In the best of all worlds, whether in a solo or a group practice, physicians have their fingers on the pulse of the practice finances, immediately identify when things are going awry, and get to the fix. Unfortunately, my experience tells me this often is not the reality. Too often, I’ve been called into a practice that is in a financial crisis—a crisis that could have been avoided if actions had been taken sooner.
Physicians have the best of intentions when it comes to minding the store, but pressing clinical demands occupy their time and business matters get only a quick glance. In fact, when it comes to practice finances, many physicians are not even sure what danger signs to look for, let alone what corrective actions to take. As a result, physicians are sometimes blind-sided with a sudden deterioration in the practice’s performance. Following are some tips and procedures for monitoring practice finances and spotting red flags that indicate the practice is headed for trouble.
Set aside two hours a month for the physicians and the administrator to meet, review the practice’s management reports, understand the financial position, and make informed decisions based on the numbers. This encourages prudent decision-making and gives the manager the authority to act, based on your approval. This type of meeting serves as a report card of management’s performance and increases accountability. You should be looking at the following three types of information.
Productivity and accounts receivable
Each month the manager should prepare and update graphs that reveal the numbers for charges, receipts, adjustments, and aged accounts receivable for each of the previous 12 months. The data can be pulled directly from your practice management system’s month-end reports. If you notice a sudden jump or decline from one month to the next, there may be trouble on the horizon. For example, a sudden increase in adjustments may be an indication that accounts are not being followed up or perhaps someone is being indiscreet in what they write off. If one physician’s charges have taken a dip and the physician has worked a typical schedule (not taken time off), there may be a problem with charge reporting or a backlog with data entry.
If the accounts receivable are shifting into 90+ day aging, it may indicate a lag time in submitting insurance claims, a lax attitude with collecting from patients, or perhaps one of the high volume third-party payers has become delinquent. Typically, a well-managed billing and collections department will exhibit less than 20 percent in receivables aged over 90 days and a total accounts receivable equal to less than two month’s charges. There is some variation depending on the specialty.
The procedure revenue report reveals the quantity of each service provided by CPT code. Sort these by physician for a more detailed analysis. Tracking the number of evaluation and management codes lets the practice know if the patient base is stable, growing, or declining. Each month, compare both new patient and established patient visits. For specialists, also monitor the number of top ten procedures performed.
Since staffing is the highest expense on a practice’s monthly income statement, these costs should be carefully monitored. Staff costs vary considerably, running between 15 and 20 percent for surgical specialties, and in the low to mid 20-percent range for primary care and pediatrics. Break down this expense by department and you will have a clearer picture of the staffing required to make your practice hum. It is prudent to monitor the number of full-time-equivalent employees on the payroll each month as well. Look for the variables. When the numbers are rising, it’s time to look for solutions. Monitor overtime costs as well. If they are on the rise, the administrator should be required to explain it and get it back on track. Overtime means you are paying 50 percent more for labor at the end of a workday when people are the least productive—not a wise financial decision. On the other hand, overtime on a temporary basis might be understandable. For example, staff may be required to work longer hours if a new physician has just been added or the practice is going through training for a computer conversion. Converting to an EMR system often causes a spike in overtime during the transition.
If everything in the practice is running its normal course, overtime hours should be stable and very limited. A sudden increase in overtime can indicate inefficiencies and lower productivity or it could be due to high absenteeism or excessive turnover, indicating a bigger problem.
Profit and loss
The profit and loss statement provides an overview of the money that came in and went out of the practice during the month. If the practice is stable, so are the numbers. Significant variations are an indication of problems in practice management and cash flow.
If you are experiencing financial difficulties, there may not be enough income to cover expenses, causing a delay in paying your bills. This results in an uneven distribution of expenses from month to month, which is reflected on the income statement. If this is happening, it’s time to dig deeper—look at both the money owed to you and the money you owe. Make sure collections are not falling behind and deposits are timely. Check to see if bills are being held and the practice is paying late charges. If so, it’s a management issue. It is the manager’s responsibility to bring cash-flow problems to the physicians’ attention immediately so corrective actions can be taken before a crisis emerges.
The dollar amount necessary to operate the practice is important, but for monitoring purposes, I propose you also focus on the percentage, which should remain fairly constant even when there are variations in monthly revenue. By looking at the historical picture with a running 12-month average, shifts in overhead costs will be easy to spot. Most practices spend between 40 and 60 percent of their income to cover operating expenses, with family practice having the highest percentage.
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