Review
FOCUS ON: Noninterpretive Skills
October 22, 2013

How Radiologists Get Paid: Resource-Based Relative Value Scale and the Revenue Cycle

Abstract

OBJECTIVE. To learn the impact of health care reform, it is important for radiologists to first understand basic administrative aspects of medicine. This article describes the processes of radiology billing, reimbursement, and the revenue cycle, which includes the importance of proper coding, the resource-based relative value scale, and accounts receivable.
CONCLUSION. An understanding of the basics of medical practice management can help radiologists effectively provide optimal patient care. This article provides an overview of one component of this topic—the current radiology reimbursement system.
Since the 1970s, it has been recognized that physicians emerged from postgraduate training programs deficient in the knowledge and skills of practice management, health care systems, and how to successfully navigate within them. This observation has been common to primary care disciplines and medical specialties, including radiology [14]. The Accreditation Council for Graduate Medical Education regarded this knowledge as a necessity and included expectations pertinent to practice management and health care systems within the six core competencies of its Outcomes Project adopted in 1999 [5]. More specific to radiology, in 1997 the Association of Program Directors in Radiology combined these disciplines under the rubric of “noninterpretive skills” and supported efforts to educate residents on these topics [6]. Presently, the Accreditation Council for Graduate Medical Education has reaffirmed its emphasis on educational outcomes within these core competencies, including topics of health care economics and practice management, with its Next Accreditation System, which was scheduled for phased implementation in July 2013 [7, 8]. Despite guidance from these authorities and the high level of interest by trainees and educators in acquiring these skills, training in practice management and health care policy remains inconsistent within U.S. diagnostic radiology residency programs [9].
Physician knowledge of how they get paid is surprisingly poor. In 2009, a survey of University of Washington diagnostic radiology residents asked, “How well do you feel you understand the resource-based relative value scale and how radiology studies are reimbursed?” Thirty-nine percent responded “not at all,” and 44% responded “minimally.” No one responded “very well” (n = 46; Medverd JR, unpublished data). From the observation that the ability to reach an organization's goals is dependent on having the finances to fulfill its purpose, colorfully summarized in the mantra “no margin—no mission” [10], provider understanding of this fundamental practice function can significantly affect system effectiveness in the delivery of care [11]. Without knowledge of the business of radiology, it is impossible to manage the forces changing our profession. The primary purpose of this article is to understand the current process of radiology billing and reimbursement. The article will conclude with a brief application of this understanding by exploring reimbursement trends changing the practice of medicine and radiology.

Fee-For-Service Reimbursement: Resource-Based Relative Value Scale

The foundation of current health care reimbursement in the United States began during World War II with the establishment of employer-based private health insurance [12]. With the passage of the Social Security Act in 1965, the government-administered Medicare and Medicaid programs were created and have subsequently served to drive U.S. health care reimbursement patterns. Administration of these programs is currently provided within the U.S. Department of Health & Human Services as the Centers for Medicare & Medicaid Services (CMS). Of the $2.6 trillion in U.S. health expenditures in 2010, the majority of funds were paid for by private health insurance (32.7%), followed by Medicare (20.2%), Medicaid (15.5%), and patient out-of-pocket expenditures (11.6%) (Fig. 1). However, because there are many different private third-party payers, Medicare commands a larger “market share” than any single private payer [13]. Historically, the private payers have followed the lead of CMS with regard to systems of reimbursement and approval of medical procedures and services for reimbursement [11].
Fig. 1 —Percentage share of 2010 $2.6 trillion U.S. national health expenditures by source (top) and detail of major entities comprising health insurance partition of national health expenditures (bottom).
At its most distilled level, most of a radiologist's salary usually comes from reimbursement of clinical work (i.e., interpreting radiologic studies and performing imaging-guided procedures). The computation of reimbursement can vary greatly according to the clinical setting and corresponding payment system applied.
Fee-for-service connotes remuneration based directly on units of work performed. Payment is dependent on the quantity of care, such as number of patients seen or examinations read. It is the most frequently used reimbursement method for professional services in the current U.S. marketplace. The case model for fee-for-service reimbursement is the resource-based relative value scale (RBRVS) used by Medicare. This scale determines how much radiologists and other medical professionals get paid on the basis of three key metrics: physician work, costs associated with maintaining a practice, and opportunity costs. Although Medicaid plans often also use (at least in part) a fee-for-service reimbursement method, it is difficult to present Medicaid as a model for a summary discussion because the federal government and the states jointly fund Medicaid. As a result, each state is afforded considerably more latitude in how the plans are implemented. The states can set their own reimbursements rates and policies as long as they remain within federal requirement levels. Medicare is funded and administered federally and, even though some coverage decisions are made at a regional level, is essentially uniform nationwide. Thus, examination of the Medicare case model for fee-for-service reimbursement is the most straightforward for the purposes of this introductory educational discussion.
The concept and design of the RBRVS system was proposed in the 1970s and further developed during the 1980s by a team led by William Hsiao and Peter Braun at the Harvard School of Public Health [1416]. This system was implemented with modifications by Medicare and Medicaid in 1992. Before this, payment was based on usual (average amount a physician would charge for a service), customary (average amount charged by a physician in the same specialty and location), and reasonable (maximum amount an insurer will pay for a procedure) charges, of which provider payment was the lowest of the three. Criticism of this former method included the observation that classic supply-and-demand market forces for the efficient establishment of prices do not typically hold true for health care in the United States. Market theory requires unhindered information availability and assumes consumer behavior to be predicated on the self-interested pursuit of minimizing price and maximizing value for the goods and services they require. The highly technical basis and complexity of medicine produces an asymmetry of understanding within the marketplace (i.e., more information in the hands of providers than patients). The widespread presence of employer-based health insurance serves to insulate patients from prices (i.e., fees not personally paid for have less effect on consumer behavior). It was argued that the resulting market inefficiencies contributed to the inflationary nature of this old system. The RBRVS system sought to quantify the input costs of physician services [1416]. This new nationwide system used Current Procedural Terminology (CPT) codes linked to relative value units (RVUs) to create a unified system of reimbursement. The system allows comparison of services between specialties and created a metric to compare physician productivity [14].
The RBRVS reimbursement system in use by CMS enables health care stakeholders to reliably and accurately predict reimbursement in a transparent fashion. It is predicated on providing appropriate payment for properly documented services that meet standards of medical necessity. These standards are based on patient health requirements and medical presentations and are established on a national basis for some services (national coverage determinations) and by local Medicare carriers for other services (local coverage determinations). Although it must be emphasized that the Medicare coverage determination and reimbursement processes are distinct, they complement each other through a system structure dependent on the creation and maintenance of disease and procedural definitions. The government and professional societies maintain balance and relevance of these definitions and the RBRVS system values. These system attributes will be discussed further in the following sections.

