Healthcare Econ 101 - Ep 2 (edited)
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[00:00:00] Hey everybody, and welcome back to our mini series on healthcare finance. I am joined once again by Dr. Christopher Childers, who's a surgical oncologist at the University of Washington, and a self-proclaimed healthcare finance nerd. This is Nina Clark from the University of Washington as well, one of the chief residents back working with Behind the Knife.

In our first episode, we covered a ton of ground. We talked about terminology, we talked about insurance, and we even made Dr. Childers address the question of why healthcare is so expensive in this country. This episode, we're gonna dive into how physicians and hospitals get paid. And while I think most of us have realized that we could have probably made more money in less time by going into a completely different career path, I suppose it's probably worth it to figure out a little bit about how we get money at the end of the day.

Dr. Childers, a lot of conversations about how doctors get paid center around relative value units or rvu. Can you start by explaining a little bit about the whole RVU system?

Yes. So. Vus. [00:01:00] Believe it or not, these have actually not been around that long. We talked in the last episode, Medicare, Medicaid came around in 1965.

Well, RVU system didn't come around until by the early 1990s, 1992. Before that, in that time between kind of contemporary health policy, health insurance started and 1992, the way that you used to bill is that you would say, Hey, I did an appendectomy and I think I should get paid $3,000, and you would send that bill to Medicare and Medicare.

What they would do is they would do some internal math. They would look at. The region that you are in and all of the claims that have been for appendectomy, and they would say if you fell within the 95th percentile, they would just pay it. In theory. Back then you were like not supposed to. Be able to talk to other people about how much you were charging.

There was a lot of weird policies, but as you can imagine, that system [00:02:00] didn't work too well. People quickly kind of figured out that they could raise their prices until they would stop getting paid and. When you raise your prices, that meant that everybody else could raise their prices and so on and so forth.

And so the system was growing rapidly, and so eventually they started doing some manipulation. They lowered it to the 75th percentile. Eventually they just kind of froze payments, and then they realized this isn't gonna work. We need a new system. Here come in relative value units. And so there was an economist named Bill Sau out of Harvard who had been studying this concept of a relative value system since the seventies.

The idea being that instead of being income market-based system, where you just kind of charge whatever you can get away with, we would somehow figure out all of the [00:03:00] resources. That go into providing that service. And then we would scale in some way, shape, or form the relative resources used for that service to every other service that a physician can provide.

Which is a crazy concept when you think about the actual magnitude of the number of services that we provide and trying to compare things from a surgical pathology report to a Wiffle procedure and putting those somehow onto the same scale. But they did, and so they did like seven years of research in the late 1980s, and they created this relative value system and just some very basics about.

The rvu, the concept that most people have heard about are work rvu. There's actually a total RVU that is assigned to any given service, and currently there are three things that [00:04:00] go into that total rvu. Remember, this is all the resources that go into taking care of that patient and providing the service, and so the three inputs.

Our physician work. So that's the work, our views. But there's also practice expense, right? You gotta have an office, you gotta be able to staff that office and keep the lights on, and you gotta have supplies to do some of these things, equipment. So you gotta have some practice expense. And then the third thing that actually is, is the newest component that was, this was only introduced in the, in the two thousands, was medical liability.

And it was basically the idea that different specialties have to, you have to be able to buy malpractice insurance, and that was not previously incorporated into either work or practice expense. So they created this third bucket of medical liability. And so technically every service that we provide has a total RVU, but the component that's probably the most relevant.

In terms of how you're going to be evaluated, how your productivity is gonna be measured is gonna be the work rvu. A few [00:05:00] things that we should just touch on before we kind of dive into this RVU system. Number one is the concept of a global period. There's actually several different global periods. There are 90 day globals, which is what most people are familiar with.

That's major surgical procedures, but there are also 10 day global periods and zero day global periods for different services. And then there are services that don't have a global period. Things like evaluation of management codes. You see a patient in the office that doesn't have a global period at all, a global code.

This was kind of a fundamental concept in that original 1992 introduction of rvu. Was the idea that. Surgeons proceduralists should take kind of ownership over all of the care of a patient for for prolonged period of time and for major procedures. They figured that extended up to 90 days after the operation and instead of paying you individually for the surgery and then all of the inpatient care and all of the office visits, they would just pay you a lump sum and we would figure out the total RVU, the total work RVU for that [00:06:00] entire global period.

