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Getting a clearer picture
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Physicians increasingly turning to data-driven processes for more effective practice management

Many practice owners, even those with well-established or large multi-physician offices, worry about uncertainty going forward as health care reform, electronic health record adoption, a push for care coordination, and revisions to the way providers are paid change the way they do business. But even as payers and the government use data to assess and pay physicians in new ways, practice owners can use the data they have about their own businesses to develop as clear a picture of their present condition as they can and use this snapshot to effectively plan for the future. In order to do so, according to consultants and practice managers with years of analytical management experience, it’s vital to not only collect the right data on one’s practice, but know how and when to effectively use it. 

Monitoring collection rates

While often delegated to a practice manager or looked on as a secondary priority to treating patients, effective evaluation of a practice’s financial processes and overall health is vital to a physician’s ability to provide effective care to the greatest number of patients according to William Brady, the American Academy of Dermatology’s senior manager or practice management resources.

“Quality patient care and practice [business] health go hand-in-hand a practice needs to stay competitive and thrive in order to see patients,” he said. “That’s why periodic financial check-ups are needed to ensure that the practice is on course with its growth strategy, diagnose any potential issues that need to be remedied, and identify any area needing performance improvement.” [pagebreak]

The first area a practice owner should look at, according to Dave Gans, MHSA, senior fellow, industry affairs for the Medical Group Management Association (MGMA), is the accounts receivable side of the practice. By assessing four areas, he said, one can benchmark one’s own productivity more accurately than 95 percent of practices do:

  • Total accounts receivable for each physician.
  • Percentage of total accounts receivable that is over 120 days old.
  • Adjusted collection percentage.
  • Number of days of billings that are represented in accounts receivable.

Measuring these four pieces of data, Gans said, effectively allows benchmarking at a glance of how much a practice collects, how much accounts receivable it maintains within a specific time period, and how much of that debt is overdue or unlikely to be collected — “bad debt,” in practice management parlance.

“The overall goal is to keep the amount of accounts receivable low, collect a high percentage of billings, and minimize bad debt to between 2 and 3 percent,” he said.

New services and collection practices can prove significant in altering a practice’s collection rate, according to Jim Hook, director of consulting services for The Fox Group, LLC, a health care consulting company — but practices should take care to be sure they measure from the correct baselines. [pagebreak]

First, he said, practice owners and managers need to compare numbers across a spectrum of practice services. Adding new capacity, providers, or services should serve as the beginning of a new benchmarking period.

“If you add a new service that boosts your traffic by, say, 25 percent, you have to adjust your time frame for measurement to be able to set a correct baseline,” he said.

The billing system, Gans said, should also be correctly calibrated to count the total number of days an account has been receivable. Some systems, he said, re-set the currency of an account based on a re-billing after 90 days. This changes the collection time data significantly, and fails to take the true measure of the account.

In addition, Gans said, co-payment collections prior to the time of service can make a measurable difference in collection rates, as can the high-deductible plans that have become increasingly popular in recent years.

“If a patient is paying the first $2,000 out of pocket, which is by no means unheard of, those dollars can substantially affect a patient’s ability to pay and your ability to collect on billings,” he said.

The measurement of accounts receivable data, according to Hook, need to be consistently tracked on a timely basis, not solely by the dollar amount of accounts receivable currently present in the practice. [pagebreak]

“Many practice managers I talk to, unfortunately, just say something like our accounts receivable are low, we work on them all the time,” Hook said. “But that doesn’t help very much without knowing what the exact number means. How have the percentages improved over time? How long are accounts aging before collection?”

Charity care, Gans said, should not figure in to the collection rate if a patient is accepted with the knowledge of their potential lack of ability to pay. In these cases, he said, a practice should not prepare a bill or enter the value into the collection metrics. Patients who claim inability to pay after the fact, however, and settle with the practice for less than the billed value of services should indeed be counted against a practice’s collection rates.

Overhead and provider benefits

In defining the continuing cost of operating a medical practice, it’s important to separate the cost of overhead — keeping the lights on, answering the phones, collecting payment, etc. — from the cost of offering care at the provider level. In addition, according to Gans, one must delineate the dollar value of practice expenses and the relation of those dollars to the billed value of care produced through the practice.

Total operating cost is defined by MGMA as everything that does not include provider (whether physician or not) compensation and benefits. So one’s building, facilities maintenance costs, supplies, administrative staff, and operational functions such as malpractice insurance all come under this umbrella, according to Gans. Dividing expenses according to whether they are incurred paying providers or operating the practice, he said, allows a practice to benchmark itself against very different practices with a stunning degree of accuracy. [pagebreak]

“You take that value, and you have to standardize it for benchmarking purposes. And we look at standardizing it in two ways. One is on a cost-per-physician basis. In a physician-owned practice, that is what the physician’s share of the cost is. It also allows you to benchmark to organizations of different sizes. But once you standardize per doctor, the data are remarkably consistent. Even vastly different practice settings can have very similar figures at the per-physician level.”