International Classification of Diseases

Patient presentations and diagnoses (e.g., chest pain, pneumonia, or congestive heart failure) translate into International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) diagnostic codes. This code set is published by the World Health Organization and is maintained and revised by the National Center for Health Statistics [17]. All U.S. government and most private insurance payers in the United States require ICD-9-CM codes when submitting medical claims for reimbursement. The codes define the medical situation and convey necessity for subsequent medical services performed. ICD-9-CM codes have between three and five digits and are to be used at their highest number of digits available. A three-digit code can be used only if there is no further specification. Where fourth or fifth digit subdivisions are provided, they must be assigned. A code is invalid if it has not been coded to the full number of digits for that code. For example, acute myocardial infarction, code 410, has fourth digits that describe the location of the infarction (e.g., 410.2, of inferolateral wall), and fifth digits that identify the episode of care. It would be incorrect to report a code in category 410 without a fourth and fifth digit [18].
ICD-9-CM has about 17,000 codes. Although the use of these codes has been instrumental in standardizing the classification of disease data internationally, in practice, ICD-9-CM has been found to be limiting in its ability to add new codes and procedures to enable description of modern health presentations with the depth of detail desired. Therefore, a mandatory transition to 10th revision code set, ICD-10, will occur on October 1, 2014. ICD-10 codes have between three and seven alpha or numeric digits and contains over 155,000 codes, includes new diagnoses, and allows increased detail in the assignment of patient presentations [19]. Given the size of these code sets, it is important that physician practices have billers and coders who are attuned to this complexity and change because inaccurate coding can lead to billing delay or denial [11].

