Employers are always searching for ways to trim expenses without harming employee morale and compensation. Employee medical benefits is one area where employers have difficulty finding such "win-win" projects, principally because of the ever increasing cost of medical care.¹ Yet employers that self-insure their workers’ compensation and employee medical insurance may find it cost-effective to offer on-site physical therapy for employee rehabilitation services. Compared with community-based providers, an on-site physical therapy clinic offers the advantages of better control over rehabilitation expenses and related non-medical costs; an accessible and inexpensive medical benefit for employees; and valuable non-patient services that would otherwise not be available or would cost extra.

This article will discuss the benefits and limitations of providing physical therapy in the workplace by contracting with a physical therapy provider.

Self-funded Employers Have an Edge

It’s important to first understand the connection between an employer’s decision to self-fund its medical insurance and the financial benefits from an on-site clinic. In a traditional insurance arrangement, an insurance carrier or managed care organization (MCO) provides claims administration and finances the claims pool through group-based premiums. This approach is advantageous for smaller employers because it spreads the risk of large claims over many employers. However, the risk management benefit comes at the cost of ceding control over the claims fund, premium setting, and the selection of providers. In contrast, an employer in a self-funded plan sets aside funds and pays its own claims from that fund, even though the plan may have a third party claims administrator. This approach allows an employer substantial control over its claims fund but requires larger employee populations in order to properly spread the risk of large claims.

It’s easy to see how savings from an on-site clinic would be immediate in a self-funded plan. Every dollar not spent from the employer’s fund is a dollar saved. But in a group plan, the insurance carrier or MCO handles the underwriting and premium setting and would have no incentive to share the benefits from an on-site clinic with the employer-subscriber. In addition, in workers’ compensation cases the overall expense includes lost time, not merely medical expense.² For these reasons, self-funded employers are more likely to benefit from on-site facilities than employers that are not. (All references to employer in the remainder of this article will mean a self-funded employer.)

Two Categories of Benefits for the Employer

The savings resulting from an on-site clinic may be divided into two categories: direct and indirect. Direct savings include the typical expenses of rehabilitation—therapist fees, supplies, and equipment charges—that are paid from the employer’s insurance fund. The indirect savings include non-medical expense areas, such as travel time, off-site employee conduct (liability risk), and availability of certain non-patient services. Unfortunately, these indirect savings are often overlooked when assessing the viability of an on-site physical therapy clinic. Let’s look first at how an on-site clinic can provide direct savings.

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Direct Benefits Depend on Contract Details

In establishing a clinic, the employer and the physical therapy provider must reach an agreement regarding compensation for the provider’s time and clinical expenses. In general, there are two approaches to structuring such an agreement, with these approaches shaping different financial outcomes for the employer. The first is an arrangement in which the employer pays a monthly fee to a provider, with the fee reflecting the hours the physical therapist would be required to be on-site to handle the patient volume.

In the second approach the employer brings in a provider under a fee-for-service scheme.³ The provider agrees to reduce its charges below the community average in exchange for space and utilities.

The accompanying graph shows the cost behavior of the two approaches, plus a community-based model, and incorporates assumptions that are based upon the author’s experience:

• The average cost of a community-based visit, adjusted for any co-pay, is $120, including supply costs. (Line CB)

• The employer is charged $90 per visit, including supplies, under the on-site/fee-for-service approach. This generates $30 in savings per visit. (Line OS-FS)

• In the on-site/monthly fee arrangement the provider supplies a full-time physical therapist (40 hours/week) for one year at a cost of $72,000. (Line OS-MF) This is sufficient to cover therapist compensation and supply a reasonable profit to the provider. Supplies are assumed to be $2.25/visit⁴ and are built into OS-MF.

• Volume, measured by the number of annual patient visits, is the independent variable and reflects both workers’ compensation and regular medical insurance volumes. Unless otherwise specified, the discussion in this article will assume both volumes. One therapist should be able to handle up to 2,500 visits per year. The cost of operation is the dependent variable.

• This analysis does not assume an iontophoresis contract or isokinetic equipment.⁵

If annual volume is expected to significantly exceed 1,000 visits, the economics sharply favor the on-site/monthly fee approach (OS-MF). Once the monthly fee has been satisfied, every additional patient visit saves the employer $117.75 ($120 outside cost saved less the cost of supplies of $2.25) compared with the same treatment at a community-based clinic. In contrast, the fee-for-service arrangement generates only $30 of savings for each additional visit. At 2,000 annual visits, for example, a fee-for-service clinic saves $60,000 versus the community-based system. But when the employer pays the provider a monthly fee, savings grow to $163,500!

Of course, the monthly fee arrangement becomes more expensive than the fee-for-service approach if volume drops below the breakeven point with the fee-for-service clinic (820 visits). Moreover, the monthly fee arrangement triggers a loss if volume falls below the breakeven point with the community-based provider (600 visits). Reducing clinical hours, which will lower the breakeven points, is one way to manage this problem. As a result, an employer planning a monthly fee system should allow for reduced hours in its contract if business conditions warrant.

Good Clinical Management Brings Additional Benefits

Once a therapist is on-site, the therapist and the employer’s medical advisor can effect additional direct savings by working together to improve efficiency. A major measure of clinical efficiency is the number of patient visits per episode. For example, if the regional average for a particular injury is 10 visits, but the on-site therapist produces the same outcome with 8 visits as a result of treatment guidelines agreed to by the therapist and the employer, then the employer saves 2 visits per episode. In the fee-for-service approach this efficiency would generate an additional $9,000 per year in savings, assuming 150 episodes per year ($30/visit x 2 visits/episode x 150 episodes/year).

