Improving processes in your medical practice

June 25, 2011

Understand how to make profitability and efficiency work effectively in practice.

Key Points

Unfortunately, this is not a perfect world. In the world in which we currently live, a huge amount of competition exists for the limited dollars available to pay for healthcare services, and our system is structured such that the more we compete, the lower the value per unit. The result is more competition, lower values, more competition...I think you get the point.

When I speak on this topic, I always begin by asking meeting attendees this question: "What would you say is the most important responsibility of a medical practice?" Inevitably, the response is nearly unanimous: "Provide quality care to our patients." That's a noble goal, but in my opinion, it is not achievable unless the truly most important responsibility is met first, and that responsibility is to be profitable. Unless you are a military, government-mandated, or some other form of deficit-funded facility, if you are not profitable, you will go out of business. And if you go out of business, how does that affect the quality of care within the community?

Profitability actually is a pretty simple algebraic equation: it's revenue over expense. So to increase profitability, you need to either increase the numerator (revenue) or decrease the denominator (expenses) or some combination of the two. Let's examine each of these options in a little more detail.

First, let's look at expenses. You always have the option to reduce staff pay and benefits, but what happens when you lower these expenses to below market value? You end up with a high attrition rate (read: people quit). And when you have high staff turnover, continuity of care declines, and this decline ultimately results in a decline in quality-not a good option.

How about reducing volume? Well, because we have not yet figured out a way to get paid based on outcomes, volume rules with regard to revenue, so if you reduce volume, you reduce revenue. Some practices turn to layoffs to control expenses, but many have discovered later that changing staffing levels without changing the way they do business ends up being more expensive in the long run because of mistakes, missed opportunities, and rework. The bottom line? Quality is expensive.

If you can't do much to affect expenses, then should you focus on increasing revenue? Can you just increase your charges? In any other industry, that idea might work, but healthcare is one of the few business models in the world where, with the exception of concierge providers, what you charge pretty much has nothing to do with what you get paid. Even if you filed 100% clean claims, you will not get paid what you should. Believe me, the payers make sure that this is the case. In the most recent American Medical Association National Health Insurer Report Card, it was reported that, in nearly one out of five claims filed, the payer ends up paying nothing. And of the remaining four claims that are paid, approximately 80% are paid incorrectly.

Negotiating better contracts definitely would be beneficial, but many practices, suffering from the Eeyore syndrome (named for the gloomy, anhedonic donkey in the Winnie the Pooh stories), are unlikely to pursue this process because they don't go through the steps necessary to amass the data to support their position. For example, conducting a cost analysis would allow a practice to see which procedures have a higher cost-to-collection ratio, enabling it to negotiate carve-outs for those procedures. Bottom line? Increasing revenues using traditional methods often costs more than the value of the increase.