CPT

CPT codes are used nationwide to define what was done for patients by health care providers. The code set is maintained by the American Medical Association (AMA) and describes medical, surgical, and diagnostic services performed. New editions are updated annually on the basis of revisions from a 17-member CPT Editorial Panel. The CPT Editorial Panel is composed of 11 physicians nominated by the national medical specialty societies. In addition, two seats are reserved for members of the CPT Health Care Professionals Advisory Committee, and one seat each is nominated by the Blue Cross and Blue Shield Association, America's Health Insurance Plans, the American Hospital Association, and CMS [20]. This panel is supported by a yet larger CPT Advisory Committee composed primarily of physicians nominated by the national medical specialty societies represented in the AMA House of Delegates. Radiology has a history of active participation and advocacy for our specialty and all of medicine within the CPT Editorial Panel and Advisory Committee. For example, North Carolina radiologist William Thorwarth served two terms as Chairman of the CPT Editorial Panel between 2007 and 2011. Pennsylvania radiologist Richard Duszak, Jr. is a member of the CPT Editorial Panel at the time of this writing.
There are three main categories of CPT codes: I, II, and III. Codes in category I are, in general, services that are consistently performed, are in widespread use, are backed by peer-review literature, and are approved by the U.S. Food and Drug Administration. Examples of category I codes include x-ray of the complete spine (CPT 72010), lumbosacral spine two or three views (CPT 72100), and CT chest with contrast (CPT 71260). Category II codes are those used to help performance measurement and data collection associated with outcomes or compliance. Category II codes always end with the letter “F.” These codes are not mandatory for billing or reimbursement purposes. As such, expenditure of coding resources on this voluntary code set represents a potentially avoidable cost. Typically, a practice or institution will deliberately report on only a limited selection of category II codes. An example of a category II CPT code is 3111F: “CT or MR brain in hospital within 24 hours of arrival, or performed in an outpatient center, to confirm initial diagnosis of stroke, TIA or intracranial hemorrhage.” CPT codes in category III are generally newer services, technology, or procedures that do not have Food and Drug Administration approval and do not have RVUs associated with them. These codes always conclude with the letter “T.” Many payers consider these services as investigational or experimental and will not cover reimbursement for the codes. An example of a category III code is CPT 0159T, computer-aided detection billed in conjunction with a breast MRI (category I CPT 77059). Codes in category III may eventually be assigned a category I code [14, 2123].
Coding accuracy is very important because there may be a risk of fraud or inadequate reimbursement for improper coding [24]. In addition, there must be proper documentation in the medical record to support the CPT codes being submitted [21, 25, 26]. For radiology, this typically represents the radiologic report. For example, if the CPT code was submitted for three views of the ankle (CPT 73610), the radiologic report must establish medical necessity by citing appropriate indications for the examination and must document that three views of the ankle were reviewed. In the case of a CPT code submitted for an MRI of the neck without and with contrast agent (CPT 70543), the radiologic report must not only establish medical necessity with proper indications (e.g., “right neck mass and pain”) but also document both which technical acquisition parameters were used (i.e., MRI sequences used) and that contrast agent was administered (both type and volume of contrast agent). Healthcare Common Procedural Coding System (HCPCS) codes would be submitted along with the CPT code. HCPCS codes are necessary to categorize the many related nonprocedural aspects of patient service episodes, such as the contrast agent type and volume and related supplies. HCPCS codes will be revisited later in this article.
Both the ICD-9-CM and CPT code sets are used to classify documented patient care services to submit accurate claims for eventual reimbursement through the RBRVS system. Although one may observe that Medicare and some private payers provide tables matching CPT codes with ICD-9-CM codes deemed appropriate to justify reimbursement for those procedures, it must be emphasized that coding for each should be independent of the other to avoid a possible charge of fraud or abuse [10, 11, 14, 25]. Abuse implies incorrect billing practices, even if unintentional (e.g., honest error). Fraud connotes intentional or systematic incorrect billing practices for the purposes of inflating reimbursement [27]. Take note that the two terms can overlap—that is, long-term systematic incorrect billing can potentially be interpreted as fraud even if, in truth, the errors may represent honest ignorance on the part of the biller. The U.S. government has identified fraudulent billing within the medical programs it administers as a significant source of waste and has placed a high priority on identifying and prosecuting health care fraud [28]. Radiologists and organizations need to be aware of the rules and requirements of the coding systems governing the establishment of medical necessity and reimbursement to assist their billing professionals to maintain compliant claims practices and maximize justifiable reimbursement.

RBRVS Payment System

The RBRVS payment system assigns a dimensionless value, the RVU, to all approved services rendered to patients. From this value assignment, a reimbursement amount can be calculated by an established formula, the elements of which are updated annually by CMS and Congress. The RBRVS system divides the RVU assignment into two major components: technical and professional (Fig. 2).
Fig. 2 —Resource-based relative value scale (RBRVS) payment system. System is divided into two components: technical (facility payment) and professional (physician payment). Professional component is further divided into physician work, practice expense, and malpractice expense.
The technical component covers costs attributed to the facility where care is provided, the equipment, and technical staff. For radiology, the magnitude of this component can vary depending on whether the study is “low-tech”, such as a conventional radiograph, or “high-tech,” such as an MRI. The time and resource investment required to enable MRI services are greater than those needed to provide conventional radiographs. This is reflected in the magnitude of the RVU value assigned [14].
The professional component is the payment directly received by physicians to pay for health care encounters and resources. This component is further divided into three subdivisions: physician work, practice expense, and malpractice expense, each of which has its own RVU assigned [14]. Physician work includes professional costs related to time, training, technical skill, and stress. Practice expense includes operational expenditures, such as rent, utilities, labor, and expenses associated with billing and collections. The AMA Practice Expense Advisory Committee helps determine the practice and malpractice expenses a physician incurs when performing a procedure [11]. Each major medical specialty has a seat on the Practice Expense Advisory Committee [29].
Depending on the circumstances of the setting in which an imaging examination is performed (e.g., hospital or independent imaging center), who actually owns the imaging equipment used, and the specifics of contractual relationships with interpreting radiologists (if any), it is possible for patients to receive two separate bills for one episode of care—one from the owner of the imaging equipment and one from the radiologist for performance of professional service (the interpretation).
An example where this could occur involves the case of an MRI performed at an independent diagnostic testing facility (commonly known as an outpatient imaging center) owned by an entity that is separate from the radiology group that provides the interpretation and where the radiology group has not assigned its professional billing rights to the facility owner in return for a negotiated sum. In such a scenario, the owner of the imaging center would bill the technical component, and the radiologist group interpreting the study would bill the professional component. If, in fact, the radiologist or group interpreting the study (professional component) is also the owner of the imaging center (technical component), then the bill would be submitted as a global claim, with the technical and professional components combined [21]. In practice, regulatory and contractual complexities make assignment of blanket statements regarding medical imaging billing very difficult.
To maintain relevance and accuracy, periodic updates to the relative values assigned to physician work are recommended to CMS from the AMA Specialty Society Relative Value Scale Update Committee, widely referred to as the RUC (pronounced “ruck”). This multispecialty committee is composed of 31 members, 21 of whom are appointed by national medical specialty societies that represent a variety of medical specialties and subspecialties [30]. Radiology holds a permanent seat on this committee, and the American College of Radiology plays an active role and has a history of leadership within the RUC, including service as RUC members, advisors, and chairing various subcommittees and the 5-year review panel. The American College of Radiology submits recommendations to the AMA on radiology-related codes and actively collects survey data on CPT codes that may be misvalued or in need of an update for radiology to present to the RUC. This is extremely important because radiology needs representation in defending values for services performed and there is a lot of money at stake for underrepresented RVUs.
The way in which ICD-9-CM and CPT codes are used with RVUs to ensure appropriate payment through the Medicare RBRVS system is summarized in a simplified fashion in Figure 3. In essence, an appropriate classification of a patient presentation (ICD-9-CM) initiates an appropriate medical response (CPT) to earn proper medical reimbursement (RVU) for approved services.
Fig. 3 —Simplified schematic of coding and resource-based relative value scale (RBRVS) system. International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes define signs and symptoms and convey medical necessity. Current Procedural Terminology (CPT) code defines procedure. Relative value units are matched to appropriately performed and accurately claimed approved procedures for reimbursement through RBRVS system.

