In this age of declining reimbursements and rising costs, physicians keep running faster, seeing more patients, and cutting staff in order to remain in business. Physicians must instead learn to work smarter. But to do so requires solid, readily available management information.
In the past, many myths led to bad business decisions. "Big is better." "Staff represents the biggest expense, therefore if we cut staff we'll save money." "Never write off old accounts." "Add physicians and the patients will come." These myths still persist because small "Mom & Pop" physician practices often lack the time to develop managerial tools, the staff to research problems and opportunities, and useful data for decision-making.
While "gut feel" and tips picked up in the physicians' lounge may work sometimes, they are an unreliable - and risky - way to do business. Computers, on the other hand, hold lots of data, but converting it into useful reports requires knowing what you need and how to organize it.
Practice Management Toolkit
This toolkit contains a series of spreadsheets intended to give the owner physician or office manager templates for monitoring key financial indicators within the practice. These reports can be used for a variety of purposes and, if used wisely, can help you work smarter. The purpose is to condense, organize, and present critical information in the way you need it to run your practice and to make effective management decisions. We have included a list of source reports that are likely to be available from most standard practice management systems (billing software). If some data are not available, you may need to modify the tools and/or the formulas. Simply insert, delete, or modify to suit your individual practice needs.
Although these spreadsheets summarize data from various financial reports, it is vitally important that you also become familiar with and regularly review the key financial reports themselves, including the balance sheet, income statement, and budget. Other valuable sources of financial information include reports from your accountant (or accounting software such as QuickBooks) - general ledger, accounts payable, payroll, and banking-related information, such as cash deposits, bank balances, and debt payments.
Benchmarking is another means of evaluating practice performance. It is an exercise that compares your practice to others or to yourself as a way to strive toward improvement. The reports in this toolkit can help you benchmark your practice against its own historical performance.
How to use this toolkit:
The reports contained in this toolkit, and the purpose for each, are as follows:
- The Monthly One-Page Financial Report - includes a series of key indicators that you should watch each month. These monitor collections, productivity, and expenses. Trends can often indicate very specific problems or needs. As required, you may add additional rows, such as for additional office locations, physicians, or physician-extenders. These indicators are useful in comparing individual provider productivity as well as overall practice growth and productivity. The financial indicators, if tracked over time, measure the financial health of your practice.
- The Annual Report - includes greater detail and longer-term trends that can indicate more fundamental growth, problems, strengths, weaknesses, and other attributes. These trends describe your business results over time and may help assess the effectiveness of your practice management team.
- The RVU Report - tracks productivity based on relative value units. If good RVU data are available, this information can be very useful in negotiating managed care contracts, revising provider income distribution formulas, setting fees, cost accounting, or tracking relative resource use within your practice.
- Evaluating Payors - There are many times when you might need to evaluate your payors. You may be trying to decide whether to renegotiate your contract or to drop it altogether. You may have been approached by a new payor and want to do some modeling based on your experience with other similar payors or overall.
- Payor Profitability - allows you to evaluate an existing contract based on overall profitability or to negotiate a fee schedule based on cost per CPT code from the RVU Report. This tool, in conjunction with the Collections Monitoring Report, can provide you with valuable financial information about the contract and thus assist you in deciding whether to keep or drop the payor. For instance, it may be time to drop a payor if it is not covering costs, or you may determine that a new payor's proposed fees are insufficient to cover your expenses to produce those services. You can also use this tool to assess whether you should target particular fees for renegotiation.
- Collections Monitoring Report - is used to monitor how each of your insurance contracts is performing. (This report is often called a payor mix report.) This tool can indicate if payors are paying claims promptly, monitor the effectiveness of your billing staff, and track the relative size of each payor as a percent of your business. If one or two companies represent a large portion of your practice, you should develop a good relationship with those payors and work hard to ensure their profitability. On the other hand, a small company that is hard to work with and/or who is falling behind in its payments to you may not be worth keeping if it contributes little revenue to your practice.
- Fee Schedules - This spreadsheet lists your practice fees next to those of each of your payors, including Medicare. This tool can also help the billing staff verify that the payment received is correct. If you are negotiating a new contract, insert a column for the fees of the proposed contract to see how the proposed fees compare to those of existing contracts. You can also insert rows for referral requirements, provider service phone numbers or your provider identification number, thus making it a one-sheet resource for your business office staff.
- Adding a New Service - Cost vs. Benefit Analysis - One way that many practices are combating the continued reimbursement constraints and rising expenses is to add new revenue-generating services. But you need to make sure the new services will in fact generate enough new revenues to cover the new expenses. This spreadsheet will help you make decisions about whether that new piece of equipment or new service you are considering will be a profitable endeavor or one you should continue to refer out. There are more detailed ways to do cost benefit analysis, but this is a fairly simple method of estimating whether your new or existing service can be profitable.
- Source Reports - This is a suggested list of reports to use to fill in all the numbers for these six reports. Your practice management and accounting systems' capabilities and/or availability may determine which of these reports are possible to run and how often. You may also find that other reports are available containing useful information about your practice.
- Suggested Reading - For those who want to go into more depth about the financial management of medical practices, this list of publications may prove helpful.
In each spreadsheet, instructions or notes are included in comment boxes indicated by a small red triangle in the upper right corner of the cell. Hold your cursor over the triangle for pertinent information about that data element.
We need your help: ACP would appreciate feedback on this toolkit. Does it work for you? For what purpose(s) do you use it? Was it difficult to use? What didn't work and why? How did it help you in the financial management of your practice? If you have problems using this toolkit or need help customizing any of the spreadsheets to the data available in your software or the particular needs of your practice, contact Margo Williams by phone at 800-338-2746, ext. 4565, or by email at mwilliams@acponline.org.