6 keys to profitability

With an ever-growing list of costly mandates, increasing overhead, and declining reimbursements, the pressure to remain profitable has undoubtedly intensified for many office-based primary care physicians (PCPs), according to practice management experts.

The business challenges in 2013 likely will become even more magnified as patient demand increases, the supply of available PCPs decreases, and the focus on the healthcare sector shifts to cost reduction overall.

“We’re seeing a shrinking number of available PCPs in the marketplace,” says Tessie Quattlebaum, CHBC, FACHE, president and chief executive officer of Quantrex Healthcare Business Consultants, Lilburn, Georgia. “There are multiple reasons for that; the reimbursement versus the expense can be very difficult to juggle. The patient volume is out there, but [physicians] still have the overhead, and they can only see so many patients in a day.”

In 2009-2010, Quattlebaum says, specialists outnumbered generalists, yet generalists still reported about 30% more visits than specialists.

The message? This numbers game isn’t focused soley on patient volume. In fact, it’s more about managing the business in more efficient ways than in the past.

Although the tools to monitor, track, and increase profitability are available, says Anthony Morabito, CPA, ABV, CFF, CVA, ASA, of Morabito and Co. CPAs in Rochester, New York, “the difficult part of it is whether or not [practices] have the ability and the time to watch these items.

“Doctors and other providers care about their patients, but the time, effort, and expense of practicing medicine will be weighed against the financial benefit and reward to be earned,” he says.

The key to building an economically healthy and viable practice, experts say, is to start with a sound business plan that focuses on patient engagement, serves a valuable need, and addresses key issues important to the economic viability of the practice. A business plan is essential to giving you and your practice firm footing on the path to financial health, and such a plan is not just beneficial to those approaching the completion of residency. If you are debating whether to stay in your current arrangement or make a change, it pays to give serious thought to these six factors multiple times over the course of your career, experts suggest. Doing so can help you determine whether the arrangement you have in mind will cover your expenses and result in net proceeds.

1. LIFESTYLE

In creating a business plan, ask yourself key lifestyle questions such as how much time you want to spend at the office. Many primary care practices have expanded to evening and weekend hours, and new regulations are forcing them to incorporate more variables into their practices to meet quality-of-care measures. Such changes make it increasingly difficult to predict trends and complicate the creation of business plans, Quattlebaum admits.

“Even though right now we’re looking at a per-unit basis of how to break even, the shift is going to quality outcomes,” she says. “Our system is in flux so, as a consultant, I feel that if a practice is established and has an efficient model and good customer base, it can work into outcome-based models and be dedicated to it. [But] the predictive aspect of it is going to become increasingly difficult.”

2. SALARY

“In the primary care groups we’ve worked with, the biggest factor that determines how much business they need to bring in is directly tied to the salary the physician wants,” says Andrew Creme, MBA, a consultant with MD Practice Consulting, Lake Mary, Florida. When discussing benchmarks, “it really depends a lot on the situation a practice is in,” he adds.

If you are new to practice, only take what you need to survive, then determine how long it will take for you to break even, Quattlebaum says.

The average income of a PCP, depending on the size of the patient panel, ranges from $120,000 to $180,000. Add in staffing costs, overhead, facility fees, and more, and a “bare-bones” practice would have to bring in $700,000 to $800,000 a year in business, Creme estimates.

On the low end of the physician salary scale, a practice should expect to generate $50,000 to $60,000 per month in revenue. Average salary requirements drive a need for $100,000 to $150,000 a month in revenue, whereas high-end salaries demand $250,000 to $300,000 of revenue each month. Those figures only finance smaller practices, perhaps with a single practitioner and one to two midlevel providers, Creme says.

Once doctor income has been set, most new primary care practices need to earmark about $250,000 in startup costs, then decide what they will need in average collections to estimate a total panel size needed. Panel size and average collections depend on the market and the payer mix for their area of practice.

3. COLLECTIONS

Median collections in family medicine are around $630,000 per year, and median total practice overhead can run around 56%, Quattlebaum says, citing statistics from the Medical Group Management Association (MGMA). See “Measures of success in primary care single specialty practies” for more MGMA research results.

4. PATIENT PANEL

A family practice might be able to break even with 14 patients a day but would need to see 18 or more in most areas to see a greater profit margin, Quattlebaum says.

And panel size determinations involve other factors, too. Many practices average more than 24 patients per day but then have to consider expanding staff and facilities to support that patient panel size.

Quattlebaum says she expects to see PCPs maintain a panel size of about 1,900 patients per year, overall. Creme estimates PCP panel size at about 2,500 patients for each solo, full-time or full-time-equivalent PCP. A physician assistant could add another 1,000 to 1,500 patients to a practice, he says.

But exactly how many patients are included in the panel depends on what kind of practice a doctor wants to run. A practice dedicated purely to family medicine makes money traditionally on consultations and less on ancillary services, Creme says. The more ancillary services a practice offers, the fewer patients are needed in the practice’s panel, because the physician is maximizing dollars.

“As they grow a single patient, they don’t want to generate $1,000 a year….It’s better to generate $2,000 a year off each patient,” Creme says.

