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By Neil Baum, MD, Consulting Editor
(Editor’s note: In an era when seeing more patients seems to be the only way for a practice to bring money in the door, finding an alternative may seem like a pipe dream. But Practice Marketing and Management’s Consulting Editor Neil Baum, MD, a urologist in New Orleans, says it can be a reality. Below is an excerpt from his book, Take Charge of Your Medical Practice — Practical Practice Management for the Managed Care Market [Aspen Publishers], that explains how.)
Growth is a major goal of any business; however, as a business grows, a point of diminishing marginal returns is eventually reached, and adding more business increases revenue, but not profit. Unfortunately, additional volume can have a negative impact on customer service and, if allowed to increase unchecked, can actually lead to declining profit. This problem is accelerated when an industry becomes more price-competitive and volume continues to increase as a result of price discounting.
Most physicians focus on increasing patient volume. While this is an important strategy, many continue to add patients beyond the point where they are being "overbooked and overworked." These doctors feel they need to continue growth to maintain profitability, but the typical outcome of adding patients to a busy practice (beyond the point of replacing normal patient attrition) is to reduce profitability by increasing overhead costs and lowering the collection ratio. This problem is magnified when patient volume is increased as a result of discounting. Also, volume growth lowers quality by reducing the time available for each patient. An alternative to increasing patient volume is finding sources of non-patient-care income.
In a discount market, this is an important strategy for doctors regardless of the patient volume. The following are strategies available to any physician who wishes to add income without increasing patient volume. Using just a few of these will reduce the need for signing contracts with deep discounted fees for your services or for seeing excessively large numbers of patients!
1. Reduce overhead through efficiency improvement.
There is no perfectly efficient practice. Efficiency improvement is a life-long, continuous process. Efficiency improvement is a critical strategy for every practice because it results in improved quality of patient care as well as higher profit. Cost-cutting opportunities are more available with an increasing size of your practice, making overhead reduction the ideal strategy for larger groups. Even well managed practices carry at least 10% excess overhead. Some extremely busy, inefficient practices may carry overheads that are as much as 40% too high and have two times the number of staff required. Remember, every dollar cut from overhead goes straight to the bottom line. For most busy practices, the opportunity for increasing profit is greater through cost cutting than through increasing patient volume, and effective cost cutting also increases the quality of care.
2. Improve your collection ratio.
Most practices demonstrate a declining collection ratio as volume increases. (The collection ratio is the net collections divided by the net billings). Your target should be in the mid to upper 90%. One reason for a declining collection ratio is that each new managed care patient can generate 40 to 50 new business transactions. Additional transactions include insurance verification, obtaining authorization for surgery or requests for outpatient procedures, discussing the concept of copayments with a new managed care patient, ensuring that the ICD-9 codes match the E and M codes, etc. These added transactions increases the probability that bits of data will fall through the cracks and end up in non-collection or under-payment.
Because there is less time available for follow-up of overdue accounts, adding managed care patients reduces the collection ratio for the entire practice. Practices experiencing this magnified increase in data and billing complexities tend to hire more people. This is a costly solution. Adding personnel to an already inefficient reimbursement process cannot help the problems associated with either capturing data at the point of service or moving that data through the process. This requires a change in process. Most practices may be unaware that their collection ratio is declining, or they may believe that the decline is a result of contractual allowances and other phenomena of managed care. How large is this problem? Improving the collection ratio presents a tremendous opportunity for most practices. Remember, a low collection ratio represents delinquent dollars for which the work has already been performed and the overhead paid.
3. Improve your productivity.
Similar to efficiency improvement, this strategy focuses on using time effectively. In this age of transition from a fee-for-service method of reimbursement to a managed care environment, efficiency will be vital to the success of your practice. In the past we enjoyed the luxury of low volumes of patients and large profit margins. Today, it will be exactly the reverse, i.e., large volumes of patients and razor-thin profit margins. This will be especially important if you have capitated patients where you will be receiving a per-member per-month fee for your services and you may experience huge volumes of patients. The time made available through efficiency gains can be used to increase productivity. Efforts that improve efficiency, such as eliminating wasted tasks and reducing interruptions, give the doctor and staff more time for each patient. This not only makes better care possible, but also increases productivity for both fee-for-service and capitated patients.
Increased productivity is critical for any business competing in an industry where prices cannot be raised. Your productivity can also be improved by increasing the number of treatment rooms, the type and location of equipment, or staffing ratios. For example, a treatment room can be created by converting old charts to electronic data, freeing up the space previously used for filing the thousands of inactive charts that often line the shelves and consume valuable floor space. If you belong to a large group practice, you need to ask yourself whether all of your partners need a private office. By consolidating two or three physicians into a single office, you can easily find an additional treatment room. Time spent analyzing these areas may be more beneficial than treating additional discounted patients.
