How Carriers Determine Fees
One of the most confusing issues surrounding third-party re-imbursement concerns the method each carrier utilizes to determine fees. Fee schedules used by insurance carriers usually are based on one of two systems-1) charging patterns or 2) relative-value scales. The exact method and actual fees allowed typically are considered to be trade secrets and are guarded closely. Most dentists are unaware of a carrier`s allowable fee for a procedure, until they submit a claim or predetermination for an individual patient.
The "charging patterns" method of determining fees usually is based on a data pool of charges for a specific section of the country. To this end, some third-party carriers use individual-tracking programs to determine charging patterns among their providers, while others subscribe to the Prevailing Healthcare Charges System or PHCS®, the nation`s largest data base of provider charges for private-sector, health-care services. The PHCS® is operated by the Health Insurance Association of America, or HIAA, which collects, compiles, and publishes data. Major companies, such as Blue Cross/Blue Shield and Delta Dental, are subscribers.
Subscribers typically submit information, as well as receive PHCS® reports, with information collected from over 80 million claim records going out every six months. The PHCS® report is based on the large volume of actual charges for services rendered, submitted by subscribers, and is categorized for users by geographic area, procedure code, and fee.
The PHCS® system began at HIAA in 1973 and currently has more than 150 major contributors, including commercial carriers, third-party administrators, Delta Dental plans, and self-insured groups. The data collected from these contributors is processed and reported, based on four elements: 1) ADA CDT-2 codes, 2) Zip-code area, 3) Date of service, and 4) Charge amount. The charge amounts, which are the providers` billed fees, are published showing the mean, or average, charge; the mode, or most-frequently-reported, charge; and eight different percentile levels. A carrier selects one of the percentile levels for its allowable or UCR fee. Once the carrier determines the percentile, all allowables at that level become the payer`s UCR fee schedule. Private insurance carriers may draw allowables from the 90th percentile, the 85th, the 50th, etc A payer typically chooses a certain percentile to control costs, attract clients, or to satisfy providers.
Only eligible organizations may subscribe to the HIAA PHCS®. These include: 1) claims organizations or companies that directly administer claims, such as commercial-insurance companies, third-party administrators, or self-administrating organizations; 2) HMOs and PPOs; 3) research, non-profit organizations, such as an academic institution; and 4) consulting or utilization-review organizations, which provide consulting services for third-party companies and government agencies.
Relative-value scales are evaluations of the dollar worth of a service, based on the complexity of the service, as compared to other services. Relative-value studies are produced by several companies, such as McGraw-Hill or Med-Index. Unit values are assigned to services and procedures-the higher the number of units assigned, the greater the procedure`s worth. Relative-value studies use either a charge-based or resource-based method of developing "value." The resource-based technique places a value on factors such as time needed, supplies required, specialized equipment and materials, lab services, experience and training required, patient risk, and legal liability of the provider. A charge-based system primarily uses historical-charging data. Relative-value studies are utilized by virtually every third-party payer for pricing claims, with over 30 different ones currently in use.
The "value" from a relative-value study is not a fee; it is an expression of a service`s worth in relation to other services. A "conversion factor" turns the value into a fee. A conversion factor for a given procedure code is a monetary figure, which is calculated from a historical charge for a given procedure. These historical charges are used to calculate the average conversion factor, which then is used to turn relative values into fees. To derive a conversion factor, a section of codes and fees, provided by dentists, must be evaluated. After a conversion factor is identified, the Conversion Factor x Relative Value Unit = Dentist Fee.
For example: For procedure Code (02750), Crown-porcelain fused to high-noble metal, let`s say that the relative value unit is 22.0. If the conversion factor is $30/unit, the fee would be 22.0 x $30 = $660. (The conversion factors used by insurance carriers to establish allowables vary from payer to payer. Recently, the HIAA also began to provide conversion-factor reports, based on actual charge data and relative value.) The Sherman Anti-Trust Act of 1890 prevents dentists from any contract that unreasonably restrains competition. The McCarran-Ferguson Act exempts the "business of insurance" from any anti-trust liability. Insurance companies are allowed to compete and share information at the same time. This information-sharing results in the fee schedules they use and the allowables they permit.
Carol Tekavec, RDH, is the author of two insurance-coding manuals, co-designer of a dental chart and a national lecturer. Contact her at (800) 548-2164 or at www.steppingstonetosuccess.com.