How is it that you have a long list of clients in need of services, you can’t seem to hire enough providers to fulfill all the authorized service hours, you are running out of space in your center, yet each month you are barely breaking even?
Many of us went into business to help people in need, support families, and make a difference in our communities. While we may not have selected this field to achieve great wealth, we did not expect to barely scrape by each month — continually stressing about whether we can afford to cover payroll and keep the lights on. Many factors can affect whether a company turns a profit. As we have all experienced with the pandemic this year, some elements are out of our control. However, others depend heavily on the decisions that leaders make. One place to look closer may be how you price your services.
In speaking with ABA business owners and executive leaders about how they price their services, they often default to two sources. These include their payer contracts (e.g., “We set our prices based on what the insurance companies pay us”) or the hourly rates they pay their employees (e.g., “We pay behavior technicians X dollars per hour, so we charge Y dollars per hour for their services”). While these are essential factors, they fail to consider the true cost of delivering services. Before we outline some key factors to consider, let’s first address factors that should not influence how you price your services.
- Medicaid fee schedules. These rates are a good baseline to use when negotiating with health insurance companies, as they are often the only publicly available reimbursement rates. However, in many states, Medicaid rates are relatively low compared to the usual and customary rates1. Unless you are operating in a select few areas of the country, it is doubtful that pricing your services to match Medicaid’s fee schedule will help you create a sustainable and profitable business.
- Proposed/published rates from third-party payors. An agreement between an insurance company and a provider, in theory, should be mutually beneficial. By accepting discounted rates (a benefit to the insurance company), the provider gains access to a member network (a benefit to the provider), and members gain access to providers who have been vetted by the insurance company (a benefit to members).
It is important to note that by contracting with an insurance company, the provider agrees to accept discounted rates (that does not mean one shouldn’t negotiate). The insurance company does not consider a company’s fixed and variable costs when proposing reimbursement rates. Further, pricing services to match a single health insurance’s fee schedule is not an advisable strategy due to the following:
◦ It eliminates the provider’s negotiating power.
◦ It makes it increasingly challenging to reach terms on future rate increases.
◦ It invites insurance companies to bring down rates for you and other providers operating in your geographic area.
- Sympathy for another’s circumstances. One of the main reasons we became behavior analysts/small business owners is because we wanted to use the powerful science of behavior to help families with neurodiverse children live happier, healthier, and more productive lives. If there is one thing you take away from this piece, we hope it is this: You cannot help anyone if your company spends more than it earns and can’t take care of you or your employees financially.
There are several ways to help underserved populations. Setting prices too low is not one of them. If you feel uncomfortable benefitting personally from delivering behavioral services, consider the following alternative options:
◦ Reinvest profits back into the company and use these resources to open new locations in underserved areas or serve a more significant number of clients.
◦ Invest in the health and wellness of your employees by enhancing your benefits package.
◦ Supply employees with the most effective and up-to-date tools.
◦ Partner with a firm specializing in improving business performance to help you design a compensation structure that rewards improved and exemplary performance.
◦ Make significant contributions to non-profit organizations in the market segments that align with the company’s purpose and core values.
◦ Consider taking a lower salary.
If you find your company struggling financially, but you have never been busier, it’s time to take a hard look at how you are pricing your services. While there are many pricing strategies for service businesses (e.g., premium pricing, economy pricing), we will only focus on cost-plus pricing. Cost-plus pricing is a strategy that involves determining the cost of providing a service and then adding an amount to yield a financial gain (i.e., profit margin).
Before we discuss the costs associated with running a business, let’s briefly tackle the profit margin. Many people go into business to make a profit (not to break even year after year). Business owners take on tremendous risk. One potential benefit of shouldering all that risk is the opportunity to build a comfortable life. To ensure that you achieve a profit for your business, you need to mark up your services to account for your desired profitability and unforeseen challenges. As a simplified example: if you want to turn a profit of $100,000 next year and your company is projected to provide approximately 10,000 service hours at a median cost of $60 per hour, you will want to price your services no lower than $75 per hour (a 25% profit margin).
To apply this cost-plus pricing strategy to ABA services, establish rates based on time or units. To do so, calculate the cost to deliver each service annually, add a margin for profit for the year, and then divide that amount by the total service hours you provide in a year.
Those steps seem straightforward, right? The trouble is that the simple equation above holds a complex variable: costs. A myriad of factors influences costs. Business owners and executives have a fiscal responsibility to unravel these factors and consider them when pricing services. To begin, consider examining the following areas that can impact costs and thereby influence prices.
- What are your overhead costs?
Overhead (or indirect) costs are the expenses required to operate the business regardless of the number of employees or clients you have. Examples include rent, internet service, accounting software, business licenses, liability insurance, and administrative staff salaries (non-revenue generating employees). Companies can incur fixed overhead costs (e.g., rent) or variable costs (e.g., building maintenance).
Understanding overhead costs allow you to drill down and calculate a per hour cost for merely keeping your doors open. It also enables you to factor volume into your financial planning as overhead costs tend to decrease per hour as service delivery volume increases.
- What are your direct costs?
Your company incurs costs each time a new employee is hired. These include the costs of new hire and ongoing training, benefits like paid leave and health insurance, and user fees associated with your company systems. Similar to overhead, there are both fixed and variable costs. For instance, software licenses are a set per employee expense – they cost the same for each employee regardless of how many hours they work. Employee incentives may be a variable expense – the cost per employee will vary based on the incentives particular employees earn.
Determining your per employee costs and combining them with wages and payroll tax expenses helps you to understand the actual price of an hour of an employee’s time.