Calculating Payment

Specific RVUs are preassigned to the submitted CPT and HCPCS codes and are divided into technical, professional, and global components. They are multiplied by the geographic practice cost index (GPCI), which accounts for the cost of living in different locations, and finally a conversion factor, which converts the RVUs into a dollar value. Thus, Medicare payment = total GPCI-adjusted RVU × conversion factor.
The national GPCI is set at 1.0. If the cost of living in a particular area is higher than national average, then the GPCI is greater than 1 and if the cost of living is less than the national average, the GPCI is less than 1.
The conversion factor is set on an annual basis by Congress and is used to convert RVU to a dollar amount. The initial conversion factor in 1992 was set at $31.00/RVU and it is currently set at approximately $34/RVU [31].
Under the Medicare Physician Fee Schedule, the actual reimbursement dollar amount could be calculated as follows:
(1)
where RVUW is physician work, RVUPE is the practice expense and RVUMP is the malpractice expense, for which there are associated GPCIs because of differences in cost of living (GPCIW), office rent and employee wages (GPCIPE), and disparities in malpractice premiums (GPCIMP). CF is the conversion factor [25].
Of note, in fields such as radiology where there is a separate professional and technical component for each CPT code as described already in this article, this reimbursement equation is also modified to reflect this complexity with the professional component calculated through Equation 1 and the technical component calculated by simply inserting 0 for the RVUW to yield Equation 2:
(2)
If both components are combined under one billing entry, then the bill would be submitted as a global claim, with the technical and professional components combined with the equation as follows: global claim = reimbursement for professional component + reimbursement for technical component.
An example of how Medicare reimbursement is calculated for a chest radiograph versus a chest CT with contrast agent performed at an independent diagnostic testing facility operating in Seattle in 2012 is depicted in Tables 1 and 2. It is interesting to note in this example that the professional component for a CT chest with contrast agent is approximately 19% of the global claim, whereas the share of the chest radiograph professional component is nearly 50%. This fact illustrates that the higher resource demands of providing CT services (because of the expensive equipment) is accounted for in the magnitude and distribution of RVUs between the technical component and professional component for these two procedures. It is also important to know that these numbers reflect the Medicare allowable reimbursement amounts. Actual collection may be lower than this amount because Medicare reimbursement is typically paid 80% by the government and 20% by the beneficiary, but factors of patient deductible levels and possible supplementary insurance can produce variability in the beneficiary component. Reimbursement calculations can be further complicated by different patient care settings, which will be further discussed later in this article.
TABLE 1: Professional Component Reimbursement in Seattle, WA
FactorDefinition
Current Procedural Terminology code7102071260
DescriptionChest x-rayCT of thorax with dye
DateOctober 15, 2012October 15, 2012
RVU × GPCI  
 Work0.22 × 1.025 = 0.2261.24 × 1.025 = 1.271
 Practice expense0.08 × 1.144 = 0.092047 × 1.144 = 0.538
 Malpractice0.01 × 0.881 = 0.0090.07 × 0.881 = 0.062
 Total GPCI-adjusted RVUs0.226 + 0.092 + 0.009 = 0.3271.271 + 0.538 + 0.062 = 1.871
 Multiplied by CF0.327 × $34.038 = $11.131.871 × $34.038 = $63.69
Total professional fee$ 11.13$63.69

Note—The Medicare conversion factor (CF) is $34.038. Geographic practice cost index (GPCI) for work is 1.025, GPCI for practice expense is 1.144, and GPCI for malpractice expense is 0.881. RVU = relative value unit.

TABLE 2: Technical Component Reimbursement in Seattle, WA
FactorDefinition
Current Procedural Terminology code7102071260
DescriptionChest x-rayCT of thorax with dye
DateOctober 15, 2012October 15, 2012
RVU × GPCI  
 Practice expense0.59 × 1.144 = 0.6756.81 × 1.144 = 7.791
 Malpractice0.01 × 0.881 = 0.0090.01 × 0.881 = 0.009
 Total GPCI-adjusted RVUs0.675 + 0.009 = 0.6847.791 + 0.009 = 7.800
 Multiplied by CF0.684 × $34.038 = $23.287.800 × $34.038 = $265.50
Total technical fee$23.28$265.50

Note—The Medicare conversion factor (CF) is $34.038. Geographic practice cost index (GPCI) for practice expense is 1.144, and GPCI for malpractice expense is 0.881. RVU = relative value unit.