4. Merge with a nearby practice.
Practice mergers are not easy, but the potential cost savings are sufficiently high to be well worth the effort. While mergers provide an advantage under managed care, they make sense in any environment. A well-planned, efficient merger of two equal-size practices can add at least 30% to the bottom line for both practices. An efficient merger will reduce rent and staff size. Remember, if the office is efficient, charges are being posted at the point of service into the computer and follow-up services are scheduled at the point of service, requiring no new personnel. If the doctor uses electronic medical records, you no longer need a file clerk to file and move charts.
A merger has the potential to reduce the combined staff size by at least 40%. The use of electronic scheduling may increase the capacity to see more patients by 30%. How many strategies exist that can improve profit to this extent without the need for treating more patients? Mergers require careful planning of the new business’ infrastructure. Otherwise potential savings can evaporate as group decision making begins to add unnecessary costs.
5. Stay focused.
Focused strategies lead to better outcomes and lower costs. It is no accident that the best outcomes and lowest price for open-heart surgery are achieved where the highest volume of these is performed. Dr. Denton Cooley, the famous heart surgeon in Houston, has reduced the cost of coronary artery bypass surgery from a national average of $43,370 to $27,040 and still has one of the best outcomes, even among high-risk patients. The higher the volume of similar procedures, the more skilled the doctors become at performing them, and unit costs decline as more procedures are spread over existing fixed costs. Treating every condition provides neither the highest quality nor the highest profit. In some offices, applying a cast may set the entire schedule back, while in others it is a routine, fast process. Some doctors enjoy treating certain conditions more than others, and narrowing the focus of a practice may revitalize a burned out practitioner. Focusing means increasing the number of profitable services while decreasing the less profitable services that consume more time and generate less money. This could mean either rebalancing your patient mix or adding a physician assistant who focuses on the services you prefer not to treat.
6. Renegotiate contracts.
Even in an environment where doctors have little control over price, contract terms can be improved. If you have been collecting patient satisfaction data, you can present that information, if it’s favorable, at the time of contract negotiation. If the MCO and patients are happy, they don’t want to lose you. Even a small change in a contract can make a significant impact on your profit. Producing data that show better outcomes may even justify an increased fee for selected procedures — especially ones producing a "cure" in fewer visits or ones that eliminate the need for an ancillary service expense.
If a contract fee can’t be increased, there may be other changes that would make the contract more doctor-friendly. Examples of doctor friendly changes might include an increase in the co-pay, or reducing paperwork requirements. Remember, when renegotiating contracts, you have more leverage than you might think.
7. Provide supplies and products.
Some doctors still feel that "selling" retail products in their practices is unprofessional. It is often a valuable service and leads to better patient care. For example, if a mother can obtain antibiotics at a pediatrician’s office rather than driving with a crying baby to a pharmacy, searching for parking, and waiting for the prescription to be filled, she will probably appreciate the convenience and will pay a small premium for the time saved. Remember, this is not only a growing and acceptable practice in professional offices, it provides both better care and better service for patients — they even expect it! Patients and their families will pay for convenience. One-stop shopping also applies to health care.
8. Collaborate with peers.
Collaboration with peers is still in its infancy, but it represents one of the best potential sources of future non-patient-care income — especially if it includes collaboration regarding ways of improving patient care that can also reduce total cost for payers. Managed care is pushing doctors to collaborate for the purpose of managing contracts, but collaboration provides significant opportunities for reducing costs and increasing revenue. Additionally, activities such as group purchasing allow doctors to receive better prices from vendors for equipment, supplies, and services. Some doctors are expanding into ancillary areas such as ambulatory surgery centers. The cost of performing surgery in a single-specialty surgery center is substantially lower than performing that same procedure in a multispecialty ambulatory surgical facility. In addition, quality increases and costs decrease with higher volumes of patients. Lowering costs is a triple win, i.e., a win for doctors, patients, and payers. Previously, doctors working in academic health care centers and hospitals have had both administrative and clinical duties. Doctors in private practice who enjoy management duties will have similar administrative opportunities as collaboration leads toward larger physician groups and networks.
It will still be important to maintain a focus on growth and to continue securing sources of new patients; however, "growth opportunities" should not be limited solely to increasing patient volumes. Multiple opportunities exist for improving practices without increasing patient volumes beyond the point that leads to poor patient care. These strategies, coupled with better financial planning, may be all doctors need to make it through this difficult transition period.
Today’s health care environment leaves little that we can do about changing the reimbursements that we receive from insurance companies. However, we can do a lot to improve the efficiency and productivity of our practices. These eight suggestions are a place to start. We think if you try one or two, you will observe a positive impact on your bottom line.