For many physician practices, December means the end of another fiscal year. Records are sent to the accountant, financial statements and tax returns are prepared, and another year begins. But how many physicians take the time to actually read and understand their financial statements?
Medical practices are businesses. Gone are the days when physicians could treat patients, not worry about getting paid for their work, and bring home a sizeable paycheck. With decreasing reimbursements and increasing costs, medical practices need to be proactive in their business. Financial statements are an invaluable tool in understanding the business of medical practice.
In order for physicians to maintain the levels of income they’ve grown accustomed to, they need to view their practice as a business and use the business measurement tools available to them. These include productivity analysis, benchmarking, and financial statements.
Many physicians are asking why their compensation is declining and simply blaming decreasing reimbursement rates. However, there is more to the big picture than declining reimbursements. Much of the raw data necessary to get a grasp on how the practice is doing lies in the body of its financial statements. Financial statements guide the physicians and CPAs to ask the right questions and identify business issues.
The two main reports are the balance sheet and the profit-and-loss or income statement. The balance sheet is a snapshot of the practice’s assets and liabilities on a given day, i.e., Dec. 31. The profit and loss shows the practice’s revenues and expenses during a given period, i.e., Jan. 1 through Dec. 31. Though we are using the dates Dec. 31 and a full-year time frame, these statements should be prepared and reviewed on a more regular basis — monthly or quarterly at minimum. Items on these two statements may necessitate a more indepth inquiry into the supporting documents (general ledger, invoices, bank statements, etc.).
Revenues: The first section on most profit-and-loss statements is revenues. It is here the physician can at a glimpse see how much money he took in and from where. He can see how much money came from patient services, honorariums, medical directorships, and research. If any of these items are more or less than expected, the reasons why should be examined. Did a major carrier decrease its reimbursements? Are the days in accounts receivable up? If so, is it due to billing errors, coding errors, or a problem with a particular insurance plan? The explanations can be found through further research into the revenue-producing areas, which then leads to corrective action.
Expenses: What is the practice spending its money on? Period-to-period and year-to-date fluctuations should be examined. The physician should be looking for unusual fluctuations, spikes, dips, etc. Explanations should be attainable for all of these. By looking into the detail behind the line items (i.e., the general ledger), one can see where the money went. Further analysis into actual invoices may also be necessary.
Creating a budget for revenues and expenses is an excellent way to monitor and maintain fiscal control. The profit-and-loss statements should be compared to the budget. Using monthly or quarterly information, and comparing this to what the practice expected to take in and spend, can help pinpoint problems before they get out of hand.
Overhead: By looking at the profit-and-loss statement, physicians can calculate their overhead. The costs incurred to run the practice make up the overhead. This typically includes all costs except for provider compensation and benefits.
The overhead rate is the overhead expenses divided by the practice revenue. This rate is often discussed and dwelled on by physicians, often leading to immediate discussions of cost-cutting. However, a higher-than-normal or increasing overhead rate can be the result of either higher or increasing costs or lower-than-expected revenues. One cannot simply look at the rate and determine which actions should be taken. All contributing factors must be considered.
For example, a practice with multiple sites and multiple providers may have what appears to be an extremely high overhead rate. This may be due to increased support staff or occupancy charges. However, physicians need to look at provider compensation. If the provider compensation is at or above the normal, expected levels, this is an indication that the additional overhead may be necessary for this size practice.
Resources like the Medical Group Management Assoc. and the American Medical Assoc. provide financial statistics for most types of medical practices. These range from gross charges per provider to accounts-receivable aging. Understanding how to use this data and compare it to your own practice can help determine if you are on the right track. These statistics vary from specialty to specialty.
The balance sheet of an entity typically reflects all assets of the entity, such as cash, accounts receivable, capital assets, and other assets. It also shows all the liabilities, such as accounts payable, accrued liabilities, debt, and also equity. However, most physician practices prepare their financial statements on the cash basis. Given that, the balance sheet would not show accounts receivable and accounts payable.
Accounts Receivable: Since they do not show up on the balance sheet of most physician groups, these must be reviewed separately. Aging percentages, average days billings in accounts receivable, and concentrations with particular carriers should be reviewed and tracked.
Accounts Payable: Accounts payable also do not typically appear on a physician practice balance sheet. The physician should ask for an aged detailed listing of all unpaid bills. This should be reviewed to be certain there are not significant unpaid bills not reflected through the profit-and-loss statement. This could make expenses look lower than they actually should.
Understanding and using the financial statements is key to increasing compensation. Identifying where money is coming and where it’s going on a regular basis can help identify problems and opportunities.
An accountant and consultant experienced in medical practices should be a part of your financial team. The right accountant can provide valuable guidance in the management of your medical practice. He or she has the resources available to make statistical comparisons, interpret their meaning, and help you to make more informed decisions.
Lisa A. Patenaude, CPA, is manager of the Health Care Services Division of Meyers Brothers Kalicka, P.C. in Longmeadow; (413) 567-6101