Getting Paid: The Revenue Cycle

All businesses, medical and nonmedical, need to predictably collect reimbursement for work performed. Without a reliable link between “product” and revenues collected, it is difficult to forecast and plan for the needs of a business. For medical service providers such as physicians, getting paid can be complex because the Medicare RBRVS payment system described already is just one of many payment schedules within the marketplace. The U.S. health care market comprises a complex web of service providers, suppliers, and insurers. As in any marketplace scenario, each entity has examined the business terrain from its own perspective and has made decisions. The result is a considerably heterogeneous landscape. Physicians provide some services but not others; in addition, physicians or physician groups will accept some insurance plans but not others. Similarly, each insurer or payer has its own coverage and payment policies. For example, although the usage and application of ICD-9-CM and CPT codes is nearly universal, not all professional services are approved for reimbursement by all payers. Further complexity is introduced by each payer having its own established reimbursement rate for similar services. This is compounded by the frequent practice of a single payer having different reimbursement rates for the same service depending on which provider submits the claim. A common example of this is seen in the creation of “preferred provider networks.” Physicians who contract with a payer to be a part of a preferred provider network typically agree to discounted reimbursement (often in the form of reduced patient copayments) compared with a nonaffiliated physician providing the same approved service for an enrollee of the same insurer.
Further complexity is introduced when setting of care is considered (i.e., inpatient vs outpatient and hospital vs nonhospital). To continue the example of the Medicare case model, reimbursement for professional services (i.e., professional component) related to well-established procedures (i.e., category I CPT codes) are based on the Medicare Physician Fee Schedule. They are described as either “in-facility” for services performed in an inpatient or outpatient hospital or Ambulatory Surgical Center setting (usually coded with modifier suffix “-26”) or as “in-office” if performed in a “physician office” (for radiology, often an independent diagnostic testing facility). Technical component reimbursement can also be from the Medicare Physician Fee Schedule for nonhospital outpatient care delivery settings. However, hospital-based inpatient and outpatient Medicare technical component reimbursement is subject to prospective payment systems.
Hospital inpatient technical component billing and payment under Medicare is subject to Medicare Severity Diagnosis-Related Groups (MS-DRGs or DRGs). One single DRG payment is intended to cover all hospital costs associated with treating a patient for an indicated episode of care (e.g., admission for appendectomy). All hospital episodes of care are grouped into approximately 500 DRGs on the basis of numerous factors, such as diagnosis, age, sex, discharge status, and comorbidities. The DRG categories are intended to calibrate payment with severity of illness. The rules of this payment system are provided in the CMS DRG Definitions Manual [32].
Hospital outpatient billing and payment under Medicare is subject to the Hospital Outpatient Prospective Payment System [33]. Implemented in 2000 in response to a rapid increase in Medicare expenditures for outpatient services as well as increasing copayments being made by Medicare beneficiaries in the preceding decade, this system reimburses hospitals according to median costs claims data within Ambulatory Procedure Classification groups. Procedures grouped within an Ambulatory Procedure Classification are supposed to be clinically similar in regard to resource consumption. Medicare assigns an Ambulatory Procedure Classification to a procedure on the basis of the CPT and HCPCS codes claimed. Although CPT codes categorize physician services and procedures, HCPCS codes are used to code for items such as supplies, pharmaceuticals, infusions, and other patient medical-related charges. HCPCS codes contain five digits and always begin with a letter signifying grouping. For example, the “S” codes (S9901– S9999) are for billing and reporting of patient medical-related miscellaneous charges, such as lodging, meals, record copying, sales tax, transportation, and so forth. Quarterly updates of Hospital Outpatient Prospective Payment System payment rates are published on the basis of review of Hospital Outpatient Prospective Payment System coding claims data [33, 34].
A complete discussion of coverage policies and payment policies of payers, and the related discussion of medical billing fraud, is beyond the scope of this article [27]. However, it is important to understand that the complexity of the marketplace necessitates the presence of sophisticated billing administration practices and medical billing specialists to optimize collections for health care providers. These personnel and related administrative activities substantially add to the overhead of the health care industry. It is estimated that all administrative costs, including those for billing and collections, constituted as much as 31% of U.S. health care expenditures in 1999 [35]. The potential to eliminate a substantial portion of these system costs by simplifying the medical services payment landscape has contributed to calls to transition the U.S. health care marketplace to a single (government) payer system [36]. Whatever form medical reimbursement takes on in the future, the need for physicians to understand the revenue cycle of their practice will remain. As sole proprietors or employees of a larger entity, knowledge of how work performed becomes payment collected is imperative if physicians wish to maximize their activities for the good of their practices. This process is called the revenue cycle, and it is explored further in the next section.

