Thinking outside the box about practice profitability

December 23, 2013

In the world according to Frank, profitability is the most important responsibility of a medical practice. Here’s why.

What is the primary responsibility of a medical practice?  Typically, the most common answer I hear is “providing quality care to our patients.” While I would never argue about the importance of quality patient care, I want you to really think about its placement in the scale of priorities. In the world according to Frank, profitability is the most important responsibility of a medical practice. Here’s why.

A medical practice is a business. What separates us from a convenience store, a dry cleaner or a car dealership are the products and services we sell. I know this is not often a popular analogy with physicians, because it does not factor in your work as a healer.

But there are economic realities of a business that need to be considered. Unless you are the federal government, you can only operate at a deficit for so long before your practice closes and creates a huge hole in the community.

Defining profitability
So how do we define profitability?  The basic answer is revenue over expense.  

Profit is simply the difference between revenue and expense. To improve profits (or profitability), then, one only has to increase revenues, decrease expenses or contribute to some combination of the two. Sounds simple, but it’s not easy.

Cutting expenses
Let’s talk first about expenses. We could, for example, cut staff pay and benefits. But what happens when your cuts make the services you offer below market value?  You lose staff and when that happens, you have a reduction in continuity of care, which translates to a reduction in quality.  
So how about eliminating full-time equivalents (FTEs)? That works as long as you don’t cross below the value of diminishing returns.

For example, in one practice I worked with a few years ago, they reduced their coding staff from eight FTEs to six FTEs in an effort to reduce costs. Each coder was responsible to produce a certain volume of properly coded claims per day. By reducing the number of FTEs, the number of claims per day per coder increased and as it did, we noticed that the number of coding errors (unclean claims) also increased.  This resulted in a 15% increase in rework, which, in turn, ended up costing 22% more than it would have had they maintained the original staffing level.  In this case, the practice administrator failed to test this idea first and as such, missed the potential consequences down the road.  

The bottom line is that quality is expensive, and we can only cut costs so much before we begin to negatively impact the quality of care, which, if you recall, is normally what folks assign to the primary responsibility of their medical practice.

Constraints to increasing revenue
How about just increasing revenues? That is, after all, the numerator and this is a simple equation.

The biggest constraint is that we operate within a complex environment.  And while there is simply not enough space in this article to get into all the details, the principal component of a complex system is that there are many interdependencies.  One of those is the third-party payer market.  With the exception of deductible and copay amounts (which can be a nightmare to calculate), the bulk of your payments comes from a third party-arguably, from companies or groups that do not have your best interest at heart.

Think about this; the primary role of your practice is to get paid a reasonable amount for providing your patients with quality healthcare services. The primary role of the payer (with the exception of Medicare), is not to pay you reasonably for the quality healthcare services delivered to their subscribers.
Based on my research with the AMA’s National Health Insurance Report Card, in one out of five claims, the insurer pays nothing and in the remaining claims, nearly one out of five are paid in error. The fact is, as long as you choose be in partnership with third-party payers, your ability to affect your revenue is slim to none.
You could just charge more, but what is amazing to me is that what you charge has virtually no effect on what you get paid. As you remain dependent upon third parties for payment, you surrender much of the control over your revenue.

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Ways to increase revenue
There are some things you can do. For example, diligence with regard to estimating copay and deductible make it easier to know what to collect at time of visit. Again, you are dependent upon the payer to be able to give you accurate and timely information on their subscribers.  

Having a consistent policy that everyone agrees to regarding payment at time of visit can substantially increase cash flow and reduce accounts receivable. In fact, in every practice that I have consulted where there is a standardized policy and training for staff on how to collect at time of visit, daily revenue as a percent of charges is significantly higher than in those practices that do not employ this type of policy and training. For some practices, dropping payers completely can often result in a more profitable practice. I know that this is hard for some to believe, but according to a study conducted by Jonathan Gruber  in 2007, practices are 1.7% more profitable with uninsured patients than with insured patients.

Find inefficiencies and stop them
Finally, and perhaps the best solution, is to become more efficient in what you do. This often requires the practice to engage in Lean and Lean Six Sigma (LSS) projects, management techniques that are designed to improve quality, outcomes and increase profitability all at the same time. I have been involved in dozens of LSS projects for dozens of medical practices and in nearly every one, the results are nothing short of stellar. In one case, I discovered a duplicative step in the patient visit process that wasted around three minutes per patient visit.

The physicians, however, were not as impressed as I was, stating that three minutes “was not their problem.”  Yet, they saw over 100 patients a day, which calculated to 300 minutes (or five hours) per day of wasted time.  

Recovering only a fifth of that (one hour per day) allowed them to see four more patients per day, resulting in over a quarter of a million dollars per year added to the bottom line.

Think outside the box
The idea is to step outside of our canonical understanding of profitability and consider doing things differently.  My friend Henry Shaw had a favorite saying: “If what you are doing is working, keep doing it, but if it is not, then do something different.”  This is a decision that needs to be made individually by each practice, but look at what you are doing closely because it may just be that, in this dynamically changing marketplace, what you have been doing doesn’t work any more.