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| Journal of the New Zealand Medical Association,
25-November-2005, Vol 118 No 1226
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Dollars and Sense. Is there a better way to determine private
surgical fees in New Zealand?
Paul Brown, John Windsor, Michael Law
Surgeons operating in the private
sector are paid on a fee-for-service
basis by insurance companies (the largest funders of private services).
Privately funded surgical services constitute a major source of income for
practicing surgeons.
Reimbursement is determined as follows: First, the patient
is provided with an estimate of the cost of the procedure by the surgeon. This
estimate is submitted to the individual’s insurance company for approval.
The estimate includes reimbursement to the surgeon, the anaesthetist, and the
hospital (for the associated theatre costs) as well as any sundry expenses. The
insurance company then determines the price it is willing to pay based on a
procedure fee schedule. Once the insurance company has provided approval, the
procedure is undertaken. On completion, and usually after the patient has been
discharged, the surgeon submits an invoice to the patient who then forwards
this, along with invoices from the anaesthetist and the hospital, to the
insurance company. Typically any difference between the surgical fee and the
approved price is paid out of the pocket of the patient. Some more comprehensive
policies (e.g. Southern Cross UltraCare) reimburse the entire submitted
fee.
The challenge facing insurance companies in New Zealand is
the same challenge facing funders in all countries with fee-for-service
reimbursement: What is the appropriate fee to pay for different procedures?
Purchasers would like reimbursements to reflect a fair market price for the
services. However, because there is often no well-functioning, competitive
market for specialist healthcare services, purchasers have no externally
determined benchmark to ascertain whether the level of fees is
appropriate.
Other countries have addressed this problem by adopting an
explicit and transparent system for determining appropriate fees. For instance,
in the United States in the late 1980s, Hsiao and colleagues lead a process
aimed at identifying the surgeon and specialist inputs required for
approximately 7000 procedures.1–3
The reimbursement levels were determined by considering the
total work required for the procedure (time, mental effort, clinical judgment,
technical skill, and physical effort under stress), the relative practice costs,
the opportunity cost (lost income due to time in training), and the cost of
malpractice insurance. As such, it attempted to emulate the prices that would
exist in a well-functioning, competitive market. The resulting relative value
scale (RVS) recommended specific reimbursement levels to surgeons for each
procedure and is still used to set reimbursement under the Medicare program.
A similar approach has been undertaken by anaesthetists in
New Zealand (NZSA, 2004). The New Zealand Society of Anaesthetists (NZSA)
considered factors such as characteristics of the procedure (e.g. anatomical
site at which the procedure is performed and position of the patient), the time
typically required for the procedure, and any unique patient or procedure
characteristics. The scale is only a guide and anaesthetists are not compelled
to use it. However, there is anecdotal evidence that the variability of
anaesthetic fees has been reduced since its introduction, possibly due to the
insurance companies adopting the NZSA guidelines when setting reimbursement
levels.
An RVS does not exist for surgical reimbursements in New
Zealand. Instead, each insurer in New Zealand determines its own schedule.
Again, anecdotal evidence suggests that prices are heavily influenced by the fee
schedule published by Southern Cross, the largest private insurer. This details
the minimum and maximum reimbursement fee for each of 915 procedures (at the ICD
10 level; Southern Cross, 2002), with new procedures added through a submission
process.
To date, no study has examined whether the level of surgical
reimbursements is reflective of the inputs and training required for each
procedure. There is reason to suspect the reimbursements do not reflect an
underlying market. In a previous study, we compared surgical reimbursement
levels across specialities in order to determine whether there was parity in the
reimbursements.4 Using data from Medilink (NZ) on insurance reimbursements to
specialists between 1996 and 2002, our results suggested that the level of
reimbursement between the surgical specialities was remarkably consistent when
calculated as an hourly rate. The one exception was in Ophthalmology where the
remibursements were approximately 50% higher than the other specialities. Recent
court cases involving Southland Ophthalmologists concluded that attempts to
restrict entry of Ophthalmologists amounted to anti-competitive behaviour.5 Both
of these findings suggest surgeons may have the ability to influence fees and
market conditions.
Identifying whether reimbursements for procedures in New
Zealand are consistent with an underlying market would require an extensive
examination of the factors considered by Hsiao and colleagues in their original
study. Such an undertaking is beyond the scope of this paper. Instead, the
purpose of this paper is to delineate inconsistencies that might exist in
surgical reimbursements in New Zealand, and to promote discussion around whether
a better approach might be considered. It is not the purpose of this paper to
determine whether the current levels of reimbursements to surgeons or
anaesthetists are appropriate.
