Reduce medical practice costs
June 23, 2016
By Kevin N. Fine
What is the cost of doing business for your practice? How would you like to lower that cost? As medical reimbursements continue to decline and payment models continue to change, it is more important than ever for physician practices to manage costs in order to maintain (and hopefully improve) profitability. If you take a proactive approach to managing costs (productivity and performance) you can increase cost efficiency and effectiveness in your practice.
The first step to cost management is understanding your overhead. Every physician practice has direct costs, fixed costs and variable costs, and opportunities lie within each category. In addition to patient care-related items such as medical equipment, direct costs include the item that is likely the largest single expense in your practice: staffing. Employee salaries can account for up to 25 percent of practice revenues. As such, if you want to contain costs, it’s critical that you understand the financial and operational impact of your staffing situation.
Are you employing the right number of staff members for your practice? Do you have full-time employees in positions that only require part-time help? Assess how much time is really needed to complete all of the tasks that each person handles on a daily basis, and reevaluate your staffing needs. You should keep in mind known variances in workload on certain days of the week or certain times of day (if you typically receive more appointment phone calls before noon, plan to staff the front desk accordingly).
Are you employing the right kind of staff? For example, could a medical assistant perform some of the basic duties that a licensed practical nurse (LPN) is handling in your office? Look at each person’s role and determine how well his or her daily tasks and responsibilities align with his or her level of expertise (and commensurate salary). When evaluating your fixed costs, you’ll want to look at items like utilities, office rent and malpractice insurance.
Many of these expenses are subject to long-term agreements, presenting opportunities to lower costs during contract negotiation or renewal. Variable costs include medical supplies, drug supplies, laboratory fees and imaging expenses. One way to keep supply costs under control is by tracking inventory and only purchasing what you expect to use on a short-term basis. While buying supplies in bulk could theoretically enable you to secure volume pricing and thus save money while stocking up for long-term needs, the reality is that physician offices often end up discarding items that are past expiration or simply never used. Resisting the urge to keep excess inventory in your supply closet can not only reduce waste, but it can also leave you with more cash on hand.
You can’t manage what you can’t measure. If you want to improve cost effectiveness and efficiency at your practice, you should track and report financial and performance data on a regular basis. Do you know the key performance indicators (KPIs) for your practice? Are you tracking them consistently? And are you using that data to make better decisions?
If you answered no or aren’t sure about any of those questions, you have some work to do. A good place to start is by looking at a few key metrics that have the greatest impact on the health of your practice. Those metrics may include:
• Profitability indicators: operating margin, total margin.
• Revenue cycle indicators: gross charges, receipts, unpaid claims, low-paid claims, denied claims, denial rate per payer and per provider, clean claim rate, A/R aging, ratio of claims collected to fees incurred, timely submission of charges.
• Cost indicators: salaries to net patient revenue, overhead expenses as percentages of revenues.
• Liquidity indicators: current ratio, outstanding A/R, days of cash on hand.
• Productivity indicators: patient volume per provider and per office, number of procedures per provider and per office.
One of the most effective methods for improving efficiency and productivity is to perform a workflow analysis. A workflow analysis can help you to visualize key processes within your practice by mapping out in detail each step of the process, including who does what. You may want to focus on processes within common pain-point areas such as the billing cycle and the patient visit.
Armed with data and a better understanding of your expenses and internal processes, you can make more informed decisions and identify specific opportunities to improve cost efficiency and effectiveness. You may discover opportunities to adjust staffing, renegotiate contracts, change purchasing patterns, streamline administrative tasks, automate processes or make other changes to boost efficiency and productivity while containing costs.
About the author: Kevin N. Fine, MHA, is a director of health care advisory services in the Miami office of Kaufman Rossin, one of the top 50 CPA and advisory firms in the U.S.