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From booking to billing, control your overhead.
There’s an old saying in the nonprofit world: No margin, no mission. It means that failing to take care of financials will scuttle efforts to reach even the loftiest goals.
The familiar mantra also holds true for private practices: Physicians may feel passionate about their patients and their practice model-a model that still provides strong financial rewards-but failing to recognize how a changing financial landscape affects the bottom line is hazardous to a practice’s survival.
Greater dependence on patients as payers and rising electronic health record (EHR) costs, not to mention routine annual personnel cost hikes, are taking their toll, practice advisers say.
From 2013 to 2014, for example, internal medicine practices logged $229,164 in net income per full-time equivalent physician (after retirement and other benefits), which was 34.7% of revenues in 2014. Those figures were down from $238,747 (36.5% of revenues) in 2013.
Invasive cardiology practices, meanwhile, saw net income per full-time equivalent physician fall substantially, from 37.3% of revenue to 32.6%, even as costs declined, according to joint reports by the National Society of Certified Healthcare Business Consultants (NSCHBC) and the Academy of Dental CPAs.
In its 2015 MGMA DataDive Expense and Revenue Module, the Medical Group Management Association (MGMA) found median operating costs for physician-owned, primary-care group practices rose 18% in 2014, to $546,476, from the prior year, though it followed a year when costs dipped.
Practice management experts say reining in overhead is critical to survival as payer trends shift, and particularly as patient copays and deductibles soar. “Overhead is going up, but the problem is that the revenue cycle hasn’t really changed,” says David Zetter, PHR, a healthcare management consultant and founder of Zetter Healthcare in Mechanicsburg, Pennsylvania.
As healthcare moves dramatically toward consumer-centered payment, he says, the revenue cycle needs to change. “Ask any billing department, ‘How many statements do you send out to patients?’ Everyone says ‘three.’ But where is that rule located? It’s an old wives tale.”
Despite challenges, practices are retaining positive income on every dollar of revenue.
Privately-held physician offices had an average net profit margin of 13% in the 12 months ending in April 2016, according to Sageworks, a Raleigh, North Carolina provider of financial analysis data that tracks private industries.
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Physician practices’ margins are roughly in the middle of the pack of other privately- held service providers, below lawyers and dentists but above day-care centers.
“Physician offices have been growing a little less in revenue, but it’s been slow and steady and it has higher than average profitability, which makes it a good business model,” says Libby Bierman, a financial analyst at Sageworks. The average net margin for physicians has been around 13% percent for the past five years, the firm says.
R. Douglas Iliff, MD, FAAFP, a solo family practitioner in Topeka, Kansas, keeps a keen eye on his income statement, aiming to maximize profits for every hour spent at work. For each dollar in total practice income in the first quarter of 2016, Iliff spent 43 cents on operations and 26 cents on support staff and retained about 31 cents for his own salary, benefits, payroll taxes and other items, he says.
Iliff also watches expense trends carefully. On a recent weekday, he was researching lab services fees from new vendors after noticing charges from his local hospital have crept higher in the last several years.
“I’m going to have to have a talk with them,” he says. “Other [lab services] providers periodically try to pitch us, and you have to stay on top” of any rising fees, he says. Periodically re-negotiating terms doesn’t become onerous as long as he pays attention to changes in expenses.
In a broader context, however, maintaining his practice independence is the bigger factor in staying profitable with the practice. Iliff says he doesn’t participate in any government programs, and thus doesn’t incur associated costs, including EHR expenses.
For most other practices, of course, higher technology and other operating costs are facts of life, notes David Gans, MSHA,
FACMPE, senior fellow in industry affairs with the MGMA.
“We’re observing that expenses are going up, and so are revenues, but not at the same rate,” he says. “At one time malpractice insurance rates were a crisis. Today, for the most part, they are a smaller worry than IT or the cost of personnel,” Gans says.
Nurses and qualified billing and coding staff are in high demand, and thus becoming more costly, Gans says. Having a dedicated IT staffer is increasingly common as practices move to value-based payment systems.
At the same time, some physicians are skipping staff raises, questioning overtime and re-thinking staffing credentials, says Chris Zaenger, CHBC, president and owner of consulting firm Z Management Group in Elgin, Illinois.
“They’re trying to keep costs in line, so they are weighing whether a physician’s assistant might make more sense than a second physician, or replacing a [registered nurse]” with another type of provider, he says.
For a recent client, Zaenger drilled down, literally, to the trash can. Noticing the client was paying $160 per month on biohazardous waste pickup, he bid out the work to five new vendors. “All five were lower than the current charge, from $40 to $100, so I contacted the current vendor and said I thought the current charges were excessive,” he says.
When the vendor referred Zaenger to the client’s three-year contract, which spelled out the charges, Zaenger responded that the deal also carried a 30-day notice to terminate. With that, negotiations opened and the price declined to $30 per month, he says. For another client in the same building the charges went from $600 per month to $60.
“You have to really watch these small expenses,” he says.
