Five-Step Private Medical Practice Survival Plan: Part I

In 2014, private practices will face a period of unprecedented change and challenges, driven by a wide variety of factors, ranging from the implementation of the Affordable Care Act to increasing private and public payer requirements such as ICD-10 and the shift to consumer-driven payment models. These factors are just adding to a growing list of concerns that are contributing to the fact that independent physicians, as group, are a disgruntled bunch right now. According to the recent 2013 Great American Physician Survey, conducted by Physicians Practice and sponsored by Kareo, physicians ranked their number one frustration as too much third-party interference. The conventional wisdom, often covered by the mainstream media, is that the rate of change and the significance of the challenges are creating insurmountable barriers for independent practices leading to practice sales or early retirement.

Despite these pessimistic views of the future of private practice physicians, there are actually signs of a coming renaissance for the independent physician. Both the Physicians Foundation and the AMA have released their own studies, and the data shows that while hospital employment has increased, work in private practice remains much more significant. Most interesting, a recent AMA study showed that doctors in physician-owned practices are more satisfied than those working for hospitals or larger delivery systems. Ironically, the coming renaissance is being driven in part by the same set of challenges, most notably increased patient demand. But it's being made possible by the emergence of new and better technology, services, and operating practices that are enabling small-practice physicians to rebalance their focus away from the business side of running a practice to the patient side, where it belongs.

There's no question, though, that 2014 is going to be a challenging year, and physicians can't simply sit back and wait for changes to happen. Those who are interested in a better future must take steps now and plan for their practice so that they can successfully manage the transition over the next few years to emerge as strong, successful, independent, patient-centered practices. The first step is to develop a 2014 action plan.

Step 1 - Your Financial Plan

The place to start is the most critical area for a practice - its financial condition and operations. The best way to do this is with good benchmarking data. These data can be secured through many sources, including healthcare associations such as the Medical Group Management Association, suppliers, and networking. By comparing a practice's performance relative to benchmarking data, key areas of weakness can be identified for action. Benchmarking data should reflect the size, geography, specialty, and operating model of a practice, although some metrics can be viewed more universally.

In benchmarking financial performance, it's good to start with practice revenue. How does the practice compare in gross billings per provider to a relevant comparison group? What are the drivers of either positive or negative variances? Are there consistent schedule openings that could be filled with new patients? Are there opportunities to expand services to existing patients, like scheduling annual wellness checks? Is the payer mix optimized for the best possible financial performance? Are billing results meeting standard performance metrics? 

Very few practices collect all of their billed revenue and even fewer do so through an efficient billing process. Billing metrics are among the most important to understand and manage in a practice. Despite this, private practices achieve vastly different billing results hindering the success of otherwise well managed practices.

In diving deeper into billing results, here are a few key benchmarks to analyze:

1. The net collection rate overall should be greater than 95 percent. If it's less than this, a practice has one or more billing issues that must be resolved to ensure financial success.

2. Average days in accounts receivable (A/R) should be less than 40 days to 45 days. Longer time periods mean a practice has to carry too much working capital to cover ongoing costs and points to an ineffective billing process.

3. Accounts received over 120 days from date of service should be less than 12 percent to 15 percent.

4. Days from service to bill should average less than three days, with most claims billing in one day to two days. Again, longer periods point to an inefficient process.

5. The claim denial rate should be less than 3 percent to 5 percent monthly. This is essential in both achieving a collection rate greater than 95 percent, but also to avoid unnecessary administrative costs managing denials.

Gross and net revenue are the starting points for a financially successful practice, but the broader costs of a practice must be benchmarked as well. The best way to do this is as a percentage of gross revenue and collected revenue. A practice should break up its costs into a manageable number of categories and analyze these versus other similar practices to understand cost mix. These categories should include: provider compensation and related expenses, staff compensation and related expenses, facilities and associated costs, costs tied directly to the delivery of care, and non-facilities infrastructure costs like software, equipment leasing, maintenance, etc., and legal and financial management costs such as accountants, attorneys, and insurance expenses.

Where a practice identifies what appears to be a more costly category, the practice should explore opportunities for cost reductions. These might take the form of new negotiated agreements, outsourcing of sub-scale functions like billing, or replacing older and more expensive technology with newer, cloud-based options.

By understanding relative financial performance, a practice can identify key areas of risk or weakness and then establish clear actions to address these areas in 2014. Almost all practices, even the best managed, have multiple opportunities for improving financial results with proper planning and focus.

One example of a practice that achieved positive operational improvements after a practice assessment and action plan is Perry, Ga.-based pediatric speech therapy practice Speech Path. The practice moved to a cloud-based billing system supplied by Kareo and an integrated EHR from WebPT and added three clinical providers and eliminated four non-provider positions. This well-managed practice now has 21 providers at two locations seeing 400 patients a week supported by five non-provider positions. Their average time in A/R generally runs less than 30 days and claims from their largest payer are received in 10 days or less. They have a steady flow of revenue and are well positioned for ongoing growth.  

In Part II of this blog, Dan Rodrigues will discuss the second and third steps for a private medical practice survival plan for 2014: addressing your payer plan and your technology plan.

Dan Rodriguesis the founder and CEO of Kareo, the cloud-based medical office software and services platform he launched in 2004. Today, Kareo serves nearly 20,000 healthcare providers through its integrated practice management, EHR, and revenue cycle management solutions. Prior to launching Kareo, Rodrigues designed technology for healthcare, and other industries, as a co-founder and managing partner of Skematix, and earlier in his career, he also co-founded and led Scour, a popular search engine for finding music and video content online. He holds a Bachelor of Science in Computer Science from the University of California, Los Angeles and is a resident of Orange County, Calif. E-mail him here.