What's Your Practice's Financial IQ?
Six steps for preventing financial health problems
Costs are up and revenue is down in many practices. Even so, some physicians and office administrators are reluctant to dig into the details of the problem and find solutions. If you're tired of the anxiety and unpredictability, buckle down and take a hard look at your numbers.
Physicians should perform routine financial checkups on their practices throughout the year. Just as they recommend preventative steps for their patients, so too should they follow these six steps for preventing financial health problems in their practices.
- Develop a budget
- Monitor practice overhead
- Monitor cash flow
- Monitor accounts receivable
- Monitor collection rates
- Know the cost of doing business
1. Develop a budget Preparation
|
If you're developing a budget for the first time, don’t expect it to be perfect. Think of it as a work in progress and an investment in your financial future. |
Many medical practices don't develop annual budgets because preparing one takes time and analysis. Is knowing your destiny worth it?
Budget preparation requires an understanding of the type and amount of expenses your practice historically incurs. Budgeting also forces you to assess what impact current market indicators will have on future operations.
For example, it's important to project the impact of increasing medical malpractice premiums on your practice's financial operations, particularly on cash flow.
Assessment Physicians should assess where and why variances to a budget occurred.
For example, did expenses for medical supplies increase because of:
- Increased usage?
- Increased pricing?
- A combination of both?
If it's a pricing issue, can you use alternate vendors or employ more effective purchasing techniques?
The budget is only useful if you assess actual results to expectations. Comparing actual against budgeted expenses on a monthly basis is a useful exercise, as is comparing current expenses against last years' expenses for the same period.
Having a budget and using it provides for proactive management of your practice's finances.
[
Top]
2. Monitor practice overhead
Gaining an understanding of your practice's overhead percentage is key to successful financial management.
|
Analyze and compare overhead expenses to previous years' performance monthly. |
The practice's financial statements should clearly differentiate physician expenses from other operating or overhead expenses. The ratio of operating expenses to net revenues (collections) is an important financial indicator.
Physicians should compare their practice overhead to other practices of the same specialty. There are a variety of surveys you can use to benchmark overhead expenses, including ones from the Medical Group Management Association (MGMA) and the National Association of Healthcare Consultants (NAHC). Some of the specialty societies also collect this information.
An important component of monitoring overhead is a comparison of staffing level/expenses per full time equivalent (FTE) physician to other practices. Staffing levels vary significantly by specialty.
For example, the Pennsylvania Medical Society's 2001 Salary and Benefits Survey reported an average of 5.75 staff per physician in ophthalmology practices. The same survey reported an average of 3.11 staff per physician in pediatrics practices. Both of these benchmarks were comparable to the averages reported in the MGMA and NAHC surveys.
[
Top]
3. Monitor cash flow Many practices these days are experiencing difficulties with cash flow. Barring any unusual circumstances, shortages of cash often indicate more serious financial problems.
Every aspect of a medical practice's financial operations affects cash position, including:
- Physician productivity
- Fee schedules
- Billing
- Collections
- Expense management (particularly compensation and staffing levels)
- Purchasing activities
The availability of cash can be problematic at the beginning of the year because of the need to "zero out" the practice's books at year's end. Some practices place monies in reserve in anticipation of this. Physicians, with their accountants, should plan for this so the practice isn't operating without adequate funds to start the year.
Generally, it's not advisable—nor should it be necessary—to utilize a line of credit to pay for the practice's ongoing operating expenses.
If your practice is using this strategy to fund operations, use credit sparingly and on a temporary basis. Otherwise, your practice will be in a vicious cycle of borrowing and incurring interest which further compounds the problem by placing strains on cash.
[
Top]
4. Monitor accounts receivable
|
Aggressive management of A/R is key to a practice's financial success. |
Practices should monitor accounts receivable (A/R) monthly, at minimum. The most successful practices review them weekly.
The A/R in the 0-30, 31-60, 61-90 and 91-120 day categories indicate how successful your practice is at getting paid for the services it provides.
A general rule of thumb:
- The longer a claim is outstanding, the less likely it will be paid.
Aggressive management of A/R is key to a practice's financial success. Again, there are benchmarks available for comparison purposes. Generally, a practice should have less than 20 percent of its receivables in the 91-120 day category.
Electronic claims submission and payment posting typically improve a practice’s A/R status.
[
Top]
5. Monitor collection rates
There are two rates to help you evaluate your practice's collection efforts:
- Gross collection rate
- Net collection rate
Gross collection rate
|
Obtain charges and payments from your practice's billing system. |
Calculate the gross collection rate by dividing total receipts by total charges. This indicates the percentage of total charges collected.
This ratio can vary from practice to practice based on payer mix and fee schedules.
For example, a practice charges $100 for a service. In accordance with the practice’s contract, the insurer pays $50 for the service, yielding a 50 percent gross collection rate. However, if the practice charges $50 for the service and is paid $50, the result is a 100 percent gross collection rate.
You should establish internal goals for gross collection rates for each major payer based on your practice’s fee schedule.
Net collection rate
|
Your net collection rate should be as close to 100 percent as possible. |
The net collection rate shows how much a practice collects based on what's available to collect. Calculate this ratio by dividing the sum of total receipts and total adjustments by total charges.
As in the example above, the practice has a $100 charge and the insurer payment is $50. The adjustment amount for the practice’s charge is $50 and the net collection rate is 100 percent.
The net collection rate—which indicates how much of your practice's collectible production is actually deposited into the bank—should be as close to 100 percent as possible. This rate may vary due to timing of collections and adjustments from earlier periods.
[
Top]
6. Know the cost of doing business A business can't survive if the cost of producing a product or providing a service is greater than its selling price. A medical practice is no exception to this rule. If you know the cost of providing services, you can make more informed practice decisions.
RVU analysis
|
It's preferable to utilize a full year’s worth of data to conduct an RVU analysis. The data should include all of the services the practice provided, as well as reimbursements for those services. |
Conducting a relative value unit (RVU) analysis is an easy way to determine the costs that go into each service your practice provides.
To perform the analysis, you'll need:
- A report listing total volume for each procedure (by CPT code) and total charges and payments for one year. Most practice management computer systems will provide this information.
- Your practice's statement of income and expenses for the corresponding one-year period. This statement determines work, malpractice and practice cost components of the RVU analysis.
Work component The statement of income and expenses must separately identify all physician expenses such as:
- Salary and benefits
- Conferences and travel
- Automobile
- Any other expenses specifically related to the practice's physicians
Malpractice component
- Most practices capture malpractice expenses separately for accounting purposes and to easily distinguish it from other insurance-related expenses
Practice cost component
- All remaining expenses of the practice
Cost per procedure Based on the RVU’s for the procedures performed during the year, a conversion factor is calculated for each component of the analysis. These conversion factors are applied to each procedure in an effort to identify the per procedure cost.
|
Physicians who pay attention to their practice's financial IQ
will have a healthier
practice overall.
As noted by B.C. Forbes:
“If you don’t drive your business, you will be driven out of business.” |
Use a cost analysis by procedure to:
- Make more informed decisions on types of services to offer
- Decrease overhead by eliminating unprofitable services
- Analyze capitated and global payment contracts
- Negotiate higher payments for unique services provided by the practice
- Market the practice’s most profitable services
[
Top]
Source: Content of this Web article courtesy of PMSCO Healthcare Consulting, a subsidiary of the Pennsylvania Medical Society, which provides a full range of health care consulting services to physicians, hospitals, third party payers and other health care organizations. For more information, go to
www.consultpmsco.com.
Last Updated: 8/6/2008