The big picture matters, too, of course. For many clients, accounts receivable have risen, in some cases by as much as 100%, as practices struggle to collect that $1 in revenue, Zaenger says. With Medicaid expansion, some state plans are paying late, or not at all, he says, due to confusion over eligibility rules.
Another growing problem, he says, is underpayment by insurance companies. He says he has found consistent, slight shortfalls in payments that add up to significant revenue loss in several practices. Most practices don’t have the systems to catch the
errors, he says.
On the expense side, he’s seeing practices running lean-some even too lean. “We’ll run into practices where doctors don’t pay overtime (when they should be), and that’s a compliance issue,” he says. Other ways practices are cutting costs include skipping retirement plan contributions, and, like Iliff, reviewing lab services contracts.
“We’re analyzing it to determine if doing the labs ourselves versus even hiring a lab to do it makes sense,” Zaenger says of his clients. “Practices can make money doing it themselves, but they tend to stop watching the ball to see if the margins are there.”
Another good example is medications, he says. Physicians should evaluate what they are reimbursed on injectable medicines and see if it’s worth becoming certified as a primary care medical home, he says. Just remember, these steps are not cheap.
One client, for example, experimented with providing childhood immunizations on a large scale to meet certification requirements, he says. The margins earned on the $1 million investment couldn’t be justified when considered with the additional staffing and oversight required, he says.
He also encourages clients to embed preventative health services and chronic care management that is eligible for Medicare payment into their EHR systems as other ways to boost revenue.
“The office has to manage follow-up and make sure patients are taking their medications, but typically a practice can receive an extra $42 a month for every member in the program. That’s about $500 a year to the practice if it actually gets done and documented,” Zaenger says.
In addition, some practices are beginning to implement more aggressive patient-pay practices, addressing the problems Zetter discussed about antiquated revenue cycles.
Stephen Gildea, MBA, executive director of Blair Gastroenterology Associates in Altoona, Pennsylvania, says his practice is working on improving its process for collecting insurance information sooner and identifying patients’ out-of-pocket charges.
The practice is setting up online and credit card payment systems, as well as installment payment plans, he says, and is considering offering discount incentives for upfront payment.
Even if patients can’t be billed immediately for services because a payer’s contribution isn’t known at the time of the appointment, the practice at least has the patient’s credit card or online payment information ready to go when the final charges are known, he says.
The practice runs insurance verification checks two to three days ahead of appointments, and then checks on deductibles the day of service, he says. “This is all very new, but we’re trying to come up with the best processes that are fair to the patient and that ensure we get paid for work that was done,” he says.
Despite overall profitability in the profession, there is a wide variation among individual practices, says Zetter. “The average practice out there is probably going to run about 60% overhead, with net profit of 10%, on up,” he says. Within that average is a big range, however, with some practices retaining far more in profit than others.
Zetter says some practices will make much more than the average because of their efficiency and management. The practices that aren’t proactive about managing the revenue cycle and costs, meanwhile, are headed for trouble as current payer trends accelerate, he says.
“We had a practice in Manhattan that was being run like a mom-and-pop shop. None of the providers knew how bad their billing process was or what the staff should have been doing,” he says. A few rudimentary fixes boosted revenue by 30%, according to Zetter.
In common with other practice managers and consultants, Zetter urges physicians to keep patient credit card information and pre-negotiated installment payment limits on file so that when final charges are known, payment becomes a seamless process. Doing so dramatically lowers the number of defaults and saves administrative time in preparing statements, he says.
Expect some resistance from patients on this, he says, but others will welcome the ease of automatic billing. Even if practices don’t use automatic billing, they can verify insurance and deductible information ahead of appointments, he says, and that alone can make a significant difference.
“Many practices don’t want to pay for an outside service to do this, but it’s much cheaper than having staff check this information,” he says.
Another area where revenue dollars are lost is when practices fail to question a sales representative’s claims about profitability of a certain piece of equipment, Zetter says.
“Practices don’t always verify the return on investment,” he says. “A sales team will come in and sell equipment based on data showing high Medicare reimbursement rates, but the practice doesn’t confirm that they would actually qualify” for that rate, he says. “And then you end up with all this new equipment sitting in a box.”
Even as practices step up efforts to capture every dollar of revenue, though, the landscape may be shifting again, experts say.
“We often view payers and providers as adversaries, but that’s not always the case anymore,” says Jason Williams, MBA, vice president of business analytics at RelayHealth Financial. He sees payer contracts evolving as retail healthcare competition grows. Mergers and strategic partnerships among payers and providers, too, will alter the revenue picture, he says.
Payers and providers will try to keep the best terms from their previous arrangements, and practices will inherit more costs as they demonstrate quality metrics, he says.
“But my bigger concern is for the practices that are really just continuing the status quo in an environment that’s changing around them,” he says.
Practices that strategically evaluate data that are being viewed by payers will come out ahead, whether or not they choose to merge. “The complexity of these interactions among payers and health systems is just going to go up,” Williams says.