Financial Best Practices – Physicians Groups Must Review and Monitor Operating Expenses

There are many financial struggles in owning and managing a medical practice. Expenses continue to rise while revenues decrease, yet everyone is working just as hard. Healthcare reform is a constantly moving target that is only continuing to evolve and promises to take new shape under the new presidential administration.

Additionally, many patients are having trouble adjusting to their payment responsibilities in the world of increasingly common high-deductible plans that are being offered. These things are all having a negative outcome on your bottom line. The question is, what can be done?

This series of three articles has been designed to address, through process orientation, planning and implementation of best practices, various financial challenges medical practices continue to face. In part one of this best-practices series, we focused on proper collection procedures and related keys to success. This article, the second in the series, will focus on expense management and oversight. More specifically, we will identify opportunities that can be found through careful analysis of your expenses that can save you money, time and effort. The subsequent and final piece will focus on the benefits of mid-level providers and alternative revenue streams.

In a market of declining revenues, it is imperative that every practice perform regular reviews of, and continuously monitor, their operating expenses. We will begin with a basic review of the budgeting process for a practice. From there, we will explore some of the more meaningful benchmarks/ ratios that can be used when considering and executing a cost management strategy. Additionally, we will discuss several common examples of where practices may find an opportunity for cost savings.

Budgeting

The creation of a budget is the very first step in being able to properly monitor the expenses of a medical practice. A budget, at its most basic level, is a tool that is designed to set certain expectations, and then to provide a vehicle to measure actual results against those expectations. This is referred to as “Budget to actual.”

Budgeting for expenses is developed by first determining whether an expense is fixed or variable. Fixed expenses are those that are set at a specific amount and can be pre-determined, such as rent and manager salary. Variable expenses are dependent on certain events occurring, such as the use of additional medical or laboratory supplies as revenues increase.

Once the budget is created, it is important to monitor the expectations set forth within said budget as the practice operates throughout the year. Such monitoring should force the practice to focus on discrepancies at the account level rather than some other form of global or high-level analysis. It also provides a basis for accountability within the practice.

Consider this: If payroll is up unexpectedly, are staff members being utilized properly and is overtime being managed correctly? If medical supply inventory or expenses are too high on a consistent basis, is an adaptive strategy for inventory procurement being considered? If the answer to either of these questions is ‘no,’ management should work to identify the cause and develop a plan for correction.

Benchmarking

As final returns for a period are available, the next step in expense oversight and management is benchmarking and trend analysis.

Benchmarking is a process of comparing actual results within a practice against its peers — either nationally or specifically within their marketplace, depending on the availability of data. While different for each practice, the most common benchmarks include overhead expenses and staffing costs against collections. To the extent that anything unusual is uncovered, there is the possibility to drill down into individual expense accounts. One of the more common peer group benchmark resources in the healthcare industry is the Medical Group Management Association, or MGMA. Annually, the MGMA puts out benchmarking data based on industry wide surveys in areas such as productivity, operating costs and compensation. However, depending on your specialty, there are often other resources available through local and national industry associations.

Trend analysis differs from benchmarking in that it compares internal data over a period of time. When we work with a practice to perform a trend analysis, we often do so over a three- to five-year period. This allows management the ability to determine if certain expenses are increasing at rates that are inconsistent with expectations or industry trends outlined in the benchmark resources.

Cost Management

Upon completion of your budget to actual review and benchmarking analysis, the final step is to utilize these results to properly manage your costs. If costs were trending in a negative direction or were not in line with your budget, they should be reviewed. A good place to start is through contract renegotiations and vendor shopping. Too often we find medical practices use certain vendors for no better reason than, “that’s who we’ve always used,” and never considered an alternative. Recently, I learned of a practice that made the decision to change their vendor for hazardous materials and cut their related monthly costs in half!

Such reviews can be performed over each of the operational expenses of a practice. As it relates to staffing, consider whether your practice has the right number of employees and whether they are being utilized to their fullest potential. If not, reassignment or cuts may be necessary. Consider if medical supply inventory is being periodically audited to determine if there is waste. If it is determined that supplies are expiring in excess of reasonable expectations, purchasing techniques and strategies could be altered to minimize this waste and create cost savings.

As you work through the management of your expenses, there are a few additional points that should be considered. The first is relative to practices with multiple locations. Are satellite offices being properly utilized, and if not, are they necessary? Certain costs, such as rent, are fixed whether you are there one day or five days a week, and can significantly drive up overhead. Next, if the satellite locations are determined to be necessary, consider consolidating the purchasing function into one central location. This will allow for potentially greater discounts for bulk purchasing and may also allow for the sharing of supplies between locations, as opposed to ordering duplicate items.

Next, consider evaluating the market rate of your staff. It is not uncommon for long term employees to be compensated at a rate higher than what market conditions may dictate, especially if they have hit a technical ceiling in their career and continue to receive raises year after year. To better control this, some practices will establish a range for a given role or position.

If someone is at the top of this range, the practice could work with this individual to determine if their skill level allows them to take on greater responsibility or improve on job/ task efficiency through best-practices and training. If an individual’s rate of pay is greater than market conditions present and they are unable to bring additional skills or value to the practice, a difficult decision may need to be made.

Finally, be sure to include your team in the management of costs. They may recognize opportunities for savings or situations where needless waste or excess is present that you may not consider. Additionally, they may recognize other opportunities for improvement that would only be recognizable to someone on the front lines doing that specific job. Potential incentive bonuses tied to cost saving measures and overhead reductions may drive team engagement and save more money in the long run.

With the current economic pressures facing your medical practice, it is essential that you are as effective as possible in the oversight and management of your operating expenses. By implementing a few key policies and procedures, you can help to ensure the financial well-being of your practice. As mentioned earlier, the next piece in this series will focus on the benefits of mid-level providers and alternative revenue streams. Combined with this review of cost management and our earlier analysis of collection efforts, my hope is that you will be armed with a broad spectrum of financial best-practices to consider for your organization.