The global period actually starts the day before a major operation. And it goes up to 90 days after the operation, and it's supposed to include all of the care that you provide as a surgeon in that 90 day window. Not just seeing the patient on the morning of surgery, getting them into the operating room, doing the actual operation, getting them to the recovery room, talking to the family, writing the operative note, seeing them in the hospital for however long they're in the hospital, and then seeing them for all of their office visits up until 90 days.

And so that is supposed to be built into that RVU valuation. I think that covers the very high level, but I know we're gonna dive into some of the details, so maybe I'll pause and see if any immediate questions come up.

Yeah, you know, first off, that initial system seems wild. That's like capitalism on steroids.

You know, where you can vaguely or, or not so vaguely pay attention to what your colleagues around the country or in your region are charging and upcharge just within that realm to get the net to go up for everybody. Is kind of wild that that was [00:07:00] even allowed to proceed like that for as long as it seems like it did.

A couple of just kind of initial thoughts, just hearing all of this is is that the practice expenditure component of the total RVU is interesting to me because we talked last time about how we have such nice practice environments in this country, and that's part of our spending issue is that we've got these beautiful hospitals with floor to ceiling windows and presumably some of that.

PE portion of the total RVU is kind of to keep the lights on, but also presumably for nicer work environments. I'm interested in, in hearing kind of your take on how this does or does not actually play out in terms of limiting that type of spending, because presumably we are kind of capped and how much we make as physicians based on those types of expenditures.

But maybe that also goes into how hospitals get paid, which we're gonna address later this episode. One more concrete question I have. Just hopefully briefly, is what happens with these. We all have these patients who've had some horrible complication and they fall well [00:08:00] outside of that 90 day global period.

What happens then to your compensation when you're seeing somebody down the line, maybe a year after their initial operation with you?

So the very straightforward answer is as soon as you get to day 91, you can in theory bill for all of that care. The reality is that there are exceptions to that 90 day global period.

So if you take a patient back to the operating room, for example, you're allowed to bill for that additional operation. And in fact, actually the global period restarts when you do that second operation to 90 days after the subsequent operation. The other thing is that, that we will touch on in episode three when we talk about coding is that.

The global period is specific to the operation that you're performing. And so you do some emergency X lap in somebody, a hartman's procedure for diverticulitis, and that patient has some issues related to that operation, but they may also develop other problems during that hospitalization, right? They may develop heart problems or a PE or other things that are maybe [00:09:00] not directly related to that operation.

And so there are some ways to be able to. Recuperate the work that goes into those patients, and we'll talk about how you can actually build that later on.

All right. I'm not sure. I want to know, I asked you a similar question last time, but who comes up with these RVU U values? How is this all determined and who calculates what that number ends up being?

Yeah, this is, um, this is the topic that's very of interest to my heart. Uh, the Harvard studies that we talked about.

So these were the studies that were done in the 1980s that created the original RVU U valuations in 1992. I want you to think about what. The world was like in the 1980s, there was no N quip. There was no reliable internet available. There was certainly no large databases, no Excel files that had access to information like operative times and post-op length of stay or anything like that.

And so the way that they did that study. Was they did, they took the a MA master file, which was as good of a list of all the positions in the country as [00:10:00] you could come up with. And they did phone interviews with those people like on your landline. And they had mailed them the questionnaire ahead of time.

And so that was the basis of most of the data that they got for coming up with RVU valuations. And what they did was they took, let's say you're an orthopedic surgeon, they provided you with an index procedure. I think it was carpal tunnel syndrome is what they do, which now is of course provided by hand surgeons and not general orthopedists, but anyways, they took an index operation that you might be familiar with.

So for general surgery, I think it was inguinal hernia repair. And then they provided you with 20 ish services and they asked you to. Rank the relative work of all of those services. And so if inguinal hernia is a hundred, how much is a hemorrhoidectomy? How much is a Whipple procedure? How much is a colectomy?

And they asked you to just scale it up or down If a hundred points for inguinal hernia, maybe it's 400 points for, um, Whipple procedure. And they created kind of national averages of what people said, all of the relative values of these things [00:11:00] were. Now, of course, that's only allowing you to kind of figure out the relative values within one discipline.

Then they had to figure out a way to like cross link it to every other discipline, right? So pathology and radiology and therapy services and pathology and, and trying to match all those up was a whole different process. And as you can imagine. There's about 8,000 codes or so in the CPT manual. They only directly surveyed a fraction of those codes 'cause there's a lot of very low utilized codes, a lot of rare procedures in those initial CPT manuals.

