board of directors.

“To prepare for this meeting, the pathologists should determine the goals that administration and finance aim to hit, then ask themselves, ‘What creative ideas can the pathologists present?’ Where can the pathologists be proactive? What is the best use of physician talent and department managers and staff?’’’ said Tessier.

Set Specific Financial Goals

“At a minimum, the pathology group must provide high quality and cost effective services with quality assurance provisions,” emphasized Tessier. “Then, you will want to suggest specific financial goals. These goals might include: 1) partnering with the hospital to ensure that laboratory benchmarks continue to improve; 2) that unit costs in the lab are reduced through economies of scale; 3) that best prices for equipment and supplies are negotiated; or, 4) that high patient satisfaction scores are achieved by the laboratory, as compared to national benchmarks from Press-Ganey Associates, for example.

“Another performance measure can be to ensure that the hospital has the most highly-respected laboratory in the region by surveying the medical staff routinely and then seeking to achieve the highest levels of satisfaction,” he continued. “This tasks the pathologists with the responsibility to ensure that the laboratory is a positive and highly-productive work environment. This can be measured by tracking the number of employees on the waiting list who wish to apply for job openings in the lab.

Getting Attention

“One of the best ways to get the full attention of hospital administrators is to focus on outreach for both AP and CP services,” advised Tessier. “Recognize that income from clinical laboratory testing has the greatest impact on the hospital.

“One formula I like to use to determine the financial benefit to the hospital from outreach laboratory testing is to take the net revenue from increased CP out- reach testing and subtract the direct costs of that testing,” he said. “Include a percent of this figure from increased CP outreach income into the Part A incentive plan.

“When quantifying outreach, it is highly beneficial to the success of the Part A contract negotiations that the pathology group works with the hospital’s finance staff to determine the relationship between revenue (charges) and real income for AP and CP services,” noted Tessier. “For example: AP may equal about 30% of total laboratory revenue and the referred technical component per case will be about $35 to $45. The CP component will equal less than 25% of revenue.

“These numbers are important to quantify because they will show the actual effect of adding new outreach lab testing business,” he added. “And, remember that the finance department will want the real income that can be expected—not the inflated ‘gross charges billed.’

“To expand and increase testing volume from the hospital’s laboratory out- reach program, the pathology group can offer to develop and direct the sales effort for AP and CP services,” he continued. “If there are outreach sales reps, give them training, guidance, and collateral marketing support. If there are currently no outreach sales reps, consider hiring a sales rep as an employee with a strong bonus program consistent with that of competing commercial labs.

“Finally, it’s important to demonstrate what the pathology department will do with any increased income it receives by discussing the importance of dividend reinvestment with the hospital administrators,” suggested Tessier. “Dividend reinvestment is critical because administrators and finance professionals often complain that all hospital-based physicians (including pathologists) have exclusive arrangements that earn income but they don’t give anything back to their departments or to the hospital.

“Be aware that even modest contributions are respected by both the hospital administrators and the finance professionals,” he continued. “Their support can come in the form of expertise as well as financial support.

“Consider a significant contribution to the development of improved laboratory operations,” Tessier recommended. “Ideally, this support can be a tax-exempt charitable contribution to a department fund from each of the pathologists.”

Effective Contract Strategy

Performance-based Part A Pathology Service agreements provide pathology groups in any region with an effective way to deliver added value to their parent institution. But to be successful, pathologists must do their homework to gather accurate data before commencing negotiations.

Educating Hospital Administration about the Value of Part A Pathology Services

Reasonable Compensation Equivalent (RCE) Calculation
Speciality: Pathology

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Boosting Part A Pathology Reimbursement Means Being a Visible Part of the Hospital’s Clinical Team

ONE PATHOLOGY GROUP which has benefited from the “performance-based” Part A pathology strategy is at Norwalk Hospital in Norwalk, Connecticut.

“In any contract negotiation, it is important to keep the customer in mind,” explained Saraswathi Nair, M.D., Chair, Department of Pathology & Laboratory Medicine at Norwalk Hospital. “We have several years experience with using performance-based benchmarks in our Part A Pathology Service contract with the hospital and we think this approach is win-win for both the hospital and the pathologists.

“When pathologists are in Part A contract negotiations, you will find that the negotiations can certainly break down quickly for any or all of these three reasons: 1) if your clinical colleagues in the hospital view the pathology group as being obstructionist; or, 2) the pathology group is viewed as not a part of the team; or, 3) the pathology group does not provide the kind of clinical services that the hospital expects the group to provide.

Support Of Clinical Team

“These are essential points to keep in mind,” said Nair. “If your pathology group does not have the support of the clinical team, the Part A negotiations with the hospital administrators will not be successful.

“At the same time, it is the hospital administrators (meaning the CEO and the CFO) who will be looking at the proposed contract,” she stated. “That is why, for the particular purpose of these negotiations, I define the customer to include the hospital and the clinical team, in addition to the patient. After all, the pathologist serves all of these customers.

“In addition, it should be emphasized that the pathologist needs to be a highly visible member of the hospital team,” she said. “When clinical integration takes place and the pathologists are seen as a contributing part of the hospital team, then the administration will recognize the pathology group as a department that is considered a full partner in the hospital’s growth opportunities. That is a key to a successful Part A contract.

“Next, I can’t stress enough the importance of doing all the homework necessary for the Part A contract negotiation process before the discussion begins,” added Nair. “This negotiating activity has to start with the financial officer and the financial team at your institution, for a simple reason.

“The cornerstone of your pathology group’s list of benefits and contributions are data and numbers that have been developed in concert with the hospital’s financial staff,” noted Nair. “It is their validation of the beneficial contribution to income and operational cost savings that back up your pathology group’s statements during Part A negotiations.

“These numbers are also the basis for developing the performance measures that will be used to trigger additional Part A pathology payments as the pathology group achieves these standards.”

As a result of these efforts, the pathologists at Norwalk Hospital made a number of improvements, including starting an out- reach program and hiring and paying for a dedicated outreach client service sales representative, Nair said. The sales rep earns $78,000 in salary and benefits and the hospital pays 75% of these costs.

Nair said that AP business has increased by 4% to 5% over previous levels, despite increased competition from commercial labs. Clinical lab outreach testing volume has increased 12% to 14% per year.



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