- What services does your company offer?
It is essential to have a precise idea of your company’s service lines. Does your company provide clinic-based services, in-home services, or both? Do you provide individual or group services? Do your providers administer assessments or only provide intervention services? Presumably, each service line is associated with its unique costs. If such is the case, you will want to calculate prices for each service line.
- Who delivers the services?
Some of the most critical factors correlate with the organization’s service delivery model. Notably, the level of training and credentialing needed to deliver each specific service your company offers. For instance, does your company operate a two- or three-tiered service model? In your state, are assistant behavior analysts (i.e., BCaBAs®) authorized to provide the same services as behavior analysts (i.e., BCBAs®)? Do your behavior analysts ever provide direct intervention? Depending on your answers to these questions, you may need to calculate a price per provider level per service type. For example, you may need to establish one rate for a behavior analyst’s direct intervention and another for direct intervention delivered by a behavior technician (i.e., RBT®).
- Who supports the provision of services?
When pricing services, you must take into account the cost of clinical oversight and support (often referred to as “non-billable” or “bundled” services). How much case direction time have you allocated for the behavior analyst for each hour of direct intervention delivered by the behavior technician? Do you provide intensive services that require a higher provider to client ratio? Unless you only accept private pay arrangements, it is unlikely that you can bill payers directly for services like these. Therefore, it is imperative to calculate these costs and include them in your usual and customary rates.
- What are the usual and customary rates in your area?
We understand that determining prices for your company’s services can feel like a daunting task. Another way to alleviate some of the stress and anxiety related to setting rates (i.e., in addition to steps 1-5 above) is to research to get an idea of the usual and customary rates for the types of services you deliver. When researching, you may want to look at websites for similar organizations or health care providers in your area (some companies post their prices). However, before taking action regarding #6, we strongly recommend that you carefully review and follow the APBA Antitrust Guidelines,2 including consulting with an attorney specializing in state and federal antitrust laws.
As a field, it’s essential to be diligent when setting prices. Failure to establish prices that reflect the cost of delivering services, and the value they add, has made it difficult for small companies to negotiate reasonable rates with insurance companies. In turn, companies struggle to deliver high quality care because the higher volume is often their only pathway to financial stability. Troublesomely, insurance companies have more information than we do – they are privy to the agreed-upon rates accepted by all providers in their network. This position puts providers at a disadvantage, especially when insurance companies leverage the data to drive down rates for the field as a whole. Agreeing to discounted rates from insurance companies that are so low it’s impossible to make a profit only enables fortune 100 companies and their shareholders to amass more wealth — while putting your company at greater risk for failure.
Taking the time to gather information and calculate costs associated with the factors above will help you understand the costs for delivering services, and thereby, what you must charge. Building a financial model using this information can help you “play” with the numbers and empower you to see the impact of hiring more employees for a particular role, increasing employee benefits, taking on more clients, or reducing expenses in specific areas. This information should inform your decisions about when to join and when not to join insurance companies’ provider networks based on their proposed rates. This financial knowledge is critical. It will help you serve as a more effective advocate for fair reimbursement rates because you can help educate payers about the real cost of delivering quality behavioral services. Most importantly, it will enable you to set prices that significantly increase the likelihood of building a robust and solvent company that will stand the test of time, prosper, and allow you to serve clients without never-ending financial stressors.
About the Authors:
PhD, BCBA-D, LBA
Jennifer Castellanos-Bonow earned her PhD in Behavior Analysis from the University of Nevada, Reno (UNR), an experience that laid the foundation for her work with children with autism and other behavioral disorders. Jen has extensive experience leading clinical initiatives, designing training programs, maintaining best practices in the delivery of behavioral and psychological services, and developing and managing processes to support ethical and compliant service delivery. After serving for a number of years as the clinical director for Blueprints, based in Bellevue, WA, in 2019 Jen transitioned back to her hometown of Reno, Nevada. In partnership with a group of behavior analysts, she has helped to establish The Learning Consultants which aims to provide behavioral support and services to children with autism and parents and families facing acute behavioral challenges.
Jen serves as the managing partner and CEO applying her experience administering performance management systems, designing processes and implementation planning, navigating healthcare funding of behavioral services, and developing and maintaining policies and procedures to ensure regulatory compliance. She is also actively involved in the behavior analytic community, most recently by serving as the President of the Nevada Association for Behavior Analysis. While her roots are in early intervention, Jennifer’s foundation from UNR and recent work have provided her with wide ranging experiences applying the science of behavior.
Shane Isley, M.S., BCBA, LBA
Shane Isley is an entrepreneur, performance thinking® practitioner, and management consultant who earned his bachelor’s and master’s degrees in behavior analysis from the University of North Texas. He serves as a Senior Consultant for the Performance Thinking Network and leads the company’s emerging Performance Thinking® For Behavioral Health/ABA Organizations service line. In his role, Shane works with a team of organizational performance consultants to deliver performance improvement programs and services to companies of all sizes to help them establish or improve their performance infrastructure, processes, policies and procedures, job definitions, and management capabilities. Shane collaborates with business owners and executives to develop and implement solutions that increase profitability and improve operational efficiency, employee engagement, and service quality.
Shane has over fifteen years of specialized experience and expertise in the behavioral health care market as a business owner, executive director, and performance improvement consultant. Shane remains committed to helping behavioral health organizations lay the foundation for sustainable, ethical, and profitable growth with a focus on organizational alignment, leadership & management development, and process improvement.
2 Association for Professional Behavior Analysts (2015). Avoiding antitrust liabilities: guidelines for APBA members. San Diego, CA; Author.