And so they did the best they could. They did these national surveys, they did focus groups, they did some rudimentary algorithms and they came up with an RVU system that RVU system went live on in 1992. But they admitted that this was not gonna be. The final iterations, they knew that there was gonna be errors that were going to have been made.

They knew that new procedures were gonna intro get introduced. They knew that things might change in terms of technology efficiency, and so they [00:12:00] created a committee to help guide updates to relative value units. And so they created this ruck, this relative value scale update committee that is housed under the American Medical Association.

This committee still exists today. They meet three times a year. They have advisors from all of the different kind of specialty societies that come up. They will present a code that needs to get updated, a code that is new, and they will try to generate an RVU valuation and they use. Believe it or not, a relatively similar process is what we did back in the 1980s.

We do surveys of, they're now in Qualtrics. We do surveys of physicians that perform the procedure, and we ask them to figure out the relative work that goes into that procedure compared to other procedures that they perform. But one other final thing that I should mention before we move on is the ruck does not have the final say on any of this.

The RVU fee schedule, the physician fee schedule is maintained by [00:13:00] CMS. And so CMS has the final word on all of these things. The AMAs Ruck does a lot of kind of the legwork and, and kind of comes up with what they think the valuation should be, but then it gets passed along to CMS and CMS gets the final say and.

More and more frequently in the past decade. I would say CMS is starting to disagree with the ruck more and more. There was a paper in Health Affairs about a decade ago that showed that CMS accepted the recommendations 87% of the time, or something along those lines. And that number has definitely fallen, and it's probably fallen mostly at the expense of proceduralists and surgeons.

I've looked at a little bit of this data and in general, when CMS is adjusting things down, they're doing it for. Proceduralists and for surgeons, and so some of our RVU have been adjusted downwards from what the Amma's Ruck has even recommended.

Your finance nerd is really showing, because I have to say that the first thing I think of when I think of the 1980s [00:14:00] is not the lack of NIST quip. It's like shoulder pads and big hair. Nevertheless, yet another kind of fascinating. Story of how this whole complicated system came about and continues to this day.

Do other countries and other health systems have similar setups? This seems like one of the only like semi standardized national, you know, quality, I guess kind of set of standards that we have talked about honestly, in this series so far. Is this how other countries do it, or do they have completely different systems in and of themselves?

A number of other countries do rely actually upon the CBT and the RVU system that is created in the United States. So the, the implications of this RVU system are not just to, and one other kind of clarifying point I should make is that technically the system is designed for Medicare. And only Medicare.

It is used by every other insurance provider in this [00:15:00] country as kind of the standard way of valuing physician work and the services that we perform. But it was really only designed for Medicare. But nevertheless, it is not only used just for everything in the United States. It's used outside of the country as well.

Yeah, and imagine other insurers or other countries don't really wanna replicate all the work that goes into the system. So that's, uh, fascinating. All right. How does an RVU translate to dollars? How does this whole thing work out where this turns into money somehow?

Yeah, so the nice thing about these RVU valuations is that they stay.

Stagnant over time, and they're comparable from one institution to the next, from one geography to the next. Right? So if you're doing an appendectomy in Kansas, it's the same as an appendectomy in Washington and other states. What. It isn't the same as how much you should actually get paid for that service, because obviously cost of living, cost of wages, all of those things vary from one place to the [00:16:00] next.

And so the thing that translates our views into dollars is what's called a conversion factor. Medicare publishes their conversion factor every year for 2026. The conversion factor is roughly $33 and 50 cents for each RVU, and that changes every year based on congressional budgets, based on some budget adjustments that happen based on this concept of budget neutrality.

The conversion factor then also gets adjusted based on geographic cost of living. And so the amount that you get paid in different states is a little bit different. The conversion factor today, 33 50 is actually less. Nominal dollars. Another kind of fancy financial term that we talk about is nominal versus real dollars, and the difference is nominal is just referring to whatever the number is.

And so $30 in 1982 versus $30 in 2026 real dollars is the idea that $30 went a lot further [00:17:00] in 1982 than it goes in 2026. And so nominal dollars 33 50. In 2026, it was $36 and 70 cents. In 1998. And so not only has the conversion factor not kept up with inflation, it actually hasn't even kept up. Like it's not even the same as it was back then.

So the conversion factor today is a real problem for physicians and surgeons and. I want to give an example that I think will resonate, especially with kind of junior faculty members. So if you're getting paid $33 ish for each work, RVU, let's say you do 10,000 work RVs, that's higher than any median benchmark for any surgical specialty, well above median benchmarks for any surgical specialty.