In this study we compare the (implicit) average level of
reimbursements per hour of operating time and the variance in reimbursements for
surgical and anaesthetist services using the data from Medilink (NZ). We then
compare reimbursements to surgeons and anaesthetists, focusing upon the relative
variability both across and within procedures. These comparisons illustrate that
surgical fees are significantly more variable than anaesthetist fees (where a
relative value scale exists). We conclude with a discussion about whether the
differences in average hourly rates are justified on the basis of different
levels of skills or other inputs.
MethodsData—Our
investigation utilised a database provided by Medilink NZ containing information
on 8294 privately financed surgical procedures between 1996 and 2002 in New
Zealand. Medilink NZ is a private company that processes insurance claims for
insurance companies, 11 of which are represented in this database. The dataset
does not include data from the largest insurer, Southern Cross Ltd, as it
processes its own claims.
The dataset contains information on various aspects of
each case reimbursed by the participating insurance company, including:
In
order to control for differences in the time required for each procedure, an
hourly rate of reimbursement to surgeons and anaesthetists was calculated.
Information was available on the rate charged per 15 minutes of theatre time for
23 of the hospitals in which procedures were performed. These 23 hospitals were
associated with 3847 claims, 46% of the total number of claims (3847/8294). The
time required for each of these 3847 cases was calculated by dividing the total
theatre cost by the rate per 15 minutes of theatre time associated with that
hospital. Additional minutes for costs falling between the two time blocks were
determined pro rata.
As all these hospitals have a 30-minute minimum charge,
procedures that cost the minimum charge (n=661) were not included in the
sub-sample, as the actual time of the procedure could not be calculated. For the
remaining 3186 cases, the hourly rate was calculated by dividing the total fee
paid to the surgeon or anaesthetist by this time estimate.
The procedures codes used to identify the surgical
speciality followed the Southern Cross categorisation6 of General Surgery,
Otolaryngology, Urology, Gynaecology, Ophthalmology, Orthopaedics, Peripheral
Vascular Surgery, Oral & Maxillofacial, and Cardiac Surgery.
The location where the procedure was performed was
categorised according to whether the surgery took place in a rural or major
metropolitan centre (Auckland, Hamilton, Wellington, Christchurch, and Dunedin).
All prices were converted to $NZ 2002 values using the
Statistics New Zealand Labour Cost Index for Private Sector Professionals for
surgeon and anaesthetist fees and the Consumer Price Index for Health Care items
for other costs.7 Procedure code 3953 and 3955 (Ophthalmology) includes the
price of an intraocular lens. For these cases, a conservative amount of $250 was
subtracted, representing the approximate cost of an individual lens (with no
volume discount, which some practices may receive).
Analytic
methods—The analysis consisted of two types of comparisons. First,
we examine the average hourly rates of reimbursement to surgeons and
anaesthetists for each of the 30 most commonly performed procedures.
Specifically, we examine whether (for a given procedure) the average surgical
reimbursements show greater deviation than the average anaesthetist
reimbursement. This provides evidence on whether surgeons are reimbursed more
for some procedures than for others, and whether the reimbursement of
anaesthetists shows a similar pattern.
The second type of analysis focuses upon the
variability in reimbursements within a procedure. For each of the 30 most common
procedures, we present the ratio of the variance of average hourly rates of
reimbursement between surgeons and anaesthetists. Being a measure of the
dispersion, the variance indicates how much consistency there is in the fees
that are paid for a given procedure. Low variance indicates that all cases are
reimbursed at essentially the same rate, while a high variance indicates that
some cases are reimbursed at much higher rates than other cases of the same
procedure. Comparing the ratio of the variances for each procedure fees between
anaesthetists and surgeons provides an indication of whether there is
significantly more variability in the reimbursements to anaesthetist (where a
RVS exits) or surgeons (where no RVS exists).
ResultsDescriptive—Table
1 shows the descriptive results for the sample. For the 3186 patients for whom
an average hourly rate could be calculated, 33% were General Surgery, followed
by Gynaecology (19%), Orthopaedic (18%) and ENT (17%). Auckland was the most
common location for the procedures to be performed (28%), followed by
Christchurch (24%), and Wellington (12%). The bulk of the remaining procedures
were performed in rural locations (26%). The average reimbursement per hour was
$1,116 for surgeons and $372 for anaesthetists. Table 2 shows the differences in
average reimbursements across locations.