In the monthly fee approach, efficiency changes increase the clinician’s capacity to manage both patient and ancillary service volume. There are no immediate savings because the therapist is on-site for a flat fee, regardless of volume levels. But as patient volume grows, the enhanced capacity—300 visits using the above example—ultimately translates into savings because it delays the addition of another clinician. Clearly, good clinical management can reward the employer in both approaches.

The cost savings just described, where the employer and the therapist improve efficiency through better clinical management, is a contingent benefit and should be distinguished from the benefit described earlier where the savings arise from a simple substitution of providers. The distinction is important. Once an employer and a provider reach agreement on the terms of the deal and start operations, the savings are almost automatic. But a contingent benefit is not guaranteed and depends upon effective management of the new
situation.

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Indirect Benefits

Let’s now focus on the second group of benefits from an on-site clinic. These are generally non-medical in nature and would not be reflected in insurance savings. This point is important because any employer, whether self-insured or not, could benefit from savings of this type. For non-self-insured employers these cost savings may provide a "back door" way of justifying an on-site clinic.

The chief indirect benefit is time saved on travel. This translates directly into increased productivity, and its annual effect is estimated by multiplying the number of off-site visits by the travel time for an off-site visit by an hourly work rate. Since some employees’ travel occurs on personal time, this product should be modified by multiplying by the percentage of visits occurring on work time. For example, if we assume an annual volume of 1,500 visits, one hour for round-trip travel time, $23.20/hour for the value of work time, and 50% for the employer time factor, then an employer could save $17,400 per year.⁶ The following table shows the value of recaptured work at different volumes, using the preceding assumptions.

Other indirect expenses are contingent and can reflect a range of assumptions, making them difficult to quantify, but they are still significant and should not be overlooked.

• Liability and employee misbehavior. Every employer has concerns about employee misbehavior and liability whenever an employee is off-premises on employer business. Improved control over an employee’s whereabouts resulting from an on-site clinic may result in potential liability insurance savings.

• Speed of access to physical therapy. Speed is important since there is evidence that the ability to initiate physical therapy quickly translates into improved outcomes, particularly reduced lost work time and duration of treatment.⁷

• Ancillary services. The monthly fee arrangement allows for services beyond the normal therapeutic functions at no extra charge. Such additional services include musculoskeletal screenings for new hires and recalls, functional capacity evaluations, transitional work programs, and ergonomic and job site consultations. Additional services performed by the therapist represent a savings equal to what it would have cost to hire an outside consultant. The savings here could be substantial. In the fee-for-service model, the employer would have to pay for such additional services, but could possibly negotiate reduced fees with the provider.

• Employee morale. On-site physical therapy benefits employee recruitment and retention. Because employees juggle so many priorities in their lives, some will forego needed physical therapy if they have to seek a community-based physical therapist. Both the employee and the employer lose in this decision because avoiding essential medical care can lead to lowered productivity, functional status, and morale.

Employees could receive another benefit from an on-site physical therapy clinic: reduced or zero co-payments. The fee-for-service arrangement allows the employer to allocate the savings between itself and the employees in any percentage by adjusting the co-pay from zero up to the regular amount. The monthly fee arrangement has no co-payment. Whichever arrangement the employer selects, the employee is sure to appreciate any reduction since a co-payment now costs as much as $20-30 per visit.

Costs and Limitations

The benefits of an on-site clinic can’t be realized without an initial expenditure of funds. The cost of equipment in a lightly furnished clinic would run approximately $15,000–$20,000. In addition, some building modifications may be required, such as plumbing or wiring. But if the potential savings are sufficiently large, the initial investment would be recovered very quickly.

Besides the initial cost there are some practical limitations on patient volume for an on-site clinic. The clinic would not be able to handle any in-patient physical therapy or provide care in all specialty areas, such as orthotics, prosthetics, and some hand or neurological cases. Some specialized equipment may not be feasible either, such as hydrotherapy or traction.

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Setting Up a Clinic: Due Diligence

The following steps provide a map for an employer considering on-site physical therapy.

1. Collect data for both occupational and non-occupational physical therapy claims, keeping in mind the preceding point that not all conditions can be treated at an on-site clinic.

2. Analyze the information for volume.

3. Contact local physical therapy providers. Important topics for discussion include their experience in the treatment of occupational injuries and in on-site clinics, whether a fee-for-service or a monthly fee setup would be best, expected volume and hours, initial investment for equipment and building modifications, supplies procurement, space requirements, and ancillary services. (Other important issues are listed below.)

4. Secure the approval of executive management and request written proposals from the providers.

Setting Up a Clinic: The Letter of Understanding

Once a provider has been selected, both parties have to finalize their agreement. Every point that was discussed in the preliminary talks or proposed in the written proposals, along with any negotiated modifications, must go into this agreement. The agreement should be reviewed by the parties’ respective legal counsels and should address, at a minimum, the following points.

• Charges and fees, including supply and equipment costs, building modifications, and ownership issues.

• Who purchases the supplies, and payment arrangements (e.g., bill-back arrangements).

• Clinic hours.

• Medical records ownership, management, storage.

• Staffing and substitution of personnel (e.g., use of physical therapy assistants).

• Medical directorship/referral sources.

• Regulation of the practice of physical therapy (HIPAA, professional standards of the American Physical Therapy Association, and state laws).

• Treatment limitations in specialty areas.

• Agreement renewal and termination.

Conclusion

An on-site physical therapy clinic is an opportunity to provide a service that will generate benefits for years in the future. It’s a clear "win-win" for both the employer and its employees. .

Footnotes