That would mean that if you only had Medicare patients. Your revenue, the amount that you would bring into the institution would be [00:18:00] $335,000. And keep in mind, it's not just $335,000 that you just get to keep cash. It's supposed to also cover your benefits. It's also supposed to cover some of your staff as well, like your administrative staff.

And so there is no world in which the current conversion factor for Medicare. Keeps up with the salary expectations for surgeons today, and we'll talk about the implications of that a little bit later on. When we talk about compensation models, we've talked a lot about Medicare 33 50 for Medicare private insurances will have their own conversion factor, and that'll usually be a negotiated rate between your individual institution and an individual insurer, and so there's no standardized number for that Medicaid.

It will depend upon the state. They may have a conversion factor that you can look up on your state Medicaid's website.

Okay, so if I want to [00:19:00] figure out like what I, you know, I did today at work and how many rvu I gen, I don't generate any rvu 'cause I'm a resident. But if I was a a real doctor, how would I go about looking up the RVU for what I did in a given day?

Good, good question. So. The first thing you would need to know is you need to know what the CPT code is for whatever service it is that you provided, and we'll talk actually later in our billing encoding section about how you can maybe look those up.

But let's say you do have a CPT code, so you, you just happen to know that laparoscopic cholecystectomy is four seven. 5, 6 2. You can actually look up the RVU really easily. You can go onto the, onto the Medicare physician fee schedule lookup tool, which is just a publicly available website, and you can plug in a CPT code and it'll tell you the rvu.

'cause like I said, they're standardized across all of Medicare. And if you were to look up 4 7, 5 6 2, you would see that the work RVU U is a little over 10, 10.21. The practice expense RVU is six and the medical malpractice one is 2.67. [00:20:00] And you can also on that same website, look at. What that translates to in terms of a national price.

And so I've got it pulled up right here. It's $632 is how much is being paid for the total RVU of that service. The way that that's calculated is they just add together those three RVs, the 10 for the work, the six for the practice expense, the two for the medical malpractice, and then they multiply it by the conversion factor of $33.

And that's how you ended up with a $632. But keep in mind that you as the surgeon. Don't really get credit for the practice expense or for the medical liability. You're really only getting credit for the work component, and so you're really only getting credit for those 10 rvu. And so yes, if you do the math, that means that when you do that terrible gallbladder, it takes you three hours and comes out in pieces and the patient stays forever and you lose sleep over it, and then you take care of them for the next 90 days.

And the thing that that entails, you're [00:21:00] getting paid $350 for Medicare to do that, which is less than, you know, ATI rotation these days.

Yeah, that's, that's wild to, to go through all that, just for, you know, 350 bucks. Maybe in medical school I would've bought into that, but not now. Is this the kind. Thing that, like I get these emails all the time from the American College of Surgeons about advocating for physician payments.

Is this where that typically plays out, is improving this type of structure payment back for the work that we provide.

Yep. Great question. So almost every year you're gonna get an email from the college that, and actually from the A MA as well, where they'll say the conversion factor is going down or it's only going up by a quarter of a percent.

We need to advocate for better adjustments and. A couple of, uh, things that are important about this. So we mentioned the fact that the conversion factor is $33 now, and it was [00:22:00] $36 30 years ago. The reason why the conversion factor has stayed stagnant and certainly decreased in terms of real dollars is because there has never been on the physician fee schedule side of things, any type of inflationary update.

To that conversion factor. In fact, there were old programs that actually basically made it so the physician payments could only go up by a certain amount, and so they actually had planned on having a much lower conversion factor today. And it's only the way that it is because of kind of congressional action to up make these kind of one-time updates.

And so at this point, we're basically in the system where every year it's a debate, it's an advocacy effort on the part of physicians. To try to get a, some nominal increase in that conversion factor. There's nothing built in, and it's important to know that every other institution and the way that they get paid, and we'll talk about how hospitals get paid in a [00:23:00] second.

All of those systems do have inflationary updates built into them, but they've never been built into the physician fee schedule. And so that's why every year you get some email about the conversion factor not going up appropriately and not being able to cover those things.

Yeah, that's pretty wild.

Alright, and then what is this about this non facility versus facility prices and how that plays into this whole system?

Yeah, this is, this is a little bit, this is a little bit subtle, a little bit convoluted, but I actually do think it's extremely important for surgeons going into practice, especially surgeons that are doing procedures that might be able to be performed in different places.

