Business Model, Game Theory & Fee Schedule

Copyright © 2009 bcc: Consulting. All rights reserved.www.hitbcc.com
David Brooks
President, bcc: Consulting
Practice to Win

David Brooks
• B.S. Honors English, United States Naval Academy (1993)
• MBA with concentration in Finance, University of Chicago, GSB (2000)
• Investment Banking (2000)
• Helped launch MercuryMD, Inc. (2001); VP, Business Development (2001 to 2003);
MercuryMD, Inc. acquired by Thomson Reuters in 2005
• Founded bcc: Consulting (2004 to Present)
• Healthcare IT strategic sales and marketing firm
• Published numerous articles and research papers, including:
• Going Mobile (2004 & 2006 Editions)
• bcc: Mobile Research Guide
• bcc: EMR Guide for Small and Midsize Practices
• Consultant to IBM’s Nationwide Healthcare Information Network (NHIN) pilot,
representing outpatient offices (2006)
• Co-founded Southwest Durham Family Medicine, PLLC (2004 to Present)
• Acting Office Manager, 3 provider primary care office
• Integrated PMS/EMR user
• Founded PracticeSync, Inc. in 2008
• Developing web-based, integrated EMR/PMS platform to deploy office
management services

10 Most Important, Yet Misunderstood
Business Concepts
3 Fee Schedule
4 Opportunity Cost
5 Marketing / Advertising
Revenue
1 Business Model
2 Game Theory
Overview
8 Revenue Cycle Management
9 Performance Reports & Metrics
Operational
Performance
6 Sunk Cost
7 Technology
Expenses
10 Business Value
Business Continuity
Exit Strategy

Business Model

Business Model
Medical care is a commodity.

Business Model
We are “price-takers”.

Business Model
S
D
Industry Demand Curve

Business Model
S
D
Industry Demand Curve
P*
Firm Demand Curve

Business Model
As “price-takers,” we are paid
by volume, not quality.
Our goods must meet a
minimum industry standard
(i.e. “standard of care”), but we
are not paid beyond that.

Business Model
MEDICARE
HEALTH INSURANCE
1-800-MEDICARE (1-800-633-4227)
AME OF BENEFICIARY
MEDICARE CLAIM NUMBER
IS ENTITLED TO
SEX
EFFECTIVE DATE
SIGN
HERE
DO NOT SEND CLAIMES FOR PAYMENT OF
MEDICARE BENEFITS TO THIS () ADDRESS
JANE DOE
000-00-0000-A
FEMALE
HOSPITAL
(PART A)
07-01-1986
MEDICAL
(PART B)
07-01-1986

Business Model
MEDICARE
HEALTH INSURANCE
1-800-MEDICARE (1-800-633-4227)
AME OF BENEFICIARY
IS ENTITLED TO
SEX
EFFECTIVE DATE
SIGN
HERE
JANE DOE
000-00-0000-A
FEMALE
HOSPITAL
(PART A)
07-01-1986
MEDICAL
(PART B)
07-01-1986
{ [ Work RVU x Work GPCI ]
+ [ Expense RVU x Expense GPCI ]
+ [ Malpractice RVU x Malpractice GPCI ] }
x Conversion Factor
= CPT reimbursement based on locale

Business Model
MEDICARE
HEALTH INSURANCE
1-800-MEDICARE (1-800-633-4227)
AME OF BENEFICIARY
IS ENTITLED TO
SEX
EFFECTIVE DATE
SIGN
HERE
JANE DOE
000-00-0000-A
FEMALE
HOSPITAL
(PART A)
07-01-1986
MEDICAL
(PART B)
07-01-1986
{ [ Work RVU x Work GPCI ]
+ [ Expense RVU x Expense GPCI ]
+ [ Malpractice RVU x Malpractice GPCI ] }
x Conversion Factor
= CPT reimbursement based on locale
2009 North Carolina CPT 99213
[ .92 + 0.694 + 0.019 ] x $36.0666 =
1.633 x $36.0666 = $58.89

Business Model
Typical Manufacturer of undifferentiated commodity
Raw
Materials
Finished Product
(Widgets)

Business Model
Medical care provider
Patients RVUs

Game Theory
“Attempts to mathematically
capture behavior in strategic
situations, in which an
individual’s success in making
choices depends on the
choices of others.”
— Wikipedia

Game Theory
Prisoner’s Dilemma

Game Theory
Prisoner’s Dilemma
• Our decisions affect, and are affected by
the decisions of others.
• Rational “players” seek to maximize their “payoff”…
In other words, we play to win.
• Inaccurate calculations of “payoff” values may skew
a player’s decision(s).