But back to demographics. Creme says a physician must consider the demographics of his or her practice when building or evaluating a business plan. A practice that has a base with a higher proportion of elderly patients requires more physician visits and testing, but Medicare reimburses at lower rates than commercial insurance payers. So although a PCP whose practice has more elderly patients may generate more visits from his or her patients, the doctor also will spend more time with each patient and will be reimbursed less for that time than a physician who sees a younger group of patients who have their own insurance or a practice with a good mix of younger and older patients.

5. OVERHEAD

In terms of overhead, Creme says that business plans should be as exact and all-inclusive as possible. Include items such as malpractice insurance, facility costs, legal costs to ensure that all of the practice’s contracts are in place correctly, human resources costs, staffing costs, marketing costs, credentialing, and information technology.

Average costs depend on demographics and market conditions, but usually the biggest cost other than physician salary will be the facility the practice is housed in. Rent can be $15,000 per month alone, not including equipment costs, Creme estimates.

6. PRACTICE ARRANGEMENTS

To battle increasing costs and lower reimbursements, Morabito says that more physicians in solo or small group practices are looking into merging.

Mergers do little to save on operating costs, and the practices typically continue to operate independently within the combined group practice. But such an arrangement can give practices increased negotiating power with payers-like that enjoyed by larger practices-and could have a considerable effect on reimbursement rates.

A doctor who does not merge his or her practice with another may consider becoming an employee at a hospital system or, if he or she is older, moving toward closing the practice or retiring.

More and more, Creme says, PCPs are joining group practices if they want to practice strictly primary care. Doctors with more entrepreneurial spirit may want to perform more treatments and surgeries and, therefore, may prefer solo practice. Hospital employment, on the other hand, offers more perceived security.

“We’ve heard some terrible stories about hospitals essentially abusing [PCPs] and using them as a referral source for their specialty services,” Creme says.

“Not too many PCPs go to the hospital unless they want a balance of life [-for instance,] they want to only work 25 to 30 hours a week and know they’ll get a salary regardless of what they’re billing.”

Hospital employment means not worrying about staffing or the business side of practice, Creme says.

Some hybrid models of practice also are forming, providing new options for physicians who don’t want to join hospital systems or own their own practices. Medical service organizations (MSO) run the business end of a practice, allowing the physician the freedom to concentrate on clinical care, Creme says. The physician negotiates a salary and bonus with the MSO, then focuses on seeing patients.

Creme says hiring an MSO has advantages over using an office manager; running your business is the sole duty of the MSO, whereas office managers are pulled in multiple directions within a practice and often cannot devote enough time and effort to expanding the business, maximizing revenue, and minimizing costs.

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7 more ways to gain or maintain financial success

If you want to be independent, Anthony Morabito, CPA, ABV, CFF, CVA, ASA, of Morabito and Co. CPAs in Rochester, New York, has some advice on maintaining and monitoring profitability within your practice.

• Prepare an annual operating budget. Most practices now use electronic practice management systems that will have all the information needed readily available, making this step relatively easy.

• Forecast revenues for the year. Your electronic practice management system can provide a productivity or production report showing the historical data on the number of times each Current Procedural  Terminology (CPT) code was used-reflecting services provided-and the average fee collected related to each code. Flow the data into a spreadsheet and enter your new average reimbursement rates to calculate your projected annual revenues. Revenues can even be projected by CPT code by provider and by using the actual rates to be received based on the projected procedures to be performed in the upcoming year.

• Forecast expenses for the year. Staff salaries and wages probably account for about 25% of your revenues and make up about 40% of a practice’s overhead. These expenses are known and can be forecasted for the next year. Other overhead, including medical supplies and general administrative expenses, can be forecasted by looking at each expense in your income statement from last year and determining what the expense will be going forward. Digging into the detail of your expenses does take some time, Morabito says, but it forces you to examine where you are spending your money.

• Compare your budget to prior-year results. Once your budget is complete, see how it compares with actual expenses and revenue from the prior year and with comparable practice percentages (available from groups such as the Medical Group Management Association and the National Society of Certified Healthcare Business Consultants).

• Monitor progress. A budget in hand does not provide much direction for a practice if it is not monitored. Morabito advises that practices check the budget, including patient charges by CPT code, every month or quarter against your budget and prior year. Are you performing more procedures or fewer of them? What is the average fee collected for each procedure? Also, review accounts receivable to be sure you collect what you billed in a timely manner. Look at gross collection rate, net collection rate, average days receivable, and accounts receivable turnover. How do gross and net collection rates compare with those of prior years and to national or regional statistics? Take note of unapplied credit balances, and return overpayments to patients. Watch evaluation and management (E/M) coding, and compare your coding and billing with national statistics to determine whether the percentage of your encounters for each E/M code fall within a reasonable range. Medicare recovery audit contractors are on the lookout for practices that are perceived to be “upcoding,” Morabito warns. Review all these operating results by the month and for year-to-date against your budget and the prior year’s results.

• Create a list of highlights, a monthly or quarterly dashboard or summary of financial metrics that are important to maintaining profitability for your practice.

• Have a plan for “just in case.” Keep a line of credit open to help smooth out cash-flow timing issues.

Measures of success in primary care single-speciality practices

Better-performing practices generate more revenue, report less total operating costs as a percentage of total medical revenue (for the most part), create operational efficiencies to ensure strong provider productivity, and collect their receivables more quickly than their peers, according to research by the Medical Group Management Association.