The other way, Gans said, is to go a step further and divide that per-physician value by total revenue, which provides a figure for what percentage of the practice is devoted to operating costs.

Depending on one’s practice arrangement and one’s benefits to physicians and providers — a single physician with health insurance is much different in cost from a provider with family coverage — a practice may decide to classify health and retirement benefits to providers either as compensation or a specifically-defined type of overhead, according to Hook.

“It’s important that you have enough accounting resources that you can distinguish between what’s overhead and what’s physician compensation,” he said. “The practice partners have to agree on what will count as compensation to them compared to what will count as overhead. In physician groups, they tend to be more generous in benefits with physicians. People have automobiles, cell phones, and all manner of incidentals through a practice.” [pagebreak]

To push the metrics just a bit further, Gans said, practice owners can divide the total operating cost by the total relative value units (RVUs) produced by the group. This tells practitioners and practice managers the cost per RVU between different payers.

“Let’s say an RVU for Medicare is about $35. You have your practice cost per total RVU, and let’s just arbitrarily say that’s $25. Then it tells you if you’re getting paid by Medicare that $10 per RVU is actually going to pay your physician costs. You’ve got margin,” Gans said. “Or you can look at a commercial insurance contract, and say they’re paying you $40 per total RVU. You now know that you have received $15 of contribution margin per RVU produced. This gives you a contribution margin approach to understanding your practice margins.”

The ability to see the contribution margins per RVU allows practice owners to come to a payer contract negotiation armed with a tool that will help decide whether a specific contract will help or harm the practice’s bottom line in contrast to historical benchmarks.

In terms of overhead as a percentage of practice collections, Hook said, practices don’t typically go much lower than 40 percent. With larger surgical practices, he said, that number can approach 50 or even 60 percent, depending on the space needed and the number of outpatient procedures the practice offers. [pagebreak]

Segmenting utilization rates

In looking at the benchmarked numbers for one’s collections and overhead, separating metrics by payer and procedure type can give help give owners and managers richer data when viewing the practice on a macro level. For one, Gans said, the payer type should be isolated to allow a clearer picture of one’s self-pay collections, especially for practices with a significant proportion of cosmetic procedures.

“The same metrics that we use as far as collection percentages and understanding costs and revenues are where the more sophisticated practice can isolate and categorize these procedures,” Gans said. For example, he said, if one’s overall collection percentage is near 99, and the practice’s insurers promptly pay at the full contracted rate, “you can understand what happens at the payer level when you compare the rate to that of self-pay patients.”

As the Affordable Care Act begins to alter the way providers are paid by Medicare and Medicaid, Hook said, it’s vital to determine what is currently working for a practice, to understand one’s patient population, and to use these benchmarks to strategize as the payment system changes.

Hook agreed. “You have to know now which of your claims are paid by Medicare, because those percentages are going to change and you can build that into your practice’s strategy and budget for the future. But if you don’t know which of your patients are in those categories, how can you do that?” [pagebreak]

To further extend effective benchmarking tools to dermatologists, the Academy is launching a Dermatology Business Operations Survey in 2013.

“This survey will assess the health and performance of dermatology practices,” Brady said. “Dermatologists who receive this survey will provide the specialty with valuable insights about the organizational structures, reimbursement trends, and business dynamics of typical dermatology practices around the country. The goal is to provide members with business benchmarks to implement enhanced business strategies and improve practice performance.” 

Management by the numbers

Adjusted collection percentage

Defined as the value calculated by dividing the dollar amount of collections by the total amount billed to patients. When the practice has adjusted its gross charge to the billed amount, any difference between the billed amount and the collected amount figures into this percentage.

Days in accounts receivable

A measure of how many days pass from the time the dermatologist provides service to the time the practice collects upon those services. The practice average for this figure is best viewed over a period of at least six months to a year, according to practice management consultant Jim Hook, director of consulting services for The Fox Group, LLC.

To calculate, look at the amount of total charges over the period of collection time, say one year, and divide that number by 365. That is the average daily revenue. Then divide the AR on the books by that average daily revenue figure. An average time of 30 days in accounts receivable indicates a healthy revenue cycle, Hook said. Outcomes above 60 days in AR may indicate a problem.

Aging buckets

Defined time periods of collection on individual accounts receivable. For example, a practice manager might track percentages of accounts receivable in defined time periods of 0-30 days, 31-60 days, 61-90 days, and 91+ days. Compiling an overview of the percentage of accounts receivable in each of the aging buckets should provide a clear picture of revenue cycle health.

For this indicator, it is important to understand what is happening when charges are rebilled to a payer. If the billing system resets those charges as if they are new, the aging buckets will not be an accurate measure of performance.

 

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Management by the numbers