In recent years, physician practices have watched their operating costs increase as their revenues shrink. And most practices have been left feeling the need to tighten their belts.
According to Medical Group Management Association data, total operating costs of multispecialty groups reached a 10-year high of 57.5% of net medical revenues in 1997 (the most recent year for which data are available). And medical groups' revenues after operating costs hit a 10-year low of 42.9% (see chart on page 36). The respective upward and downward shifts progressed steadily over the past four to five years, in turn squeezing practice profit margins.
"Someone in practice cannot forget healthcare is a business, and you have to reduce expenses," says Richard Sanchez, M.D., chief of health services practices at the Pace Group, Dallas. "If practices don't reduce expenses, their actual earnings will drop."
Although there is no single strategy that will work for every practice, groups have found different ways to streamline their operations. Jorge Olmedo, executive director of Drucker, Genuth and Augenstein MDs, a five-physician radiological practice in New York City, used a combination of cost-reduction measures to cut $300,000 from his practice's costs last year. While the practice had been profitable before, Olmedo says he found plenty of areas where fat could be cut.
For instance, the practice took bids from other companies on an existing service contract for magnetic resonance imaging and saved 22%, or $23,000. "We even ended up with the same company because they didn't want to lose the business," he says.
The practice, which performed 18,000 procedures last year, employed other cost-cutting measures such as:
Clearly, little measures add up. It also pays to pay attention. Olmedo reviewed invoices and found that a purchasing company had made a $42,000 error by not giving the practice a negotiated contract price for film. "You've got to check everything that comes in," he says. "Regardless of your practice size, if you save $20,000, that's $20,000 more for either profits or to invest back into the practice."
To get an overall handle on a practice's financial performance, Bob Koudelka, a partner with Deloitte Consulting, Dallas, suggests developing a one-page management report that provides key expense and revenue indicators at a glance. Koudelka calls the one-pager a "dashboard" and says it should include items that can be monitored for trends over time, such as revenues and expenses per patient visit, and collection ratios.
"This gives you some clarity on the important practice issues you need to focus on," he says, and it's a way to rally fellow doctors and staff around specific concerns.
Another key to improving financial performance: Don't think of costs as overhead; think of them as investments.
"Know why you're spending money and what practicewide benefit you'll get from it," says Perry Hanson, principal in the health industry consulting group for Towers Perrin, Minneapolis. "If you can't answer that, don't spend the money."
Some cost-cutting or revenue-generating recommendations may not work for every practice, and consultants tend to emphasize different measures. But here are some suggestions that may prove helpful:
Work-flow charts and clear job descriptions can help determine the number of staff members a practice needs. Adding performance standards to job descriptions also can help. Hanson points to a multispecialty primary-care practice in the Midwest that reduced its full-time-equivalent employees to 4.9 per physician from 5.5 by adding performance standards to job descriptions. "We reduced variation and duplication of what employees were doing so (the doctors) didn't need so many employees," he explains.
Elizabeth Woodcock, a Philadelphia-based consultant with the MGMA's Health Care Consulting Group, says practice managers should question hiring practices. "When a new surgeon comes on board, do you really need another RN at a cost of $20 an hour when you can use existing nurses and hire a patient-flow coordinator, or 'runner,' to take blood pressure and weights?" she asks. "The annual savings can be $10,000 to $15,000."
Remember, cutting staff isn't always the answer. In fact, the MGMA reports that its better-performing practices actually have higher staff ratios than the norm, mostly in direct patient-care or physician-support positions. "But you have to give increased staff responsibility and be able to show how they're going to generate additional money," says La Nita Kreiling, an owner of Medical Management Technology, a New York-based medical practice management company.
Woodcock points to another example: A six-surgeon practice in the Northwest earned an additional $15,000 a year by eliminating its on-site X-ray services.
After removing the X-ray equipment, which was taking up 400 square feet of space, the practice was able to open two additional exam rooms and, as a result, see more patients.
On the flip side, if a practice refers many of the same procedures, it may be profitable to do them in-house. "Making those evaluations is critical," Woodcock says.
"Don't lock in at a high rate," says Deloitte's Koudelka. "If you get a low rate, get options to continue it to provide some flexibility to allow the practice to expand or contract."
Fewer than 10% of practices bid out all contracts, Kreiling estimates, so the potential for savings is widespread. The amount saved can run anywhere from 1% to 20%. So, if a practice spends $100,000 annually on medical supplies, it might save anywhere from $1,000 to $20,000 by getting bids.
Probably the most common area in which this happens is when an OB/GYN practice stops providing obstetric services but its malpractice premium doesn't reflect the change. Correcting such an error can save thousands of dollars.
"We also want to make sure physicians have availed themselves of any group malpractice efficiencies that usually come with belonging to a medical society or specialty, an (independent practice association) or another organization," Sanchez says.
Westshore Family Medicine, a hospital system-owned, nine-provider practice in Muskegon, Mich., reduced costs and increased revenues when it switched to an electronic patient record system four years ago. Eliminating paper charts resulted in greater efficiency and reduced staff and transcription costs.
According to Medical Director Michael Banka, M.D., Westshore has 2.5 staff members per full-time provider, compared with 3.5 at similar practices without electronic patient record systems.
The group uses the Practice Partner system by Physician Micro Systems of Seattle. It allows doctors to check drug prices and choose the least expensive option when writing prescriptions.
It also lets Westshore doctors improve the delivery of preventive services, such as immunizations and mammograms, by automatically calling or sending reminder notices to patients needing such care. And when patients are due for preventive services, the system flags their records during visits. Both features improve patient care and boost revenues, the practice says.
Although the initial investment was a little over $200,000, the system has more than paid for itself in the past four years, Banka says. "Part of the justification of the cost was to increase hospital referrals -- such as for mammograms -- not only decrease staffing and increase efficiency," he says. "It has proven effective."
One caveat from Woodcock: Practices should avoid buying expensive systems and then underutilizing their components. Powerhouse systems, bought primarily for billing, often can be used in a multitude of ways. "The time savings can be phenomenal, but understanding how to use them is essential," she says.
"If you don't capture all available billings, then you're not getting your fair share payment of the work being done," Hanson notes. When a practice's codes are wrong it ends up spending additional money correcting errors and resubmitting bills.
By the same token, practices should work to collect copayments upfront. A $5 copayment may not seem like much, but 1,000 visits a month at $5 each represent $60,000 a year. This also saves related billing costs, which in the long run can cost more than the copayment is worth.
Outsourcing may be another option to increase collections. While outsourcing some tasks, such as photocopying, may sound like an added expense, it can turn into a money generator -- if employees use the time they would have spent on manual tasks in more productive ways.
"Could a trained billing person be collecting money instead of putting stamps on statements?" Woodcock asks.
Says Towers Perrin's Hanson: "Seek to develop not just satisfied patients, but loyal patients. Satisfied patients may come back to you, but loyal patients come back and send their friends and family, too."
Sandy Moretz is an Atlanta-based freelance writer.