Revenue Cycle

Radiology is, in general, a credit-based business. Radiologists provide imaging services with the expectation of getting paid afterward [37]. To get a chance at getting paid, a bill must be generated. This task sounds deceivingly simple; however, there are many steps involved.
The revenue cycle is the financial process that a business goes through to collect money for products or services provided. For a service-based business such as radiology, it usually starts with preauthorizing the study to make sure the patient or the patient's insurer will be able to pay according to the patient presentation (i.e., the ICD-9-CM code).
Preauthorization is the process of evaluating the appropriateness and approving reimbursement for a study before the study is performed. It has been used as a strategy to control increasing utilization rates of medical imaging, particularly for “high-tech” studies such as CT, MRI, or PET. It can potentially decrease utilization substantially [38]. However, the approach does have certain inconveniences and disadvantages, a discussion of which is beyond the scope of this article. For outpatient “low-tech” studies such as radiographs, preauthorization has historically not been a requirement [39, 40].
Preauthorization usually requires the ordering physician to obtain confirmation of eligibility for reimbursement from a patient's insurer or its agent on the basis of certain appropriateness guidelines established by that entity. This can be done by the ordering physician directly with the patient's insurers, or, more recently, this has been done with third parties such as radiology benefit management companies, which do this for the insurers as a service. The radiology benefit management companies have their own appropriateness criteria and algorithms, which may be more stringent than other guidelines [39]. One study of one specific radiology benefit management company within the United States has shown control of the growth of utilization of these “high-tech” studies. Radiology benefit management companies are predominantly used by commercial insurers. CMS does not, in general, use radiology benefit management companies, but some specific Medicare programs (e.g., Medicare Advantage) and a minority of Medicaid enrollees may also be subject to this review [41]. A further intricacy that has recently come into play is what Richard Duszak, Jr. has termed “deauthorization.” When preauthorization was first implemented, it was accepted as approval for a group of similar services, or a range of CPT codes. For example, there may be a generic approval for a brain CT that could be performed with or without contrast agent or a combination of the two. Deauthorization refers to the recent trend toward more code-specific authorization; for example, if a study that was preapproved to be performed with contrast agent was changed to be performed without contrast agent because of acute renal insufficiency, the payment may be denied. It is important for radiology practices to be aware of this to ensure appropriate compensation and educate their patients [42].
Once the study is completed and the report is signed and properly coded, a bill (or claim) can be created. With the creation of a bill, an accounts receivable (AR) is initiated with the hope of collection (Fig. 4).
Fig. 4 —Revenue cycle before accounts receivable (AR). Chart shows number of steps involved before AR can be initiated. CPT = Current Procedural Terminology.

AR

AR is defined as payments yet to be received from customers for goods or services provided. If a business solely deals with cash-only purchases at the time of the transaction, AR is not needed. However, most radiology practices operate with the agreement that the patient's insurers or patient will pay for the films, scans, and procedures in the future [43].
A balance sheet is a summary of a business's financial balances at a stated point in time. This document is divided into three main categories: assets, liabilities, and owner's equity, such that assets always equal liabilities plus owner's equity. Assets are what a business owns or controls that has value; this can include cash, inventory, AR, real property, and equipment (e.g., CT or MRI scanner). Liabilities are what a business owes, such as bills not yet paid (also known as accounts payable) or loans. Owner's equity is composed of contributed capital (money owners have invested in the business) and retained earnings (accumulated profits not paid out to owners as dividends). On a balance sheet, AR is an asset because it is money that the business expects to receive within the near future. This is different from cash, because in a general sense, it is not money that the business has in hand. Because expenses cannot directly be paid with AR, it is ideal to convert AR to cash—the faster the better—because there are financial penalties for delaying this process. Financial penalties include the time value of money, opportunity costs, and predictability costs. The time value of money is the idea that money currently in hand will be of greater value in the future. For example, if you were able to obtain $1000 now versus in 5 years, you would be able to invest that money now and accrue interest and have a larger sum in 5 years. Opportunity costs are costs associated with investing versus not investing in something like a CT scanner for improved production value. Predictability costs are costs associated with failure to keep budget and meeting deadlines associated with AR. AR tends to be one of the largest assets in a practice; however, it is important to minimize AR to prevent the costs mentioned above.

Converting AR Into Cash

Once a radiologist has interpreted and signed the imaging report and the correct ICD-9-CM and CPT codes are assigned, the study is completed and a claim can be submitted. Once this claim is submitted, cash payments can be made and collected. If the expected amount is paid, then this is recorded as cash. If payment is less than expected by the insurer, then an invoice can be made to the patient (Fig. 5). It is ideal to have this process be as efficient as possible to maximize returns on efforts and to receive payment.
Fig. 5 —Revenue cycle after accounts receivable (AR). Chart shows basic algorithm of how payments can be collected.

Finances of the Revenue Cycle

The amount collected may be different than the adjusted charges, which differ from gross charges. Gross charges are the established prices that are billed to patients who are unaffiliated with the insurers or health system with which the practice contracts. Like the manufacturer's suggested retail price of a new car, rarely does a customer actually pay that much. Because of the peculiarities of our health care reimbursement system, gross charges are not typically set according to the actual costs of providing an imaging service. Instead, gross charges are usually set just above the reimbursement rate of the business's best payer. In this way, a practice will not miss out on the opportunity to collect this favorable remuneration. For transactions with other payers, adjustments are recorded to realistically value AR.
Adjustments are amounts that are never expected to be collected (e.g., contracted rates with insurance companies may require lower payment). A gross charge minus adjustments yields adjusted charges. This is the amount the practice reasonably expects to be paid. Often it will equal the sum of payer and patient contributions. An example of an adjusted charge is the contracted rate collected from the insurer in addition to the copayment collected directly from the patient. Write-offs are amounts that were expected to be collected, but the business was unsuccessful at collecting (e.g., claim denied because of a noncovered service) [44] (Fig. 6). Writeoffs of noncovered services are usually not performed unless the entity is unsuccessful at collecting the amount from the patient. To aid in minimizing write-offs, an advance beneficiary notice should be signed by the patient. An advance beneficiary notice is, in essence, informed consent for noncoverage by insurance companies that should be done before a study has been completed. This is a form signed by the patient that acknowledges that it is the patient's responsibility for payment. An advance beneficiary notice is a prerequisite for “balance billing,” or billing the patient for services that might be considered investigational or not medically necessary by Medicare or certain private insurance companies [45].
Fig. 6 —Finances of the revenue cycle.