Like if you are a surgeon that does lipoma removals. You have lots of different places that you could do that operation, right? You could do that operation in the hospital, you could do that operation in an outpatient setting. You could do that operation at an ambulatory surgery center. You could do that operation in your office.

And this whole concept of non facility [00:24:00] versus facility pricing and site of service is a subtle but really important concept built into the fee schedule. What does it mean to perform a service in a facility setting? Well, that is probably what most of us are most accustomed to. That is you doing a surgery in a hospital or some other facility, like an ambulatory surgery center or some other facility.

The idea there is that you are still doing the work. There's no doubt about that. You're still performing the laparoscopic cholecystectomy, but you are not as an individual surgeon. Paying for or responsible for the cost of supplies and the equipment and the setting and everything like that. And where this really becomes relevant is not for your cholecystectomy.

It becomes relevant for that lipoma removal if you happen to be in private practice surgery where you actually own your own office and saw your own patients and did some minor procedures in your own office. You could be billing for that service in what's called a non facility [00:25:00] setting. That is your own private practice office.

And when you look up on this fee schedule lookup, you see this, the price and the price is either non facility setting or facility setting. When you do it in a facility setting, so you do it in a hospital, you actually get paid less than when you do it in a non facility setting, which is a little bit counterintuitive for folks.

But intuitively, I do actually think it makes sense because when you're doing it in your office. You're responsible for everything that goes into that procedure. You're responsible for the suture and the needles and the sterile drapes and the dressings. Whereas if you do it in a facility setting, like an ambulatory surgery center or do it in a hospital, you are not responsible for those things.

Those hospitals are gonna get paid a separate fee that is supposed to pay for all of those things. And so if you looked up lipoma removal, 11 4 0 6. Which is exciting. Skin tumor of four centimeters or larger, the work RVU is the same regardless of where you perform that procedure. It's [00:26:00] three and a half-ish, but if you do it in an office, you're gonna get paid $334 by Medicare.

If you do it in a ambulatory surgery center or in the hospital, you as the surgeon are gonna get paid $228. Now the hospital and the ambulatory surgery center. We're gonna get a separate facility fee, which we'll talk about a little bit later. That's probably gonna be on the order of hundreds, if not thousands of dollars.

But that is where the difference is going is that they're paying for that themselves,

right? So non facility work is kind of like the old school, like hanging a shingle doctoring that folks used to do way more frequently. And most of what the majority of our listeners are gonna be doing is within a.

Surgical center or a hospital that's gonna be getting some of those facility fees.

Exactly.

Got it. Okay. How many, how do you know how many RVs you're making and generating on a given month or day or year? And and is this something that you keep track of typically as you get started or as you go [00:27:00] through your career?

And is it something that you're like paying attention to comparing to other folks within your department? How does that all work?

Yeah, so one of the things that probably surprises a lot of trainees as they become junior faculty is that your epic looks a lot different. And suddenly the very first page that you're gonna get exposed to is not the inbox with a thousand missed messages.

It's gonna be your performance metrics. And so it might provide your work, our views over the last six months. It might provide your benchmarks for or productivity. And so that information, I think, for most junior faculty members is, is much more readily available if you're not getting it through. Your electronic medical record, you may or may not be getting it from your section, your division, or your department in some sort of standardized way, maybe on a monthly or a quarterly basis.

But I think most providers, especially if you're in a model where you're incentivized to produce, are gonna be getting pretty routine feedback [00:28:00] about what your RVU U generation is. And when we talk later on about coding and billing, one of the things that I'm gonna kind of emphasize over and over and over again is that you gotta be paying attention to how things are being coded because you need to understand it.

You need to understand. How many operations equals how many rvu, especially if you're gonna be going into a model where you have to meet a certain target in order to be able to generate your salary. And also because you want to know if they're doing it correctly. You might have a coder or a biller that's doing your operating room work, and you wanna make sure that they're appropriately capturing the procedures that you did.

All right, so what I'm gathering though is that even if you make a bunch of rvu, we don't actually get paid all that much for doing these procedures or, or per RVU, for example. So how do surgeons actually then come out with their eventual salary amount? It's clearly not all rvu, just based on what you've told me so far.

Yeah, so going back to that example that I gave where you had the 10,000 RVU [00:29:00] is only translates to $335,000, which is supposed to cover your salary and your benefits and your administrators, that's, that's clearly not a sustainable model. Part of it comes back to. Concepts that we've already talked about, payer mix, right?