In all, there were 388 unique procedure codes in the
dataset. The most commonly performed procedure was tonsillectomy (Procedure Code
1710), with 114 cases in the sample (4%). The mean number of cases per procedure
code was 8.2, with a median number of only 2. The small number of cases makes
comparisons between anaesthetists and surgeons unreliable. Thus, the subsequent
analysis was restricted to those procedures where the number of cases was
greater than 30. The 30 procedures are listed in Table
3.
The descriptive statistics for the 1644 observations (for
the 30 procedures with n>30) are shown in the 2nd column of Table 1. There
are no notable differences between these 1644 observations and the full dataset,
including the average hourly reimbursements being similar ($1,167 compared with
$1,116 for surgeons, $279 compared with $372 for anaesthetists).
Differences in surgical
reimbursement levels between procedures—Figure 1 and Table 3 show
the average hourly reimbursement to surgeons and anaesthetists for each of the
30 most common procedures. For surgeons, the average level of reimbursements per
hour ranged from a high of $2,080 per hour for a cataract with intraocular lens
implant (procedure code 3955) to a low of $722 per hour for a colonoscopy with
removal of one or more polyps (procedure code 710). The average surgical
reimbursement for these 30 procedures was $1,167 per hour.
Table 1. Descriptive statistics
Table 2. Comparisons by locations
Table 3 also shows the deviation in average reimbursements
for each procedure from the average in the entire sample. The results suggest
that in 25 of the 30 procedures, surgical reimbursements deviated by a greater
percentage from the average than anaesthetists reimbursements.
For instance, surgical reimbursements for cataract with
intraocular lens implant (procedure code 3955) were 86% above the average level
of reimbursements ($1116), whereas anaesthetist’s reimbursements for the
same procedure were only 9% above the average ($379). As shown in the bottom of
Table 3, the average absolute deviation was 21.5% for surgical fees, but only
8.3% for anaesthetist’s fees.
As shown in Table 4, for only one of the 30 procedures was
the average surgical reimbursement within 5% of the average for all procedures,
compared with 47% (14 of the 30 procedures) for anaesthetist’s fees.
Additionally, over 36% (11) of surgical reimbursements were greater than 20%
above the average, compared with only 10% (3) of anaesthetist reimbursements.
Table 4. Average absolute deviation of average fees for
top 30 procedures: number in each range
Comparing surgeon and
anaesthetist fees—As the above discussion illustrates, there was
significant variation in the hourly rate of surgical reimbursement rates between
procedures. This suggests that average reimbursements were less likely to differ
significantly across procedures for anaesthetists than for surgical
reimbursements. However, the analysis does not indicate how consistent
reimbursements were within individual procedures.
To provide some perspective on the magnitude of variation in
surgical reimbursement rates compared with anaesthetic reimbursements, 95%
confidence levels were calculated for each procedure. As shown in Figure 1, the
95% confidence intervals are much tighter for the anaesthetic reimbursements
than the surgical reimbursement for a given procedure. As an indication of the
relative variability, Table 3 shows the ratio of the variance of surgical and
anaesthetic fees. In general, a ratio of the variances of the two fees of 4 to 1
or greater is taken as an indication of differences in variability.
Table 3 shows that variability is greater for surgical
reimbursements in all 30 procedures. The greatest difference in variability was
seen in a benign or malignant tumour requiring wide excision (procedure 260)
with a variance ratio of 56.3. As shown in Table 5, only two of the 30
procedures (codes 1700 and 1740) had variance ratios under 4, with one-third of
the sample showing variance ratios greater than 20.
Figure 1. Average fees and 95% confidence
intervals
 Table 5. Variance ratios (variance of surgical/variance
of anaesthetists) for top 30 procedures: number in each range
DiscussionPurchasers of surgical services face the challenge of
identifying the appropriate levels of reimbursement. The evidence presented in
this paper on surgical reimbursements in New Zealand highlights some apparent
inconsistencies. When compared on an hourly rate, there are sizeable differences
in average rates of reimbursement between procedures. In addition, comparing
surgical reimbursements with anaesthetist reimbursements illustrates not only a
higher range in the average hourly payments but significantly greater
variability within specific procedures. This evidence is consistent with the
proposition that anaesthetist’s fees are more reflective of what a
properly functioning market would produce, while surgical reimbursements are
less so. This suggestion comes with a number of caveats.
First, the above analyses are based on only a sub-sample of
all insurance claims. Claims from Southern Cross were not included, nor were
claims from hospitals where theatre costs were unavailable. The exclusion of
Southern Cross data from the analysis does not mean that the present data set is
skewed or subject to bias, as the current data represents claims made to several
smaller insurers in New Zealand. Rather, the question that cannot be addressed
is whether the disparities that exist in this data also exist in Southern Cross
reimbursements. Given the anecdotal evidence suggesting that smaller insurance
companies base their reimbursements on the Southern Cross fee schedule, there is
reason to suspect that it would.
