Financial Checkup

Financial success for a physician practice seems, on the surface, like a simple matter: revenue has to be higher than expenses. Put even more plainly, there has to be more money coming in than going out.

The trick lies in understanding what to measure - and what to change - to make sure you are hitting the right balance of income and costs. It's a bad idea for any business to find out only at the end of a busy year that it lost money or made less money than the year before. You need to track it as you go along and make adjustments as needed.

In a normally chaotic medical office, that is easier said than done. But by tracking just a few standard indicators, it's relatively easy to keep an eye on your financial standing. By understanding revenue and expenses - and the factors that influence both - you can manage your practice more successfully.

Obviously, the more money you bring in, the better your financial success. But that healthy cash flow isn't a matter of luck. It depends primarily on three criteria: payer mix, productivity, and successful collections.

Know your payer mix

A practice needs to know where its money is coming from. Understand both who your payers (the insurance companies) are and the quality of what they pay. That way, you can better control your income.

To identify your payer mix - or who your payers are - look at your total gross charges, then break it down, naming your top five to 10 payers (or groups of them, like "managed care") as a percentage of gross charges. For example, a typical payer mix might be 30 percent Medicare, 15 percent Medicaid, 20 percent Blue Shield, 20 percent Humana, 10 percent Aetna, and 5 percent workers' comp.

While it's important to know what your mix is, there is no "magical" payer mix that guarantees success. Some Medicaid-only practices are profitable; they make up for lower reimbursement with higher volume, smaller office space, and fewer staff. Many practices are thrilled to get Medicare rates; others won't accept anything less than 130 percent of Medicare.

With that said, it is wise to strike a balance in your mix. Just as you spread out your personal investments to mitigate the risk lest any one company fail, balancing a payer mix makes it less likely that you'll be forced to accept a bad contract from any one of them, or suffer terribly if one goes out of business. For example, even if Payer A pays the best this year, you don't want all your patients to come from them. If they go bankrupt or decide to slash rates next year, you will be out of luck. Having several irons in the fire keeps you from getting burned by any one of them. In some locations, of course, there aren't enough payers to make it possible to balance things out. If there is only one payer in town, balance is a moot point.

In addition to knowing who is paying you, you need to know how much they are paying. That way, you can make reasonable decisions about jettisoning the worst payers or shifting your mix. Identify your average revenue per visit by payer. Then, for example, you can tell that if Medicare pays, on average, $75 per encounter (based on the services that you provide) and Cigna pays $95 per encounter, shifting 5 percent of your payer mix from Medicare to Cigna would mean an approximate 25 percent increase in revenue for that book of business.

Productivity counts

No matter what your payer mix is or what each one reimburses you, it remains true that patient volume drives revenue. The more patients you see, the more productive you are, the more money you make. (Under capitation, productivity still comes into play, but it's the volume of patients who you actively manage that is important.)

To evaluate your productivity, measure the number of patients you see each day. Be sure to count only those you actually see, not everyone you schedule. You don't get paid for no-shows and cancellations, so they should not be included.

Also, look at the number of hours you work each day. What is your average patient volume per hour? If you typically see three patients an hour, do you really spend 20 minutes with each patient or are you looking for the chart for five minutes, dictating for five minutes, talking with an employee for five minutes, and seeing the patient for five minutes? You want to maximize your productive time - the time spent in direct patient care. It is this time - and only this time - that is billable.

Compare your productivity to the productivity of others to get a sense of how you are doing. The Medical Group Management Association (MGMA) publishes data regarding outpatient, inpatient and surgical volume for more than 100 specialties in its "Physician Compensation and Production Survey".

Improve collections

If you multiply volume by reimbursement, it should equal revenue, right? Unfortunately, revenue depends upon one more important variable - your ability to collect for the services you render.

First, you must actually know and record what you do. Although this sounds simple, I've seen physicians fail to bill for as much as 20 percent of their hospital consults. Unless you cross-check billed office services against the appointment schedule and inpatient services against hospital records, you are probably losing money, too.

Once you capture the services, you have to be able to bill and collect for them. To evaluate your collections process, measure these three key indicators: Days in accounts receivable, percent of total accounts receivable over 120 days and adjusted collection rate (total collections divided by net charges, not gross charges). Visit www.PhysiciansPractice.com and go to the Tools section to find a free Accounts Receivable Key Indicators calculator. It will help you with the math and provide some industry benchmarks to help you gauge your success.

Control costs

Improving payer mix, productivity, and collections will boost the bottom line, but it's an uphill battle if most of that increased revenue ends up paying for excessive overhead instead of going in your pocket. But how do you know what's excessive and what is necessary? To measure your overhead rate, divide your operating expenses (staff salaries, malpractice, rent, equipment, technology, telecommunications, and medical supplies, for example) by your revenue.

The equation looks like this: [Total Practice Costs (fixed + variable) / Total Practice Revenue] x 100 = Overhead Rate.

The overhead rate equals all those costs that are used to support the providers in a practice - the resources you must use to generate revenue. The higher the rate, the less there is to contribute to physician income. Therefore, these expenses do not include the income or benefits of physicians or any other billable provider.

For surgical practices, the overhead rate should be 30 percent to 40 percent. You take home the remaining 70 percent or 60 percent. For specialty practices, the rate should be 35 percent to 45 percent; primary-care practices have the highest overhead rates of all at 45 percent to 55 percent.

If your overhead rate is higher than normal, it may not necessarily be because your costs are too high. Remember that this overhead rate is a ratio of costs-to-revenue. By improving revenue, you can have an impact equal to or even greater than the cost saved by laying off an employee. Interestingly, according to the MGMA's report on "Performance and Practices of Successful Medical Groups," group practices with a higher than average number of staff actually are more financially successful. That's because the staff frees physicians to see patients and boost revenue.

Sizing up staff size

Still, employee costs are significant for most practices - typically more than 50 percent of the total overhead - and physicians looking at overhead frequently begin to wonder if they have too many staff.

Traditionally, physicians have judged how many staff they need by comparing themselves to benchmarks on support staff per physician. Instead, design your staffing around your volume -- how many patients you see in your office and in the hospital, how many phone calls your office handles, and how many claims and bills are sent out. A busy practice may need more than the normal number of staff per physician while a less-busy practice may need fewer.

If you are spending more than 50 percent of your expenses on personnel, consider not only the total number of employees you have but also their salaries. Are you paying close to market? Chats with colleagues and want ads are good resources for judging if you are paying too much, but also peruse the Staff Salary Survey published by The Health Care Group each year that reports by ZIP code for dozens of medical office positions.

Also look at overtime and benefits. Would it be less expensive to hire a part-time or per diem employee than to keep paying that hefty overhead? Is it time to consider asking staff to pay for a portion of their benefits? Companies in many industries are asking employees to do just that.

Regardless of what techniques you use to control costs or boost revenue, it's important to be able to tell if those methods are having the desired effect. Tracking key indicators lets you know where you stand now, whether you are improving, and eliminates nasty end-of-year surprises. Track the key measurements at least quarterly.

Elizabeth W. Woodcock, MBA, FACMPE, is director of knowledge management for Physicians Practice Inc. She can be reached at editor@physicianspractice.com.

This article originally appeared in the September/October 2002 issue of Physicians Practice.