The Economic Realities of Providing Therapy Services in a Low-Margin Landscape

The healthcare system in which we operate is, at best, dysfunctional—and at worst, broken. It is incongruous for a country that spends the most on health care (as a percentage of its gross domestic product) to rank 37th in the world for overall health system performance. As clinicians and clinic owners, we endeavor to operate within a highly complex and regulated marketplace where each of the key stakeholders seem to have objectives that are not necessarily aligned. 

One facet of healthcare delivery that illustrates the flawed system in which we operate involves reimbursement. As a licensed physiotherapist who immigrated to the US as an early careerist, I was baffled by the idiosyncrasies and nuances of billing for physical therapy services. The complexities of medical billing—and the associated administrative burden required to generate clean claims—continually increase, while revenue from many payers has declined in relative or real terms. 

Insurance companies have forced rehab therapy providers to accept continually shrinking reimbursements.

Reimbursement rates reflect the perceived value of our services and the price point we, as providers, are prepared to accept. Insurance companies take advantage of the fact that the outpatient therapy industry remains fragmented, and many therapists are coerced into accepting poor reimbursement rates.

For many outpatient therapy clinics, the increasing cost of delivering care—combined with the decline in average total revenue per treatment episode—is slowly transforming the therapy business into one requiring practice owners to anticipate and accept low operating margins. The reality is that we will have to treat more people with no corresponding proportional increase in total revenue.

Operational efficiency is no longer enough to make up for low insurance payments.

To prepare for lower operating margins, we must rethink every facet of our business. We must optimize not only our administrative and clinical operations, but also how we deliver care to our patients. In the past, the average level of reimbursement has been sufficient to support a standardized care model—one that did not require clinicians to cater to the wide range of payer reimbursement rates. In other words, the concept of cross-subsidization was alive and well. Unfortunately, now that we are faced with a much lower average revenue per unit, there is a financial imperative to strategize how we deliver care.  Our clinical practice needs to be adjusted to reflect the changing reimbursement landscape. 

Average Revenue Per Unit = Total Revenue / Average Units (or Users)

One can question the ethics and morality of adjusting clinical care based on financial means. However, this is ultimately a matter of achieving sufficient revenue to sustain a viable long-term business. Any questions concerning the ethics and morality of segmenting patients into different groups based on financial factors are somewhat moot if one cannot even keep a clinic open in the first place!

Payer rates will increasingly dictate our approach to care delivery.

To a certain extent, the system in which we currently operate already requires us to categorize based on payer rules and regulations. The obvious example of this involves differing interpretations of the 8-minute rule by different payers. However, I predict that care delivery will become increasingly differentiated based on each patient’s specific insurance reimbursement rates—unless, of course, we move toward a nationalized health service, which is unpalatable for the majority of Americans. 

Many clinicians believe it is not reasonable to adjust clinical care based on patient insurance; however, I consider it equally unreasonable to expect providers to deliver a service that doesn’t generate enough revenue to even cover the actual labor cost. Clinicians can remain frustrated with payers and try to advocate for higher reimbursement rates, but in the long term, the profession will be forced to adapt. 

Before long, I anticipate a situation where treatment modalities and duration of direct care are tailored to each individual payer. Those patients who have low insurance reimbursement for outpatient therapy services will be required to manage their episode of care in a more independent manner, with less direct care being provided by the licensed clinician. (That being said, clinicians must understand that the duration of a treatment session doesn’t necessarily positively correlate to perceived quality, functional outcomes, or patient satisfaction.)

This situation is far from the ideal, but it is the current reality.

I am certainly not advocating that the profession acquiesce to lower rates of reimbursement. The reality I have described is far from the ideal, which is that therapists are able to sustain high enough margins from insurance reimbursements that this entire discussion becomes irrelevant. However, I believe that in light of the current payment environment, there is a need for pragmatism. We must accept fundamental economic realities and work toward long-term solutions that allow us to continue providing effective care in a sustainable manner.