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Physician technology to assist with ultrasound procedures.

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Financial trouble ahead?

Table of Contents

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.

Making finances a priority at your practice

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.

Staffing costs

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.

Keeping track of 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.

When overhead is on the rise, it’s time to look at the itemized expenses. For example, if fringe benefits are inching up, find out if it’s due to increased insurance premiums, continued education for staff, an elaborate retirement party, or an unreasonable allocation for uniform expense. It may be time to tighten the reins on spending. When supply costs increase, shop your biggest expense items on the ‘net to seek a better rate. Websites often are able to beat the local market.

Other valuable financial data

There is a lot of information that will put the spotlight on practice operations, strategic planning, and marketing. When strategic issues emerge, examine relevant data to better understand the state of the practice and evaluate opportunities. For example, if each physician admits at multiple hospitals, tracking admissions by hospital will reveal if that trip across town to one of the hospitals is worth the effort.

Then there are competitive factors to consider. If a new physician is encroaching on your territory, take a more extensive look at the procedure revenue reports to see if there is a drop in the number of procedures being performed. This report also is helpful to track the numbers for a new service, such as a laser vein removal or Botox, and to identify if the expected projections are valid. Examine the practice revenue by department from time to time to make sure the ancillary services are profitable, and determine if they should be expanded or perhaps dropped, based on the return on investment.

Payer class data also can be revealing. These data monitor if a payer is slowing down payments or if the practice has become too dependent on one payer source. Also, when targeting a new payer source, such as workers’ compensation, this report will assist in measuring the success of your marketing efforts.

Look at the month-end financial reports!

Too often, administrators and practice managers tell me they run the month-end reports and give them to the physicians, but the physicians do not look at them. Managers must make the data user-friendly by graphing it. Most practice management systems allow you to export data into a spreadsheet where, with a few clicks of the mouse, the report can be presented in bar graphs, scattergrams, or pie graphs. Graphs provide a recognizable visual that reveals patterns and irregularities. They are easy to read and easy to understand. Ensure that your administrator can produce data in a way that you understand.

Looking at the historical numbers within the practice will help determine what reasonable performance benchmarks to set. At the same time, compare practice numbers to national industry benchmarks for physicians of the same specialty. These statistics can be obtained through the Medical Group Management Association’s cost survey ( or the National Society of Certified Healthcare Business Consultants national statistics (

Stay updated on the financial situation of your practice

If suddenly the manager or administrator starts canceling the monthly meeting or fails to provide current reports, it may be an indicator that the reporting is slipping down the list of priorities or perhaps the performance report card itself is slipping. Whatever the reason, don’t let it slide. Get back on course.

Practice economics are managed better by monitoring the historical patterns of the practice, heading off potential problems, and taking advantage of the opportunities these patterns reveal. It is likely to result in a more predictable future. Running the practice by the numbers is the best way to ensure decisions are made based on solid indicators and performance rationale. In less than two hours a month, your management team can review practice performance and make data-driven decisions that are prudent for the overall stability and growth of the practice. If you aren’t doing this now, it’s time to get started and stay headed in the right direction.

Judy Capko is a health-care consultant and the author of Secrets of the Best Run Practices. Her focus is practice operations, staffing, finance, and marketing. She can be reached at or through


Judy Capko

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