Dissecting the Medical Practice Revenue Stream—Part 2

Four things valuators should know about medical claims and coding

In this second installment of his review of medical claims coding, Mr. Moffatt sets forth his final two examples that explain the unique circumstances of the medical practice revenue cycle that affect cash flow and how they relate to the valuation of a medical practice. Part 1 of this article was published on March 4, 2014.

The third unique factor that distinguishes the medical practice revenue cycle is:

3) Coding patterns for evaluation and management (E&M) services can be used to qualify a revenue stream

At the heart of most any doctor visit is what is called an “evaluation and management” (E&M) of the patient. In general terms, E&M codes are used by physicians to indicate that they have performed some analysis of the patient. This, in turn, will usually lead to some course of treatment, further testing, a procedure of some kind, or other recommendations of the physician to the patient that will be documented by a separately identified code.

E&M codes are classified by type, such as “new patient visit” and “established patient visit,” and are stratified into different levels of acuity. For new and established patient visits in an outpatient setting (i.e. doctor’s office), the codes would be:

• 99201 through 99205—new patient visit
• 99211 through 99215—established patient visit

In the two examples above, the numerically higher codes would indicate a higher level of severity regarding the patient’s condition and subsequently, an increased level of time, effort, or care afforded by the physician. As a result, payors will reimburse the physician at a higher rate than if the physician had selected a numerically lower code. For example, the 2014 Medicare reimbursement for the types of visits shown in the example above would be:

It is important to note that these figures can vary by market and by place of service; however, they will generally vary proportionately to what is shown above. Payors other than Medicare will similarly have this incremental increase in payment based upon the level of code selected.

The value of the type of services above can vary by as much as 720 percent based upon the level of coding selected by the physician. A physician will support the code utilized with documentation as to the condition of the patient, the observations of the physician, the next steps recommended by the physician, etc. As a measure of whether or not the coding levels used by a physician or physician group are within a normal distribution, a bell curve analysis is often used. Based upon data compiled by the Centers for Medicare and Medicaid Services (CMS), E&M code utilization can be benchmarked against national data to identify if the coding for a specific data sampling is skewed toward a certain level of acuity. Although the incentive to “up code” is a concern, it may very well be the case that a physician or practice is coding more conservatively towards the lower level codes or even coding with a bias towards the mid-level codes.

In the end, E&M coding that is skewed toward one direction or the other does not necessarily indicate under-coding or over-coding. Certain patient populations, such as areas with high levels of retirees, can demonstrate a tendency for more complex medical problems. As a result, it may be perfectly reasonable that a practice in that market demonstrates coding patterns that fall to the right (higher level codes). On the other hand, if a coding sample shows nothing but level five E&M codes, a chart audit to confirm that the documentation supports the current procedural terminology (CPT) codes that have been selected is necessary.

An analysis of E&M coding can be very helpful when valuing medical practice. In particular, a bell curve analysis and a chart audit may reveal that the revenue stream for a practice may be under or over-stated. In these cases, a valuator’s position could include, but is not limited to:

• Specific risk for the practice is higher than normal based upon the fact that the coding for the practice appears to be “aggressive”
• Historical revenue should be adjusted to reflect a “normalized” level of coding
• Projected revenue should be adjusted to reflect the coding and documentation best practices of the acquiring entity or other coding guidance

4) Payment for outpatient therapeutic and diagnostic services can be subject to physician supervision of the service

In a recent court case, U.S. ex rel. Hobbs v. MedQuest Associates, Inc, a leading diagnostic testing firm in Nashville, Tennessee, was liable under the False Claims Act (FCA) for failing to comply with Medicare’s direct physician supervision requirement at several of its independent diagnostic testing facilities. This case has shown that providers who bill Medicare for outpatient procedures or services performed without the sufficient amount of physician supervision may be subject to substantial fines under the FCA.

In order to understand the potential for such penalties, it is important to be aware and understand the Medicare Physician Supervision Rules. As outlined in the CMS Policy Manual, Medicare provides payment for outpatient therapeutic and diagnostic services that are provided incident to a physician’s service. In order to receive Medicare payment, the outpatient services must be performed under the appropriate level of physician supervision.

CMS has classified the amount of physician supervision necessary for outpatient diagnostic and therapeutic services into the following three categories:

• General: the procedure or service is furnished under the physician’s overall direction and control, but the physician’s presence is not required during the performance of the procedure (42 CFR 410.32(b)(3)(i))
  o Examples: chest x-ray (71010), x-ray exam of skull (70250), liver and spleen imaging (78230), kidney function study (78725), eye exam with photos (92250)
• Direct: the physician must be present on the same campus where the services are being furnished; for services furnished in an off-campus provider based department, he or she must be present within the off-campus provider based department; the physician must be immediately available to furnish assistance and direction throughout the performance of the procedure (42 CFR 410.32(b)(3)(ii))
  o Examples: CT head/brain w/dye (70460), MRI neck/spine w/dye (72142); CT procedure (76497), bronchial allergy tests (95056), stinger test speech (92577)
• Personal: the physician must be in attendance in the room during the performance of the service or procedure (42 CFR 410.32(b)(3)(iii))
  o Examples: artery x-rays neck (75676), x-ray fallopian tube (74742), x-ray bile stone removal (74327), vein x-ray kidney (75831), artery x-rays abdomen (75726)

In cases where it may be that the above supervision rules have not been met, a valuator may determine that additional consideration must be taken in the concluding on a value for the entity. The steps to determine if there is risk for penalties under this rule can vary depending on the facts and circumstances of the valuation. The steps taken can be as simple as comparing the supervising physician’s schedule to the time of the services provided or comparing the time required to supervise the number of tests provided to the time available to the physician. In other cases, it may be necessary to review a sampling of the testing facility’s records to verify that the supervising physician has signed off on the sampled medical charts.

If it is the case that the valuator is advised that a subject entity may be subject to the FCA penalties for submission of claims to the government for services or procedures that were not properly or adequately supervised, the valuator may adjust his or her assessment of the specific risk for the entity, adjust revenue based upon claims that may be penalized, or otherwise qualify the conclusion of value based upon the specific circumstances.

For additional information and guidance, please see the Code of Federal Regulations, specifically 42 CFR 410.32(b)(3) for more information regarding provider supervision rules and regulation requirements.

Conclusion
The four examples presented over the course of both installments of this article are just a sample of the healthcare-specific factors considered when valuing a medical practice. Medical claims and coding data contain much of the underlying detail that can aid a valuator in assessing the quality of a specific revenue stream. Valuation professionals that specialize in the healthcare industry need to have an understanding of how the medical claims process works and how medical coding can influence the value. In most cases, without consideration of whether a revenue stream is understated, overstated, or at risk for repayment, it should be considered at best difficult to conclude upon a value.
 

Jeffry M. Moffatt, CPA/ABV/CITP, CVA, is a manager of Blue & Co., LLC’s Valuation and Healthcare Group. Jeff works primarily with hospitals and health systems in the development of physician alignment strategies and employed physician group consulting. He also assists clients in data analytics and business intelligence implementation for hospitals, physician practice groups, and outpatient facilities. Jeff can be reached at jmoffatt@blueandco.com.