Determining the most important codes for payer contract analysis is a good first step toward negotiating sound contracts.


Whether a hospital, health system, or physician practice is preparing for negotiations with payers or analyzing revenue projections, it is key that payment and reimbursement leaders do their own data analysis to benchmark reimbursements. This work should be done up front, prior to negotiations or strategy formulations. Payment and reimbursement leaders should rely on the in-house billing system and data to determine revenue. In addition, they should employ two key analytical techniques to ensure data not only are accurate but also reveal opportunities to recalibrate reimbursements.

Technique 1: Focusing on the Most Important Codes

Payment and reimbursement staff should plan on spending at least 50 percent of their time and efforts up front, determining the most important codes—those that produce the highest revenue.

This is a sample article from HFMA's Revenue Cycle Strategist newsletter. Learn more and subscribe.


There is a tendency to gather and analyze data on payer contracted rates for all codes. The problem with this strategy is that staff likely will spend most of their analysis time digging up data on 300 or more codes that have little to no effect on revenue. This dilutes the focus on the top codes that are driving 80-90 percent of revenue, which are usually in the range of 15-40 codes total.

Focusing on the most important codes means that payment and reimbursement leaders will know the real effect on revenue based on payers fee schedule changes. Revenue—and therefore code importance—is a product of payer rate multiplied by volume. For example, if a lab code results in a $.50 reimbursement/service and it is administered at an in-house lab 2,000 times, the importance of this code is $1,000 total. However, if 2,000 office visits were conducted at $100 each, the importance of this code would be $200,000. Both codes have the same volume but very different revenue results because of pricing.

Technique 2: Using Weighted Averages, Not Averages

Next, payment and reimbursement leaders can assess payer fee schedules by applying their knowledge of important codes to weighted average calculations. Calculating the average means all codes are considered equal. But calculating a weighted average assigns more importance to higher revenue-producing codes. That is, an average treats all codes the same whether they produce $1 of revenue or $250,000 of revenue. But a weighted average assigns more value to the code used once it produces $250,000 than the $1 code used 400 times that produces $400 total in revenue.

Often fee schedules show average reimbursement as a percentage of local Medicare rates increasing across a broad fee schedule. The problem is the codes that you care about most are the ones producing the most revenue. All CPT codes are not created equal. Revenue contribution must be used as a differentiator.

For example, Medicare reimbursements from a certain payer may be expressed as an average rather than a weighted average based on the payer contracted rate. This is illustrated in the exhibit below. The average percentage of Medicare, in aggregate, for the two codes combined is 178.5 percent, which is accurate. However, the weighted average reimbursement is lower at 137 percent. This is because when the average reimbursement is calculated across the two codes, the 266 percent associated with code 77418 is weighted the same as the 91 percent associated with CPT office visit code 99213. The Medicare revenue and the actual revenue value of the code based on the payer contracted rate are not factored into the average calculation.

A Comparison of Average vs. Weighted Average Medicare Reimbursement Calculations
Average vs. Weighted Average Medicare Reimbursement

In this case, the Medicare rate is higher than the payer rate for CPT code 99213 while the Medicare rate is much lower for CPT code 77418 than its payer rate (see the formula and calculation in column H of the exhibit below). The average places too much importance on CPT code 77418 because it has such a high payer rate relative to its Medicare rate, generating a very high percentage of 266 percent.

In this example, payment and reimbursement leaders should be negotiating up from 137 percent, not from 178.5 percent. Furthermore, the payer may be averaging across all CPT codes in the fee schedule, not just the top revenue-producing codes.

The lesson learned is that payment and reimbursement leaders should not base negotiations on the average rate of reimbursement because it does not account for the revenue impact of each code. It is best to use weighted averages to maximize your reimbursements.

A Game Changer

Employing these two analytical techniques—finding and focusing on important codes and using weighted average—scan be a real game changer for reimbursement analysis and benchmarking. Healthcare providers time and resources are at a premium. By using analytical techniques to evaluate payer contracts, hospitals, health systems, and physician practices can reveal critical data that maximize reimbursement.


Steve Selbst is the CEO of Healthcents Inc.

Publication Date: Tuesday, September 01, 2015