Fee Schedule
What is our
primary objective
with our business?

Fee Schedule
What is our
primary objective
with our business?
Maximize
profitability.

Fee Schedule
TC

Fee Schedule
TRTC

Fee Schedule
TRTC
TT

Fee Schedule
We are “price-takers,”
but at what price?
In general, private payers
have at least three price
points or fee schedules.

Fee Schedule
• Independent/Unaffiliated
Base fee scheduleTR0
TC
TT0

Fee Schedule
Base fee schedule
• Affiliated, yet separate
Base + 20-25%
TR0
TR1
TC
TT1
TT0

Fee Schedule
Base fee schedule
• Affiliated, yet separate
Base + 20-25%
• Financially integrated
(single tax ID)
Base + 50-60%
TR0
TR1
TR2
TCTT2
TT1
TT0

Opportunity Cost

Opportunity Cost
“The value of the next best alternative forgone
as the result of making a decision.”
— Wikipedia

Opportunity Cost
PV
Value of Future Payments (minus)
Time Value of Money, Devaluation, Risks, etc.

Opportunity Cost
NPV
Total Present Value of a time series of cash flows (minus)
All project costs expressed in Present Value

Opportunity Cost
OC
When NPV1 (versus) NPV2,
OC (equals) NPV2

Marketing / Advertising
When to advertise and
how much to spend?

Marketing / Advertising

Sunk Cost Fallacy

Role of Technology

Revenue Cycle Management
Technology is not enough

Coding
accuracy and
optimization
Encounter
Documentation
Patient
Eligibility
Patient
Collections
Claim
Timeliness
Payment
Posting
Follow-up
Keys to
Success

Coding
accuracy and
optimization
Encounter
Documentation
Patient
Eligibility
Patient
Collections
Claim
Timeliness
Payment
Posting
Follow-up
Keys to
Success
Both
Technology
Process

Performance Metrics
Do you know what is
going on?
Preferred metrics:
• Staff : Provider
• $ Collected / Encounter
• $ / RVU (revenue)
• $ / RVU (cost)
• Collections : Charges

Performance Metrics
Things to avoid:
Too sensitive to interpretation
Meaningless comparisons
Particularly misleading

Business Value
Key Assumptions:
• Maximize profitability
• Do not want to work forever
What’s going to happen
to your practice?
What’s going to happen
to you?

Business Value
Healthcare is a
cash flow business.
No goodwill or
intangible value.
Exit value of
practice is equal
to book value.

Business Value
So, what is it worth?
The Present Value of all future cash flows.
T1 T2 T3 T4 T5
PV FV FV FV FV
r
r2
r3
r4
Revenue
– Expenses
Operating Income
(EBITDA)
PV
Total

Business Value
PV = A/r
$100,000
PV Perpetuity Value
Assumes practice is at
a steady state, with
consistent cash flow.
A Annuity, or amount of
periodic payment.
r Discount rate
(or borrowing rate).

Business Value
($100K)/0.07
= $1.43M
$100,000

Business Value
($100K)/0.07
= $1.43M
vs $125,000 Asset Value
$100,000
Implications:
• Do not expect to capture
value at time of exit.
• X% of value occurs in
first 10 years.
• Retirement is paid each
& every year of practice.
• Plan transition strategy
several years in advance.

Business Value
Effect of different controllable
and/or uncontrollable variables.
Assume: Baseline revenue = $1M; Costs = $800K
FeeScheduleVariance
150%
125%
100%
Cost/Efficiency Variance
0 –10 –20
$12.3M
$8.7M
$5.1M
$11.1M
$7.6M
$4.0M
$10.0M
$6.4M
$2.9M

Questions?

Business Model, Game Theory & Fee Schedule

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