Second, the analysis focused on only those procedures with
more than 30 cases. Although there is no a
priori reason to assume that the resulting sample was not representative
of the entire population of insurance claims (e.g. no systematic biases are
likely to have resulted), it does suggest that the results should be viewed as
suggestive only.
Third, no conclusions should be drawn regarding whether or
not the level of reimbursement is appropriate or excessive. The hourly rates are
based on the time required for the surgery (e.g. theatre time used). In
practice, there are three phases to treatment: a pre-procedure (consultative)
phase, the procedure, and a post-procedure (convalescent) phase. The fee paid to
specialists is intended to cover the latter two phases, so it is misleading to
interpret the reported hourly rate as the rate they are paid for each hour spent
actually performing the operation. Rather, the reported hourly rate merely
indicates the relative payment between
procedures.
Comparisons between anaesthetists and surgeons hourly
reimbursement rates or commenting upon the level of reimbursements (e.g. too
high) are not appropriate. Even though the hourly rate presented here might seem
substantial, it is possible that reimbursement levels might actually be too low
to compensate for the time required for the reimbursement of the three phases of
care.
Fourth, even if we accept that there are significant
differences in surgical reimbursements between procedures or greater variation
than anaesthetists, this does not necessarily imply that the fees are not
consistent with those that would emerge from a competitive market. Fees in a
competitive market will differ according to the characteristics of the surgeon
(e.g., expertise, level of training, demand for services), the procedure (e.g.,
complexity of case) and the location (e.g. cost of living in Auckland compared
with Dunedin). Although the analysis did attempt to account for a critical
factor (time for procedure), it did not incorporate these other characteristics.
Thus, it is possible, although unlikely, that the outcome from a RVS approach
would be to conclude that current fees are already consistent with an underlying
market. The size of the variations between procedures, the level of variability
in payments for a given procedure, and comparisons with anaesthetists fees must,
at the very least, provide scepticism that the current system is working
well.
The results provide support for the development of a RVS for
surgical fees for New Zealand. Although the Hsaio et al’s RVS is not
without it’s critics8–10 and there are other systems (e.g. McGraw
Hill System11), there is no disputing the principle that payments should reflect
underlying fundamentals, as opposed to other factors, such as political power,
cartel related price fixing or historic reasons. Fortunately, developing an RVS
system in New Zealand would not be as complicated as in the US for a number of
reasons.12
For instance, some of the characteristics that had to be
considered in the US, such as the cost of malpractice insurance or regional
disparities, will not be as important in New Zealand. But most importantly, RVS
are now fairly well established in many countries around the world. By learning
from their experiences and using their guides as a starting point, New Zealand
would not need to go through the extensive process that has been required
elsewhere.
What would be the likely impact of implementing a RVS in New
Zealand? Experience in the US indicates that a RVS is likely to change the
established system of payments.13,14 For instance, the introduction of the RVS
in the US resulted in changes in payments to various specialities, including
increasing payments to some specialities (e.g. family surgeons by 36%) while
reducing payments to others (e.g., ophthalmologists by 18%).15 These changes can
have flow-on effects, such as inducing surgeons who have fees lowered to
increase the volume of procedures to compensate for reduced income.16–19
But the impacts will vary across specialties and will depend upon the particular
aspects of the healthcare market.
The findings of this study are presented to generate an
informed discussion about the best way to determine reimbursement in the private
sector. The public health sector is increasingly reliant on an efficient private
sector for elective procedures. This data and the experience from other
countries suggests that a relative value system should be carefully considered
as it might be a more sensible way to determine private surgical fees in New
Zealand.
Author information:
Paul M Brown, Senior Lecturer in Health Economics and Director, Centre for
Health Services Research and Policy, School of Population Health, Faculty of
Medical and Health Sciences, University of Auckland, Auckland; John Windsor,
Professor of Surgery and Head of Department, Department of Surgery, Faculty of
Medical and Health Sciences, University of Auckland, Auckland; Michael Law,
Research Associate, Centre for Health Services Research and Policy, School of
Population Health, Faculty of Medical and Health Sciences, University of
Auckland, Auckland
Correspondence: Dr
Paul Brown, School of Population Health, Faculty of Medical and Health Sciences,
University of Auckland, Private Bag 92019, Auckland. Fax: (09) 3737624; email:
pm.brown@auckland.ac.nz
References:
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