So we know that commercial insurers Medicare Advantage might pay a little bit more per RVU, maybe up to 70 or $80 per RVU. Suddenly the math starts looking a lot more attractive. If you're doing 10,000 RVU at $80 per hour, that might actually be able to support everything that you're doing. Conversely, if your population is 50% Medicaid and you're getting $12 per rvu, that's gonna be an even harder sell, right?

So. Very few people are gonna have access to a very, you know, a a hundred percent commercial payer mix. And so how do we make up the difference? Where does the rest of the money come from? And that's where you have to understand how hospitals and facilities are getting paid, because then you start seeing some of their numbers [00:30:00] and suddenly the math starts making a little bit more sense.

All right. Well, since you, you laid it up, how were hospitals paid?

So this actually is probably the part, I think a lot of surgeons are familiar with the fee schedule side of things, or they become familiar with the fee schedule by necessity. Understanding the hospital side of things is, in a lot of ways more complicated.

But I would argue more important because the advocacy side of me, the side of me that says physicians need to stand up for themselves says, you need to realize, you need to remember. That that gallbladder doesn't take itself out. Nothing that a hospital is able to accomplish and generate in terms of revenue can happen without the surgeon.

And so all of the money that is flowing to the hospital is something that you have some control over. And so understanding how the hospital gets paid [00:31:00] can be really to your benefit. And so let's dive in. And so the one that you're probably most. Familiar with, you've probably heard about before, is DRGs.

This is all part of what's called the inpatient prospective payment system. This came about, actually, I think in the seventies before the RVU system came about, and it was the idea that Medicare didn't want to pay hospitals for the individual Tylenol, for the individual radiology study for the individual.

So on and so forth. They wanted to say, we're gonna put that hospitalization into a bucket and we're gonna pay you a set amount for that bucket. This was another tedious process. That was largely spearheaded by a guy named Dr. Altman, who was also kind of a healthcare economist and instrumental to developing all of that.

But the idea is that hospitals get paid based on what bucket you put a patient into. And actually, unlike the 8,000 CPT [00:32:00] codes, there's actually only. Several hundred up to about a thousand DRG codes. So it's a little bit more of a manageable set. But this covers everything from a pneumonia admission to somebody admitted for a coronary artery bypass to somebody that's getting a cholecystectomy to a big cancer operation.

And Medicare will pay a fixed sum to that hospital for everything involved in that patient's care. So it covers nursing, it covers med, it covers labs, it covers imaging, it covers the OR time, the OR supplies that you use. A few things that you hear about frequently. Number one is this concept of of a two midnight rule, and so this is the idea that you get into this DRG inpatient prospective payment system if you think the patient is gonna be an inpatient.

And the definition of an inpatient is somebody that you expect to stay for two midnights or longer. Now there's some subtleties here. Understanding the system kind of helps explain some of that. When you first admit somebody, you're typically asked to, to declare a level of admission, right? Are they [00:33:00] you admitting them to observation?

Are you admitting them to inpatient and you're making your best guess at that point, right? If you think somebody's being admitted after their perforated diverticulitis, hartman's procedure, you're probably gonna say inpatient. 'cause you know that patient's gonna be here a while and so you'll click inpatient.

Well, they may, that's probably not the best example, but they may bounce right back and end up discharging on post-op day one. That patient technically is still paid based on DRGs, even though they only stayed one midnight. But the expectation as you as a doctor at that point was that they were gonna stay for two midnights or longer.

And conversely. The one that you all have all seen and maybe didn't realize it was you only expected the patient to stay overnight, but then they develop an ileus and they end up staying for five nights. Well, that patient, you probably admitted to observation immediately out of the operating room, and then you get a message from your Utilization review person saying, Hey, they're about to cross the two midnights.

Can you admit them to inpatient? Technically you don't have to. And if a physician does not sign that order, the hospital cannot get paid [00:34:00] based on the inpatient prospective payment system, and they would only get paid based on the outpatient prospective payment system. But you'll get plenty of emails to make sure that you put in that inpatient order.

The DRG system. Just a couple other kind of quick points about that. Number one is in general, each of the DRGs has three levels to it, and so a cholecystectomy can have a kind of a straightforward cholecystectomy. There's a second level that's with some sort of comorbidity or complication, and a third level with major complication or major comorbidity.

