Who's Managing Your Finances?

Philip Armstrong can tell you firsthand the devastating effect of physicians turning a blind eye to the management of their practice's finances. Armstrong, a one-time group practice consultant and current administrator of the Oregon Clinic in Portland, once worked with a cardiology practice that felt secure in allowing a well-known local accounting firm to take the reins of the practice's finances.

Unfortunately, Armstrong says, the accountants were "asleep at the wheel," and neglected to emphasize to the doctors how a serious drop in the number of major procedures would affect revenue. The practice is now undergoing draconian budget cuts to try to turn things around.

While it's a great idea to free physicians' schedules so they can spend more time with patients, giving carte blanche to someone else to handle the practice's finances isn't the way to go. Like it or not, physicians need to take the time to make informed decisions about who will manage their money -- whether it's a dedicated staff person, a consultant, or a combination of the two -- and to remain active participants in the process.

"Ultimately, [physicians] are the decision makers about the way the business goes," says Mike Pulaski, CEO of Peachtree Orthopaedic Clinic in Atlanta. When they are involved in the financial aspects, he says, "... they can make better-informed decisions about the business."

Who's in charge?

Depending on the size of your practice and the degree of sophistication you require in your financial reporting, you may choose to put a single, dedicated staff member in charge; install a director or chief financial officer at the helm of a department; bring on a CPA or other financial consultant to work with you periodically; or use a combination of those options.

"I do think a combination [of resources] works well to provide a check and balance," says Diane Colton, the office manager at Family Medicine Associates in Carrollton, Texas. "We have a CPA we've worked with for 16 years. Our inside [financial] person is me. Fortunately we have such a good rapport with our CPA, he and I work hand-in-hand."

For smaller or newer practices that are short on resources, Colton suggests that an outsourced financial consultant can provide the most bang for the buck.

These practices, she says, should "dedicate the on-site people to customer service, to the practice of medicine, and the efficiency of the office operation. You can have someone on the outside not only evaluating that, but also ... making recommendations, whether it's loans for equipment or what have you. And [the consultant] can tell you whether there are problems the inside people may never see."

Armstrong believes that the way a practice structures its financial management "really varies practice to practice depending on the skills of the administrator and the size of the group." But regardless of the size, he says, "traditionally an outside person will play a role at tax time." As former CEO of the 90-physician Medford Clinic in Medford, Ore., Armstrong says, "I had a full-time CPA and a finance staff, but we still always brought in an independent accounting firm to do our tax returns because we felt we needed really good advice at the end of the year."

He also recommends smaller practices get help on the outside if they don't have the right resources internally. For instance, "if a group isn't preparing a budget and they don't have the resources to do a budget, bringing in a consultant to help them is worthwhile."

An accounting firm can also help your practice create its own internal reporting mechanism. "If you have an office manager or a bookkeeper who doesn't have the talent to prepare financial statements, there is software that can do that, so maybe an accounting firm can come in and show you how to do it," Armstrong suggests, emphasizing that even small or cash-strapped practices should not be reluctant to spend money to get help with financial planning and management.

Qualify them

Whether your financial expert is on staff or on the outside, you need to consider their qualifications and whether they will meet your practice's needs.

"I always look for somebody who's going to be doing more than just traditional accounting and financial reporting," says Armstrong. "I want somebody who will proactively look at what kind of business we are in and try to generate financial information that is unique to that particular practice."

To that end, healthcare accounting or finance experience is key, Armstrong believes.

"There are some unique issues in healthcare. ... Most groups are on a cash accounting or modified cash accounting basis, and that's something of a unique accounting format to professional service groups. If you've not had experience with organizations that do their accounting that way, it puts you at a disadvantage."

Colton agrees. One of her first questions of a candidate vying for a financial management position would be, "'What other experience do you have working with medical practices?' [A medical practice] is sort of a unique type of business. I would ask not only about other practices, but what other specialties they have worked with," says Colton. "There will be different things the financial people will see in different types of practices, like overhead -- what may be OK for one specialty will be unacceptable for another."

Colton also believes that the ideal candidate will be more than just a number cruncher.

"Other than [handling] just the straight financials -- can they be proactive on recommendations, can they see trends, can they be involved with the planning and growth of the practice?"

But not everyone is convinced that healthcare experience is a prerequisite. When he was searching for a chief financial officer for Peachtree Orthopaedic, Pulaski insisted that candidates come from other types of businesses -- and he argues that the "grow from within" approach doesn't always work.

