Break-even analysis of Medicaid vs fee for service in orthodontic practice: North Carolina as a case study

Introduction

Access to orthodontic services for children enrolled in Medicaid is limited nationwide. Orthodontists cite low fee reimbursement as a significant barrier to Medicaid participation. The purpose of this study was to examine, under a specific set of practice assumptions, the simulated effect on profitability of treating patients covered by Medicaid in orthodontic practices in North Carolina by using a break-even analysis for the 2005 fiscal year.

Methods

Questionnaires were mailed to 154 orthodontists in active practice in North Carolina. The response rate was 58%. Seventy respondents met the eligibility criteria. Respondents were categorized into 4 groups based on the number of 2005 Medicaid case starts (I, 0; II, 1-5; III, 6-12; IV, 13 or more). By using the aggregated responses for treatment fees, treatment times, and overhead percentages for each group, average per-patient costs were calculated for each group and used in a break-even analysis.

Results

Group I accounted for 60% of respondents; group II, 20%; group III, 9%; and group IV, 11%. Assuming that the break-even point had not been reached, the group I practice would have an average estimated loss of $164 per patient whereas groups II, III, and IV would realize average profits from $98 to $256. The break-even point increased slightly in groups I, II, and III after the total number of patients in the patient pool was increased by 5%, assuming that additional patients were enrolled in Medicaid: group I, 203 to 210; group II, 220 to 226; group III, 158 to 160. The break-even point for group IV was 234 patients. Assuming that the break-even point had been reached, all groups were estimated to realize average per-patient profits of $1483 to $1897.

Conclusions

Break-even analysis is a basic economic concept applicable to orthodontic practices. Under the specific conditions of this study, the inclusion of 5% of patients enrolled in Medicaid in the active patient pool had minimal effect on the financial break-even point and, assuming that the break-even point had been reached, was unlikely to have a negative financial impact on the practice.

Access to orthodontic treatment for children from low-income families enrolled in Medicaid is limited nationwide despite the estimated 14.2% of children and 29% of adolescents with severe to very severe handicapping malocclusions. Although orthodontic treatment need is similar across all economic groups, less than 0.5% of children eligible for Medicaid in North Carolina (NC) received orthodontic care during 2002 and 2003.

Nationwide, the low participation rate by orthodontists in Medicaid programs is an important contributing factor to the discrepancy in the utilization of orthodontic treatment. In NC, only 8% of the approximately 230 practicing orthodontists were listed as significant Medicaid providers (filing claims for at least 10 new Medicaid recipients) for the last quarter of 2005. The most significant problem cited by orthodontists with Medicaid participation is low fee reimbursement. Many practitioners perceive that treating a child enrolled in Medicaid will result in an out-of-pocket loss. However, the financial impact of incorporating Medicaid patients into an orthodontic practice should not be based solely on the absolute profit or loss on a per-patient basis but, rather, on a more global evaluation of how Medicaid reimbursement will affect the profitability of the practice as a whole.

Break-even analysis is a financial assessment tool that can provide estimates of how a change in practice (eg, changing the fee structure or the number of patients started per year) will affect overall profitability. Break-even analysis relates the cost of doing business (fixed and variable costs) to the financial compensation for services rendered and examines the activity volumes necessary for financial costs to equal total revenue. The purpose of this study was to examine, by using break-even analysis, what effect altering the percentage of Medicaid patients in the patient pool would have on the potential profitability of an average community-based orthodontic practice in NC as defined by specific practice-management assumptions. Because of the 2005 Medicaid level of reimbursement, our specific aims were to examine, by using aggregated survey data provided by active orthodontic practitioners, whether, on a per-patient basis, the treatment of a child enrolled in Medicaid would result in a reduced net profit or a financial out-of-pocket loss, and what would be the effect of a 5% increase in the total number of patients treated, with this increase representing Medicaid patients.

Material and methods

One hundred fifty-four orthodontists practicing in NC during 2005 were mailed a survey approved by the Biomedical Institutional Review Board at the University of North Carolina. Practitioner information was obtained from the NC Health Professions Data System. Respondents were included if they were in active solo practice in NC, defined as working a minimum of 24 hours per week, grossing a minimum of $60,000 in 2005, and having at least 50 orthodontic patient starts.

A cover letter describing the study, a questionnaire, and a postage-paid return envelope were sent to each orthodontist. The questionnaire instructions asked the respondent to base responses on the 2005 profit and loss statement. Personal practice gross income data was not requested. Gross incomes were estimated based on practice fees, treatment times, and overhead percentages. Second and third follow-up materials were sent to nonrespondents. The survey methods of Salant and Dillman were used as a guide. Data were collected between August and December 2006. A 22-item questionnaire was developed with the assistance of a practice management consultant and pilot tested by part-time orthodontic faculty. The survey instrument ( Appendix ) focused on 2 general areas of practice management: practice demographics regarding the number of patients and the length of treatment, and financial information regarding treatment fees and overhead percentages. Practitioners were also asked, while maintaining the same staff and facility and without making any practice changes, how many more patients, as a percentage of the current patient pool, could be incorporated into their practices.

The respondents were categorized into 4 groups based on the number of total Medicaid patients started in 2005 (group I, 0; group II, 1-5; group III, 6-12; and group IV, 13 or more). For each group, the average per-patient (fixed plus variable) cost of treatment was calculated. The average per-patient cost was then used to calculate (1) the per-patient average profitability for a Medicaid patient before a break-even number of patients has been reached (both fixed and variable costs were considered), (2) the initial break-even point, (3) the per-patient average profitability for a Medicaid patient after the break-even point has been reached (only variable cost was considered), and (4) the break-even point after a 5% increase in the patient pool, assuming all additional patients were children enrolled in Medicaid. A simulation was performed to compare the initial break-even points in groups I, II, and III with the break-even points after the 5% increase in the total number of patients treated. No simulation was performed for group IV, since it already had a patient population with greater than 5% of the patients enrolled in Medicaid. The 2005 NC Medicaid reimbursement rate for comprehensive orthodontic treatment of $2521 was used.

The following assumptions were made relative to the break-even calculations for fiscal year 2005: (1) all practices were assumed to have a 95% collection rate, (2) all children and adults were assumed to have paid one-half the typical fee for treatment in 2005 (no phase I or limited treatment), (3) Medicaid patient starts for 2005 were the only Medicaid patients assumed to be in the practice, and (4) all treatment was assumed to have been carried out over a 2-year period.

These assumptions were made for consistency in calculations and descriptive comparisons of the Medicaid start groups defined by the aggregated group data.

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Apr 14, 2017 | Posted by in Orthodontics | Comments Off on Break-even analysis of Medicaid vs fee for service in orthodontic practice: North Carolina as a case study
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