The reason why you as a resident are getting asked to. Document the protein, calorie malnutrition and all of those additional comorbidities for patients and complications for patients is because they are trying to figure out which of the DRGs this patient is going to end up in. It also has significant implications for quality assessment and, and kind of their performance metrics, but it is also largely because it's determining their DRG.

The difference between being in that lowest DRG versus being in the highest [00:35:00] DRG can be often double the amount of money. So that's the inpatient prospective system. That's DRGs. Hospitals frequently also do outpatient stays and procedures. Think about colonoscopies and endoscopies. Think about radiology studies.

Those are all done. In the hospital environment, it's all equipment that's owned by the hospital, but the patient goes home the same day or maybe goes home the next day. Similarly, observation care, which is common for rollout a MI and things like that. The patient might be only admitted for eight hours in order to get their two troponins and then they go home.

All of that is under the outpatient prospective payment system, and there's an analogy, it's not DRGs. They use APCs or ambulatory payment classifications. This one. Is a little bit more complicated. Medicare is not necessarily paying for absolutely everything involved in that stay. There is actually some things that they'll pay for it separately as part of that, but in general, that's probably the best way to think about it, is inpatients, [00:36:00] DRGs, outpatients, APCs, and then finally ambulatory surgery centers.

Are very similar to these kind of hospital outpatient departments. In fact, hospitals can own ambulatory surgery centers and they may be on campus, in which case they typically fall under the outpatient prospective payment system. Or they might be off campus, in which case they actually fall under the ambulatory surgery center.

Payment system. Have I confused everybody enough yet? In general, the payments are a little bit lower, but there are some valid reasons why people may wanna run an As. SC. ASCs can be owned by physicians, whereas hospitals cannot be owned by physicians. And in general, there's a lot less regulations and therefore a lot less overhead at ambulatory surgery centers.

But the payment system is kind of structured the same way as the outpatient system.

Okay, well, and, and shout out to Sherry with Utilization Management at UDub, because she's paged me more times than I can count about inpatient versus ops status. It's brutal, but now I kind of understand why. So, can we go back to our gallbladder example, how, [00:37:00] how much is actually getting paid if I do this as an inpatient, as an outpatient, or at an ambulatory surgical center?

Yeah, so this might be a little depressing. So remember how we talked about the, the $350, the tire change for you as the surgeon? Well, if you do it in an ambulatory surgery center, the facility is probably gonna get paid somewhere around $3,000 if you do it in an outpatient hospital setting. So this might be like the outpatient.

ORs that you have either on or or near campus. They'll get paid about $6,000 if you do it as an inpatient. So cholecystitis, somebody comes in through the er, maybe they stay for a, maybe they get a Coley tube, and then you take it out. Who knows? They stay inpatient. It can be. As little as $8,000 if they're in that lowest DRG category, if they have comorbidities or complications, they can get to $15,000 or more.

The Medicare is paying the hospital for that [00:38:00] same operation.

All right, so I effectively make as much as a person changing a tire. I make $350 as a surgeon, and then the facility gets up to $15,000. How? How does this. Level out. And how does this act actually end up translating to my own salary that I take home at the end of the month?

Yeah, so. The what I'm, what I'm trying to convey, and, and I'm really, I'm trying not to be too, too depressing about the, the finances of how this all works, but what I'm trying to convey is that the magnitude of dollars that you're dealing with at a hospital system and a facility system is just magnitudes of.

Higher. Now, admittedly, they also have way higher costs than I do. My cost as a surgeon is my salary, like that's my cost. Hospitals have staff and buildings and everything else associated with running that facility. That all gets bundled into their expenses, their costs. And so they should get paid more.

There's no doubt about that and, and nobody's saying that. [00:39:00] Hospitals, you know, who knows whether or not hospitals are getting paid the, the right amount. We certainly know that the amount that they're getting paid is probably the price is stupid that we talked about in the last episode and, and the reason why things are so expensive.

But the point I'm trying to convey is that especially as a surgeon, you have to know that you know they're gonna want to tell you, you're only bringing three $50 for you doing that gallbladder. You're like, well, yeah, but you wouldn't have generated that $15,000 had it not been for me being there, taking that gallbladder route.

So I think that when it comes time to start talking about compensation models that. It matters. And so let's talk just briefly about compensation models. And this could, again, could be an entire podcast series in and of itself, but I like to think about compensation models as existing on a, on a spectrum.

So on the one end of the spectrum, you may end up getting hired into an institution that pays you a salary. If you work at a va, you're probably gonna be salaried. If you work at [00:40:00] Kaiser, you're probably gonna be salaried. And there are institutions around the country that might pay you just a straight salary.