Quantifying AR Performance

The Radiology Business Managers Association has a list of indicators that track AR to determine the efficiency of a business [46]. Selected measures include adjusted collection percentage, AR days outstanding, collection expense percentage, and AR aging percentage over 120 days.

Adjusted Collection Percentage

The adjusted collection percentage is calculated as follows: adjusted collection / adjusted charges × 100, where adjusted collection refers to payments received (minus refunds and returned checks) and adjusted charges refers to gross charges minus total adjustments. The adjusted collection percentage is a measure of money received versus anticipated payment. It tells us how effective a business is at collecting money that is available for collection [44, 47]. The adjusted collection percentage goal for a practice is greater than 95% (preferably 97–98%) [43]. Adjusted collection percentage is the key indicator for effective management of AR because it ignores amounts not expected to be collected and overpayments that are refunded [37].

AR Days Outstanding

The AR days outstanding is a measure of how fast AR is collected and is calculated as follows: AR days outstanding = total AR balance / average daily gross charges, where average daily gross charges refers to average monthly gross charges per 30 days. The lower the days charges in AR, the faster the conversion of outstanding balances into cash (i.e., cash that is available to be put to work for the business). The Radiology Business Managers Association goal for AR days outstanding is less than 60 days. This is favorable because the probability of collecting a delinquent account drops from 73% at 90 days to 50% at 180 days [48]. However, if the AR days outstanding is too low, this may mean that potentially collectable AR may be written off too soon [45].

Collection Expense Percentage

The collection expense percentage is a measure of collection productivity and is calculated as follows: collection expense percentage = collection expense / adjusted collection × 100. It is how much a business spends to make sure payment is collected. Collection costs can run between 4% and 10% depending on the clinical setting and type of billing. For example, in a 2004 Radiology Business Managers Association survey, the mean collection expense percentage was 9.7% for in-house billing for the professional component, whereas for practices using billing services that perform global billing, the mean was 5.5% [43, 44]. The reason for this range is multifactorial; however, a different patient mix, such as socioeconomic status and type of insurer, could explain, in part, the variation.

AR Aging Percentage Over 120 Days

The AR aging percentage over 120 days is an indicator of how effective a group is on following up account activities and is calculated as follows: AR aging percentage over 120 days = AR over 120 days / total AR balance × 100. In essence, the older the account, the more difficult it will become to collect. In the ideal situation, all accounts would be paid off before 120 days is reached, so the perfect aging percentage would be 0% [47]. For practices of all sizes, the mean AR aging percentage over 120 days was 18.6% for the professional component and 18.6% for global billing in 2004 [44].

Optimizing AR Collections

At each stage of the revenue cycle, there are ways to optimize collections. Before the study is performed, insurance can be verified and upfront payments such as copayments can be collected. These activities can occur at the time of scheduling of the study or at the time of patient check-in. Proper and prompt documentation is critical in ensuring appropriate reimbursement for our efforts. This includes mentioning the specific body parts imaged, the number of views for radiographs, the individual organs imaged for ultrasound, and number of acquisitions (unenhanced and contrast-enhanced) for cross-sectional imaging in order for a practice's billing professionals to accurately code for the work performed. In general, coders are instructed to take a minimalist approach in CPT coding if there is ambiguous documentation, such as coding for only one view of the chest if the report for a two-view chest does not specify that two views were actually performed and interpreted. The incomplete documentation in this example will result in a decrease in collection by approximately 25% [49].
After the study is completed and a claim is submitted, then payments should be received. Because payments from commercial payers are often based on contracted rates, it is important that these rates be carefully negotiated. In such a situation, if payment for a claim is less than expected, it is important to have an organized approach for review and dispute of claim denials. In other situations where the patient may owe a portion of the payment (e.g., a copayment), a realistic strategy for collections, such as letters, reminders, or a collection agency, needs to be used. In addition, health care providers need to define a point for themselves where it may be beneficial to write off a claim because collection costs may outweigh the claim amount.

