How to maintain a good dermatology practice income

Todd Petersen, CEO of VitalSkin Dermatology

Todd is the Chief Executive Officer of VitalSkin Dermatology, a world-class dermatology and aesthetics practice management firm., Mr. Petersen has over two decades of C-suite experience, including CEO, COO, CFO, and CHRO roles. He is a growth expert with a passion for new entrepreneurial challenges, revenue growth, improving operations, and building teams and partnerships.

MORE: Selling your practice: Grow, prepare early and assemble your team

Dermatology Practices Face Flat or Declining Reimbursement Rates
As we talk to physicians across the country, revenue pressure is consistently identified as one of the most challenging aspects of running an independent physician practice today. For many independent physician practices, revenue pressure is caused by flat or declining Medicare and health insurance company reimbursement rates. 

For those smaller independent physician practices who elected early on to forgo necessary investments to comply with Medicare’s Merit-based Incentive Payment System (MIPS), the 5% penalty for 2018 will show up in this year’s 2020 reimbursement and the 7% penalty from 2019 will show up in next year’s 2021 reimbursement. Because Medicare reimbursement can make up between 30- and 60% of a dermatology practice’s revenue, a 5% penalty means the practice is likely going to face declining total practice revenue for the same amount of production.  

In the last two decades, the health insurance industry has largely consolidated. Meanwhile, consolidation in the physician space has lagged behind. As a result, most dermatology practices lack the scale to negotiate with large health insurance companies on an even playing field. This means dermatology practices tend to sign standard contracts that have favorable terms for the health insurance companies. These terms set year-over-year reimbursement rates and allow the insurance company to set billing, coding and utilization management rules. Consequently, nominal year-over-year increases can be largely offset by increased denial rates and tighter billing and coding rules.

Mounting pressure across all business lines requires dermatology practices to reconsider their approach to Medicare MIPS involvement and health insurance contracting strategies.

Embrace Medicare’s Merit-based Incentive Payment System (MIPS)
As noted earlier, a number of smaller dermatology practices have elected to accept the Medicare penalty rather than make the necessary investments to participate in Medicare’s value-based reimbursement program. For those physicians with a short window until retirement, that decision may have worked out well for them. However, for those physicians with a longer runway, it may have been a short-sighted decision. Consider the following analysis: assume a general dermatologist generates $800K in net collections each year. Medicare represents 30- to 60% of the net collections, and the practice will incur a 5% penalty in 2020 for 2018 performance, a 7% penalty in 2021 for 2019 performance, and a 9% penalty in 2022, 2023 and 2024 for 2020, 2021 and 2022 performance. The five-year financial hit to Medicare reimbursement will range from $93K to $187K. For a practice with $1.2 million in net collections, the financial hit to Medicare revenue increase to a range of $140K to $280K over the five years. Furthermore, if one considered the lost bonus opportunities, the financial impact could be twice this amount.

MORE: Why are so many physicians selling their practices?

In order to participate, a physician practice will need to make an investment in an electronic health record (EHR) which supports the interoperability, quality scoring and improvement activities necessary to comply with MIPS. As you think about selecting an EHR, look for a system that is certified by the Office of the National Coordinator for Health Information Technology, is cloud based and will require minimal hardware investment or ongoing internal support, supports the ability to collect MIPS data within the normal flow of a patient examination, provides up-to-date dashboards on performance, and allows for electronic data submission to CMS.

When considering whether to make the investment of complying with MIPS, consider the following: value-based reimbursement is not going away, and many practices have found the implementation of EHRs has helped them improve their billing compliance.   

Find Creative Ways to Engage and Partner with Health Insurance Carriers
While it is true most dermatology practices have little to no bargaining power when one takes a traditional approach to contract negotiations with health insurance companies, it is not entirely true if the practice thinks more strategically. Understanding the health insurance company’s business objectives can create new opportunities and bargaining power for the dermatology practice.

The dermatology specialty has been able to fly below the radar of health insurance companies for the moment. According to a high-ranking health insurance executive, dermatology costs account for less than 2% of total medical spending. As a result, health insurance companies tend to overlook dermatology and focus their attention on other high-cost specialties. However, times are changing. While overall dermatology costs represent less than 2% of medical costs, dermatology-related drugs account for about 6.5% of total pharmaceutical spending, and it is escalating. The escalating costs are being driven by a 7% annual increase in psoriasis-related drugs. Most health insurance companies have restricted formularies to help curb the costs associated with these new therapies. Compliance with their formulary is critical in their attempt to curb costs. 

In the oncology specialty, health insurance companies have negotiated gain-sharing agreements with participating oncologists. Essentially, oncologists split the gains associated with increased formulary compliance with the health insurance company. This has proven to be a win-win strategy for both the health insurance companies and the oncology practices. For dermatology practices with market share and a large psoriasis patient population, using this strategy at the negotiating table may prove beneficial and provide the practice with improved revenues.

MORE: Safeguard your practice from a data breach

Additionally, with little to no revenue and profit growth in the commercial health insurance space, many health insurance companies have increasingly focused on the growing Medicare space. As a result, they have increased their participation in Medicare Advantage. Medicare Advantage programs have strict guidelines around physician access and participation. As a result, many health insurance companies are willing to provide increased commercial reimbursement for participation or continued participation in their Medicare Advantage program. 

These are just two approaches to contract negotiation that can provide a dermatology practice with improved revenues. The key is to do your homework before negotiations start and to understand their business and needs.