And you may have some internal benchmarks for how much you're supposed to do, but your salary is not explicitly tied to them. Then there's the entire opposite end of the spectrum, which some people call an eat what you kill model, which is probably the negative way of describing it. And eat what you treat is like the pleasant way of saying the exact same thing.

The idea basically being that you make what you bring in. And I have friends who are in private practice who they are paying attention to their payer mix. They're paying attention to their RVs, they're paying attention to how much their practice group actually gets paid for the services that they are rendering as a surgeon.

They then have a certain amount that gets taxed, goes to pay for overhead, and they're left with whatever's left over. If next year they do 50% fewer rvu, they get paid 50% fewer. Whereas in the salary model, you will [00:41:00] in theory get paid the exact same amount. So there's a huge, and then there's a huge spectrum in between there.

Of course, probably the most common model is gonna be something in the middle. Where you have an RVU target, that RVU target is gonna be probably based on some benchmark and there are tons of benchmarks celebrated. Cotter, A MG, M-A-M-G-M-A, double A MC, all release information about what your salary should be.

About what your median benchmarks should be. For rvu, it'll maybe be down to your individual specialty, like surgical oncology or colorectal or breast. Some of it may be at a higher level and just lump them all together into general surgery, and every institution will figure out what they want to use for their benchmarks for both salary and for and for productivity.

You might be provided some benchmark, and if you get to your benchmark, you get your salary. If you go over your benchmark, maybe there's some incentive to do so. Maybe you have access to a pool of funds that [00:42:00] you can get a portion of. Maybe you get paid a dollar value. 50, 60, $70 per RVU over. That amount, and that can add up pretty quickly.

You do a thousand, you know, extra RVU at $60 a pop, $60,000, that's a pretty good incentive pay. And so that is a probably a more typical model with the incentive pool varying dramatically from one institution to the next. And the question is, well, how can, how can we have that model? How can that possibly exist?

Right? Because. The $33 per RVU is never gonna make it so that I can get paid $65 per RVU. And the reality is that the way that that works is that there is what's called a funds flow, a flow of funds from the institution that hires you. To help support your salary. Right? And so it's in some way, shape, or form coming from the fact that you're making $15,000 for the hospital and some of that is getting funneled towards the surgeon in order to support their salary and then support their compensation model, [00:43:00] which is probably why.

Just to be completely blunt with everybody, certain salaries do continue to rise year over year. They're not rising exponentially. They're not rising 7% year over year, and in fact, they're probably rising a little bit slower compared to other specialties like primary care, despite the fact that we know that conversion factors are staying stable and going down.

Maybe we're a little bit more productive over time, who knows? But probably a large part of it is the fact that hospitals are still getting. An increase every year in terms of the amount that they're getting paid. 'cause they have an inflationary adjustment into their, the amount that they get paid and then that is being used to help funnel towards the salaries of surgeons.

Well, and I think this also that makes sense. I, I do a lot of work looking at rural hospital finances, right. And you hear about surgeons being these kind of financial linchpins and like really keeping the lights on for the rest of the hospital and the folks that work there. And this kind of makes sense, right?

Like RVU based. Revenue generation for a hospital is just gonna be higher if you're doing invasive procedures, I [00:44:00] presume so it seems like that kind of funnels both ways, if that makes sense.

Yep. A hundred percent. Hospitals, especially smaller rural hospitals, the financial viability of those hospitals is almost entirely dependent upon having a surgeon that can be on call and a surgeon that can operate and generate those APCs and those DRGs.

I mean, you know. Primary care is a much needed specialty, but at the end of the day, there is nothing that a primary care doctor that is gonna be able to do that's gonna generate a revenue for their hospital more than a few hundred dollars per office visit, whereas we can do a difficult operation. Sure, it may take you all day, but now you're talking tens of thousands of dollars, and so the dollar value is just different between specialties.

Yeah. Well thank you for that. That was another jam packed episode. We talked about physician payments, rvu, [00:45:00] hospital payments, how this all translates into physician salaries. It definitely generated a lot of questions for me as I, you know, start to look ahead and eventually think about getting a job at some point, a real job at least.

And I think it was a really great overview. So thank you for that, Dr. Childers. The next episode we're gonna dive into billing and coding, which I know is another black box for a lot of us in training. So really excited for that and, and stay tuned and catch you guys next week. Dominate the day.

Okay.