"This is one of my prejudices. People in the medical field tend to get very incestuous," he says. "By that I mean [people who] don't have experience in the medical office are not considered. [Medicine] has been basically a mom-and-pop industry. You typically have three- to four-doctor practices that have grown larger, and they keep the same staff who may have a high school or associate degree in accounting, or they are bookkeepers, and they get loaded with more and more things they are not qualified to do.

"Second, I will argue that the corporate culture at the average medical group is not business professional. But you will pick that up if you bring somebody from the outside."

Either way, be sure that your financial manager or adviser is able to think outside the box and over the long term.

"They need to [tell] the group when they are in financial trouble," says Armstrong. "You want someone who can look prospectively into the financial condition of that group and say, 'The way your group is going, you're going to be in serious trouble,' or, 'Things are looking really good'" -- to do some financial planning as opposed to just responding to what this month's financial condition looks like."

Finally, ask for references before you hire, and do a background check on in-house staff.

Set goals and evaluate

Many physicians neglect to evaluate the performance of the people they hire to help them manage their practices. But without regular review and feedback, how are you (and whomever you hire) going to know if the job is getting done -- and done well?

To start, decide upfront which financial measurements will provide you with the information you need to meet your financial goals and to spot trends. If the practice is not performing well financially, agree on specific goals for improvement, particularly in billing and collections. If the practice is doing well, it is still important to have some standards in place. Use industry data or best practices benchmarks both you and the financial person believe are achievable and in line with the practice's overall goals. 

Armstrong suggests "developing a dashboard report where you can get on one piece of paper all of the pertinent information that ought to be reported on a monthly basis, or however often a group needs to review financial information. This includes accounts receivable measurements, current period and past year-to-date comparisons for A/R, days receivable, aging of A/R. These measurements can really vary group to group. For example, if you're a cardiology group, you want to measure major procedures that have been done the previous month versus year-to-date."

Colton says her group's CPA has helped them set monthly targets for receipts, which she says helps the billing staff and the practice as a whole to see whether they are meeting their goals. He is also responsible for ensuring that all the physicians get timely monthly financial statements, providing input on the practice's income division formula, and "just being available if the doctors have individual questions," says Colton. "And they might not be practice-related questions. We happen to have a CPA who does personal taxes for several doctors. It's an added benefit."

At Peachtree Orthopaedic, CFO Seaton is responsible for the overall performance of the A/R and cash management. According to Pulaski, "We do a very thorough budget and we look at every month's performance [compared] to projected numbers.

Expectations are implicit in the budget as to collection rates, payer mix, cost control, purchasing ... So if there is anything awry in those categories, it's like a black mark. Any aberration has to be explained."

Involve, educate physicians

When it comes to the practice's finances, "Doctors have to be interested and hands-on. They can't just have someone take it over and say, 'I just want to practice medicine.' I know a lot of them feel that way," says Colton.

"Our CEO, Dr. Honaker, gets a daily update of what's happening. Any large expenditure ... gets discussed with the board of directors, who are also the owners," she says. "The physicians get monthly reports on their own productivity and ... a comparison, one to the other. We also do a spreadsheet for the whole practice that shows where we were in 2000, in 2001, 2002, and where we are now."

In many practices, keeping physicians in the loop and educated about the financial picture has been an ongoing process.

Colton recalls that when her practice first opened with a single physician, things were simpler: "We didn't even file any insurance unless the patient was in the hospital. The doctor didn't even realize there was such a thing as A/R. You came in, you paid for the service, and you went on your way. There was no billing. So I think the understanding of cash flow issues" has been one of the biggest learning curves for physicians, she says.

Seaton adds that during her tenure, she has been "a big part of educating [physicians] about the reports that we provide them. ... My first couple of years I spent a lot of time educating them about what the income statement was, what the balance sheet was, how to read their A/R reports."

And it's a good thing. As Pulaski puts it, "The better educated [physicians] become, the smoother the organization is because they are more secure in knowing their financial affairs are very much in order."

Then the physicians can decide, intelligently, the role they want their financial manager to play.

Joanne Tetrault, MA, is managing editor for Physicians Practice. She has more than ten years' experience writing for healthcare education firms and in the development and implementation of CME activities. She can be reached at jtetrault@physicianspractice.com.

This article originally appeared in the March 2004 issue of Physicians Practice.