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The profit equation: Stop struggling to make money

Article-The profit equation: Stop struggling to make money

Many physicians find they are working harder than ever, but end up with less money in their pockets at the end of the year.

Reimbursements have become more complicated as patients struggle with high deductibles and payers require more documentation and often pay less than in the past. Meanwhile, office and staff expenses continue to climb, leaving doctors struggling to increase revenue or cut costs.

“There are all sorts of overhead increases, and if we find a decrease, we jump up and celebrate,” says Jeffrey Kagan, MD, an internist in Newington, Conn., and a member of the Medical Economics editorial advisory board. He’s examined expenses for everything from waste removal to his answering service to the electricity provider for his two-doctor practice in an attempt to save money. “I’ve always tried to look for expenses to cut, but now, it’s even more important. If we have a gap in our patient schedule, I feel like we should go look for more,” he says.

While physicians may prefer to focus their attention on patient care, experts warn that in this economic environment, it’s imperative to carefully analyze expenses as Kagan does and calculate how every business decision can affect overall profitability.

“A medical practice is a business and has to be run like a business with principles and discipline,” says Ken Hertz, FACMPE, principal consultant for the Medical Group Management Association.

The allure of bringing in more revenue can often overshadow how much expense is added to obtain it. Getting more patients through the practice is one way to counter flat or decreasing reimbursements, but if a practice has to add staff to do so, that can eliminate any gains in revenue, says David Howard, MPH, MBA, a principal in Grant Thornton’s healthcare advisory practice.

“Increasing revenue is harder for the small practice because of limited resources,” says Ge Bai, Ph.D., CPA, assistant professor at Johns Hopkins Carey Business School. “Containing costs is usually the most feasible option. In an environment where payers are under pressure to reduce prices, small practices must think about how to control their costs.”


Personnel costs, in terms of salaries and benefits, tend to be the biggest expense for most practices, so experts say it’s a good place to start an analysis. But asking staff members about capacity may not provide an accurate picture.

“You’ll often hear the staff say they are overwhelmed and can’t do any more, so a doctor will throw more money at the problem and add more staff,” says Hertz. “But if you are not managing them well or organizing them well, you may have more people but not necessarily produce better results.”

Instead, look at the processes and workflow the current staff follows and examine what is being done and not being done, says Hertz. If the work not being done produces revenue, then it’s a lot easier to determine if a new person would generate enough money to pay his or her salary.

If the work isn’t easily quantifiable, compare staffing levels to practices with similar revenue levels (staffing data is usually available through professional organizations). If the staffing level is below that of similar offices, it might indicate additional help is justified. If the staffing level is higher, take a closer look at workflows and search for waste in the way the staff is working. For example, maybe the staff is incurring a lot of overtime pay because the practice has extended its hours and nurses, front desk staff, and X-ray technicians are all working until 7 p.m.

“The extended hours may be necessary for the practice, but plan on the extended hours and set up staggered shifts so you don’t run into overtime issues,” says Hertz. An employee might work 9 a.m. to 5 p.m. one day, then 11 a.m. to 7 p.m. on another.

In some cases, providers’ hours may have shifted, but staff hours have not. “Look at your provider schedule,” says Howard. “If two of your four providers are off on Fridays, why do you have a full staff those days?”

He advises thinking about who really needs to be doing the work in a practice. Do RNs handle work a medical assistant could do? Can routine work be outsourced? “There are companies that can do appointment verification—it doesn’t have to be done by the front desk,” says Howard. “They can do it more efficiently than what you could do with one or two staff members.”

When considering a new position, calculate the costs and benefits to determine whether it’s worth adding. For example, if a scribe costs $30,000 per year, but hiring one allows a doctor to see 10 additional patients per week and the doctor works 44 weeks per year, that’s 440 additional patients generating revenue. If the average revenue per patient visit is $150, that equates to $66,000 in new revenue, netting the practice $36,000 in profit, says Hertz.

Nurse practitioners and physician assistants should be evaluated the same way, says Howard. If a nurse practitioner bills at 85 percent of what the physician would be reimbursed but is paid half to a third of what a physician would earn, a practice has to consider that option if it is looking to expand or already has the space available. The additional revenue is worth the expense.


Expenses aren’t necessarily bad, but a practice should look at their return. “The issue is to take your expenses and maximize their ability to generate revenue,” says Hertz. A practice may spend more in overhead than a similar practice, but if the overhead generates more revenue, then it’s well worth it. “It’s not just pure dollars, but how you leverage it to create more money,” he adds.

Office space needs to be closely scrutinized, because it can be a large expense—usually between 8 percent and 15 percent of revenue, says Howard, who notes that exam rooms often are underutilized. “Think creatively on where you are spending your time,” he says. “If you have three extra exam rooms, maybe you don’t need another partner, but allow another physician to come in and use the space.”

Coding can represent both expense and revenue. It costs money to have it done right, but doing it wrong can result in missed revenue. Howard says it’s imperative that practices not only ensure their evaluation and management coding is accurate, but also in line with industry benchmarks.

“What is sometimes lost on small practices is knowing where providers fall within their peers in their specialty,” says Howard. If a practice falls on the high end of the curve, there may be some compliance risk. If the provider falls on the lower end, it may be an indicator that visits are being coded too low and the practice is losing revenue.

He also recommends practices have a third-party service conduct some chart audits to ensure compliance and appropriate billing levels to assure the practice is maximizing its revenue.

Collection practices are worth reviewing, because patients are responsible for an ever-greater share of their healthcare payments and are notoriously less reliable than insurance companies when it comes to paying on time. “If you are only getting $100 a visit and $20 of that comes from the patient, you can’t ignore it,” says Howard. “Most practices are not as focused on this as they should be.”

Not only should physicians ensure their practices are collecting any money due at the time of visit, they also need to invest in ways of making it easier for patients to pay their bills, such as through an online portal, says Howard.

“There are good tools out there that can help automate tasks like insurance verification and automate payments and help with patient throughput,” he says. “If you are trying to make it in the tough world of small private practice, you have to embrace different models and efficient technology and services that are out there. You have to also be a doctor of technology.”


Practices need to benchmark their financial performance to survive, says Hertz. “But don’t benchmark to the industry average,” he says. “Do you get up in the morning and say, ‘Gee, I hope I can be an average doctor today?’ Push to see how good you can be.”

Internal benchmarking should include monthly revenue and expense levels so practice physicians can make year-to-year and month-to-month comparisons. “Look at the trends,” says Hertz. “Are they going up or down and why? Learn what the numbers are telling you.”
But physicians should also benchmark their practice externally so they know how they compare. “You may be doing better than you did last year, but if your numbers are way off what others are doing, you may have a serious problem,” he notes.

Howard says software tools are available for around $1,000 that can provide practices  all the financial analysis they need. Tools such as Qlik, Birst, and Tableau, tie into existing software databases to generate dashboard reports that can help doctors make better financial decisions.

“Look at this as a challenge and an opportunity to have fun with it instead of getting frustrated and agonizing about it,” he says.