Belt-tightening doesn’t have to mean lower profits

Here’s how the best practices do it

With the prospect of having their practices crushed between the two-fisted grip of managed care and reduced Medicare practice expense payments, many physician groups will need to dramatically improve their financial performance to stay competitive, say many experts.

For those looking for both ideas and inspiration on how to operate a state-of-the-art practice, the Englewood, CO-based Medical Group Management Association’s (MGMA) list of "best practice" multispecialty practices is a good place to start.

MGMA’s annual best-practice survey culls key financial information from over 1,000 group practices across the country, then boils that down to the financials of 15 of the best-run practices.

"We define better practices as those that achieve above-median physician income with below-median per-procedure costs," says MGMA survey chief David Gans.

"Last year’s survey, for instance, found that median operating cost as a percentage of total net medical revenue for all multispecialty practices polled was 56.02%, compared to 51.64% for the survey’s better-run practices," says Gans. Additionally, these better practices have higher physician productivity, which is rewarded with higher compensation and benefits—$227,303 vs. $196,620 per full-time physician.

MGMA uses two basic criteria to identify these better-performing practices: above-median total physician compensation and below-median operating cost per nonsurgical encounter.

"These practices have characteristics that set them apart," says Gans. "They have higher net medical revenues, more support staff per physician, and lower costs per encounter, indicating that their higher staffing costs are more than offset by increased efficiency."

A common characteristic of MGMA’s top groups is they all have a detailed blueprint, or strategic plan, they use to direct and build their practice over time. "A strategic plan is critical," says Barbara Gunder, administrator of 39-doctor Salem (OR) Clinic, which ranks among the top groups identified in the survey. "It acts as both a road map and a point of accountability."

Critical to the strategic planning process is how much of their earnings individual physicians will be willing to reinvest in building the practice. These retained earnings can give the practice the extra financial leverage it needs to do such things as shore up ancillary services, build satellite clinics, and buy computer information systems that eventually will generate more income and the muscle to negotiate better managed care rates.

Reinvesting 5% percent of its annual net earnings, for instance, has made it easier for Quincy, IL-based Quincy Medical Group to add new physicians and negotiate favorable financing on a $13 million loan to build a new main facility for the clinic. Also, the fact the group had the cash for a 25% down payment on construction financing meant the group’s physicians did not have to sign individual notes guaranteeing the loan.

Best practices know an incentive program that encourages and rewards top production from each physician in the group is crucial to achieving the kind of financial success that generates profits that can be reinvested in the practice.

Profits come from volume

Administrators at the 80-doctor Springer Clinic in Tulsa, OK, say the best way to motivate its physicians is to pay them a higher percentage of revenue for the more patients they see. For instance, a primary care physician can receive 40% of collections for the first 25 patients seen in a day, 50% for the next 10, and 60% of collections for anything beyond 35 patients. The same concept can also apply to specialists.

While rewarding production, another purpose of this kind of formula is to constantly remind physicians that the clinic’s profits come from volume. "The first 15 or 20 patients you see on any given day just covers your overhead," says Springer’s practice administrator Rick Callis.

In fact, some of the most heated debates in many practices is how to fairly allocate overhead costs among the various specialists in the group.

Quincy Medical Group used to charge its doctors directly for their staff, liability insurance, and supplies. However, this approach also meant primary care physicians—who tend to have the highest overhead—ended up with a below-market paycheck once all these deductions were made. "We also found that this was making it harder for us to recruit top primary care physicians, which made the system counterproductive," notes Diane Weber, Quincy’s chief financial officer.

The group’s new policy now deducts overhead expenses from practice gross revenue, then divides the net among doctors according to their productivity. Management review panels also were created to keep overhead in check. "There’s been no rush to add more staff since we eliminated the overhead charge-back, largely because our review committees take a hard look at the data to see if it’s justified," Weber says.

Other best practices, however, have found direct overhead charge-backs to physicians work best for them. "We’ve found direct overhead charges mean a physician will think twice before hiring someone he doesn’t need, or asks for an extra exam room," says Bob Mann Jr., president of the PAPP Clinic in Newnan, GA.

Financial incentives alone are not enough

Best practices know having the right financial incentives does not mean a practice will be financially successful. The other half of this equation is ensuring the practice has the right combination of physician personalities who share the same work ethic and buy into the practice’s philosophy and culture.

When recruiting new physicians, Quincy Medical Group tells potential new hires up front what kind of performance will be expected from them, such as hours they are expected to work and productivity. Springer Clinic tries to cut the learning curve for new associates—and increase their productivity—by assigning each one a proctor or mentor from their department whose job is to teach them office operations and help refine their medical management skills.

This type of active oversight is not limited to first-year associates. Indeed, strong central management and constant monitoring of physician activities is a common best-practice characteristic. "The idea is to create a culture where you get everyone working for the common good of the group, and not just looking looking out for their own limited interests," says Seth Garber, a health care principal with consultants William Mercer in Washington, DC.

Administrators at Springer Clinic say tougher management oversight has helped the clinic improve its hospital utilization. "Over the years, we had tried everything we could think of to improve hospital days—educating the docs , installing nurse case managers, etc.," says Riley Hill, MD, Springer’s director of managed care. However, utilization had gotten so out of control that the clinic faced losing up to $1 million on its managed care contracts if something was not done.

The answer, says Hill, is to do a daily review of every hospitalized patient to help identify those who can be appropriately discharged or moved to a less intensive form of care.

"The idea was both simple and successful," says Hill, who feels the main reason for its success is the fact he is a doctor. "A nurse case manager could have done the job, but the problem is, most doctors do not return the call when they are paged by a nurse manager," says Hill. Next, when a nurse asks why a patient is still in the hospital, "the typical physician’s response is You don’t understand,’" says Hill.

But because physicians were being called by a doctor—as well as a respected senior member of the practice—"the physician has to think a little harder when I suggest we move someone to outpatient management," says Hill.