Evolving Reimbursement Models

Fee for service (such as the RBRVS system) is the predominant reimbursement model for physician services presently used in the United States. It developed from the “cottage industry” tradition of American medicine, where, just like at the corner grocery, money is paid for a product (i.e., medical services). Criticisms of fee-for-service reimbursement center on its decoupling of outcome and quality from payment. This may lead to potential adverse system incentives to overuse medical services and misdirect services, such as administering relatively expensive “crisis care” for potentially preventable conditions. By rewarding effort rather than outcomes, adverse financial incentives have been in place for decades that may inadvertently encourage physician specialization and complex treatment at the expense of disease prevention, health maintenance, and the coordination of care [50]. Current efforts at health care reimbursement and financing reform hinge on physician and other health care provider organizations accepting risk for the outcomes of the services they provide and eventually accepting risk for the maintenance of health of their patient populations. This can be conceptualized as a risk continuum within different reimbursement models [51] (Fig. 7).
Fig. 7 —Risk continuum for providers in variety of reimbursement models. On one end of spectrum is fee for service, where payment is based on number of services provided. On other end is capitation where there is fixed payment for provider regardless of how much care patient will need. Adapted and used with permission from [51].
The capitation model is at the opposite end of the spectrum from fee for service because a fixed monetary sum per enrollee is provided to a health care provider system to cover all health care costs, regardless of the volume and complexity of services provided during the payment period. In between are examples of stepwise progression of risk assumption. Fee for service with shared savings encourages judicious utilization of medical services by promising health care providers and delivery systems their usual fee-for-service billings as well as the opportunity to receive a share of any savings below a benchmarked value during a predetermined period.
Episode-of-care (also referred to as bundled payment) models do not ask health care providers to accept risk for whether a patient gets sick or injured but do challenge them to be efficient with and stand behind the services they provide by agreeing to a single lump sum payment for a defined set of services. An example would be for a hip replacement, which would include preoperative, operative, and postoperative care and rehabilitation, as well as treatment of any postoperative complications within a defined period (e.g., 30 days). The incentive to provide optimally coordinated quality health care and to discourage unneeded services is easy to spot, but without mechanisms to ensure appropriateness, unnecessary episodes of care may still occur [52]. The comprehensive care (also known as global or total cost of care) payment model is similar to capitation in that a single risk-adjusted payment is provided for the complete range of health care services needed by a defined group of people for a fixed period. It differs from capitation by using some limits on risk exposure.
Reimbursement in these emerging models is designed to encourage the discovery of cost savings through improved resource utilization and coordination of care. This necessitates that health care providers function more effectively and efficiently to maintain profitability in a changing reimbursement environment. To date, the effect has been a trend toward consolidation and vertical integration within the health care industry, with the goal to realize economies of scale and simplify care coordination. In its usage here, vertical integration refers to the organization of multiple, typically independently controlled or functioning, components of health care delivery under a single ownership or into a closely knit affiliation. The concept can be illustrated, for example, by a hospital creating a program of comprehensive orthopedic services. In such a scenario, if the hospital owns, employs, or otherwise controls the physicians, physical therapists, home aid services, diagnostic imaging facilities, and operating facilities needed for an episode of care, then there are opportunities for care team building, communication, and coordination that may discover efficiencies over the serial delivery of multiple steps of care. These efficiencies may not have been discovered by perhaps not as well organized, independently functioning care elements. Assembly of resources in this way leads to larger, often corporate, entities that can potentially command greater negotiating clout with suppliers and payers. In addition, these larger entities may be more effective in certain administrative functions, such as compliance oversight, benefits administration, and business financing. Together, efficiencies gained as a direct result of a business entity being large are referred to as economies of scale.
It will be imperative for radiologists, as well as all physicians, to participate in defining both their role in providing value within these emerging frameworks and how their contributions will be measured and compensated. For particular specialties like radiology, a fee-for-service model of payment may persist as a dominant method of reimbursement. However, it is conceivable that a single or multiple defined compensation models may replace fee for service as the predominant reimbursement method in the future. Thus, it is imperative to understand existing systems and to prepare for a variety of potential future reimbursement scenarios [53]. Change, even if rapid, almost certainly will occur as an evolution from the present. Command of current structures and currency with alternative frameworks as they emerge will be required to guide prudent action and adaptation by radiologists. Even if RVUs are ultimately not used to determine reimbursement, such as within episode-of-care or global payment models, it is likely that this well-established and accepted measurement will persist as a measurement tool used by health care organizations to compare physician contributions across specialties.

Conclusion

Radiologists are frequently reimbursed, directly or indirectly, on a fee-for-service model based on or associated with the RBRVS system. Today's declining reimbursement environment demands that radiologists understand how they get paid and how to optimize the AR of their imaging practices. Tomorrow promises reimbursement innovations that will change radiology practice models. Knowledge of the basis of the systems in the present will facilitate the ability to understand and adapt to future challenges and to improve patient care.

Acknowledgment

We thank Margie Lawrence, business manager of our department claims office, for generously assisting us in the preparation of some of the technical aspects of this article.

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Information & Authors

Information

Published In

American Journal of Roentgenology
Pages: 947 - 958
PubMed: 24147463

History

Submitted: August 1, 2012
Accepted: December 4, 2012
First published: October 22, 2013

Keywords

  1. accounts receivable
  2. practice management
  3. radiology
  4. resource-based relative value scale
  5. revenue cycle

Authors

Affiliations

Diana L. Lam
Both authors: Department of Radiology, University of Washington, 1959 NE Pacific St, Mailbox 358280, Seattle, WA 98195.
Jonathan R. Medverd
Both authors: Department of Radiology, University of Washington, 1959 NE Pacific St, Mailbox 358280, Seattle, WA 98195.

Notes

Address correspondence to J. R. Medverd ([email protected]).

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