Cheryl L. Toth

Five financial reports you need to see monthly

No reputable doctor would recommend treatment without first taking a history and physical, conducting an exam, and perhaps ordering tests. Yet, a lot of very good doctors make bad (and often expensive) business decisions because they lack the same data-driven rigor when managing their practices.

Data-driven decision making starts with well, data. So here are five financial reports that physicians should review no later than the tenth day of every month, for the previous month's activity.

Cheryl Toth, MBA, is a writer and content developer with KarenZupko & Associates, Inc., 

, and brings 22 years of practice consulting and training, as well as healthcare technology product and executive management, to her projects.

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When managing their practices, a lot of very good doctors make bad business decisions because they lack the same data-driven rigor they give to patients.

If you see dollar signs when you think about opening an ambulatory surgery center (ASC), magnetic resonance imager (MRI), cardiac catheterization lab, or endoscopy lab, you're not alone. Physicians stand to benefit greatly from such ventures - and so do patients. If you cherry-pick the best nurses, radiologists, and technicians, patients get better care, and physicians get more freedom and efficiency.

"Our in-office surgery center provides us a consistently good revenue stream, but that's not the only thing," says Brent Lanier, MD, managing general partner of 10-physician Central California Ear, Nose & Throat. "I can do 14 to 16 pediatric ENT cases by noon. At the Children's Hospital, I'm lucky if I get nine done by three o'clock."

But for all their benefits, ancillaries are a high stakes game, so go in with your eyes wide open. For example, "a one-room, in-office ASC can run $1 million to $1.5 million, and a two-room up to $2 million," says Jack Bert, MD, vice president and medical director of 19-physician Summit Orthopedics in St. Paul, Minn. "And some statistics show that 33 percent of ASCs fail within the first 18 months."

One multispecialty practice in the northeast opened a physical therapy (PT) unit without thinking things through. Poor quality therapists were hired and no one knew how to run the business. The unit hemorrhaged money, and even the physician-owners didn't refer to it. The moral of the story? Whatever ancillary you're considering, be sure to crunch the numbers before you take the plunge.

"No matter what you plan to open, do a market and payer analysis first," advises Bert. "If there are already 10 MRIs in town, it probably doesn't make sense for you to open another one. And if plans have negotiated exclusive deals with hospitals or imaging centers, you'll be restricted to sending patients to those facilities, not yours." 

"You've got to determine which cases or patients are portable," says David Nathanson, managing director of Phoenix Healthcare Consulting in Phoenix, Ariz. "That's the number of patients you currently take to surgery or refer for an MRI that you could send to your new facility." 

Nathanson helped a Las Vegas cardiology group determine portability for an in-office cath lab. Based on his analysis, each physician was doing an average of 20 left-heart catheterizations per month, but only 25 percent of those had insurance plans that could be ported over to the new cath lab. Still, this percentage of portable cases allowed a tidy profit. 

To determine portability for its ASC, Bert's group generated a CPT frequency report from the computer system to determine how many cases the group saw annually. Next, each case was reviewed to determine the patients' insurance plan. Based on which plans would allow patients to be treated in the ASC, Bert's group analyzed that it could send 38 percent of its patients to the new ASC, due to payer-hospital deals. "In the final analysis, that percentage still made the venture viable," he says. Lanier's group performed a similar analysis. 

For MRI, PT, or other services for which you refer out or write a script (and therefore don't have CPT codes or surgery schedules to track activity), use a log to track the number of patients you schedule per month. 

"Note each patient's insurance so at the end of the month you can calculate how many of those patients are portable," recommends Jack Spratt, a consultant with Orthopedic Health Services in Old Lyme, Conn. "You can also use the data to run feasibility scenarios."

For example, an orthopedic group in Virginia recorded that it had about 50 referrals per week. It wanted to open a physical therapy center and had 2,000 square feet to work with. "Given the space limitation, there was no way they could handle their own referrals" Spratt says. 

Keep your eyes and ears open during the planning process, too. After hearing of a North Dakota group's plan to open an ASC, a hospital administrator took the president of Blue Cross to dinner and negotiated a shaved rate on inpatient fees - in exchange for being the exclusive provider of outpatient surgery services. The door was shut for the physicians who were planning the ASC, and whose payer mix was 75 percent Blues. But learning this before construction started saved them millions.

Once you've identified how many cases can actually be sent to your facility, it's time to determine how much revenue they will yield. "When you own an imaging center or ASC you are reimbursed the facility fee, which is different from the physician's professional fee," explains Mike Pulaski, CEO of Peachtree Orthopedic Clinic in Atlanta. Often, this fee is six times more than the physician's fee, based on the fact that it reimburses for overhead, contract labor, and other expenses incurred by the facility.


It's the facility fees you need to collect, and the amount differs by payer. "We had a 'mole' at the hospital who was willing to share the information," Lanier says. 

But if you don't have a hospital cohort, "someone has to get on the phone with each payer and get the facility fee for the top 25 procedures you plan to do," says Bert. Once you've obtained the data, multiply it by the number of cases you've predicted the facility will see in a year. (See Estimating Facility Fee Revenue, page 88, for a step-by-step guide.)

"Never base your financial analysis on charges - only on actual reimbursement," Bert advises. He adds that part of revenue planning is to ensure physicians refer to the new facility - even if it's a five- to six-mile drive instead of a walk across the street to the hospital campus. "Otherwise your revenue projections will be off," he explains.

Pulaski suggests giving revenue a boost by being choosy about your contracts. "A Blue Cross Blue Shield facility fee for arthroscopy may be $690 in-network and $3,000 out-of-network, which would make it foolish to agree to be in-network," he says. 

The revenue analysis should include the global impact on your practice. For example, you may end up agreeing to a contract that doesn't pay well for E&M services and surgeries, but more than makes up the shortfall with handsome facility fees. 
Expenses and break-even points

Labor (including associated healthcare, training, and benefit costs), supplies, equipment, licensing, attorney and accountant fees, and construction costs are pretty standard accounting fare associated with business expansion. Nathanson suggests taking your time to accurately predict Medicare certification costs, legal fees, and other start-up costs. "They are often more than you think," he says. And plan to have at least three months of cash on hand so you can weather reimbursement lag time after start-up.

If it's an in-office venture, you'll also need to apply indirect costs (also known as corporate overhead) to the new business unit. 

"You've got to allocate a percentage of administrative, marketing, billing, general accounting, administrator salary, and other enterprise expenses that can't be directly attributable to the new facility, but will nonetheless be used by it," says Nathanson. 
To do this, add up the expenses that cannot be applied directly to the new business unit, and multiply them by the percentage of total revenues that the facility will bring. For instance, if you predict an MRI business unit will comprise 30 percent of total enterprise revenues, and total indirect expenses are $200,000, you would apply $60,000 of indirect costs to the MRI's financial projections.

When revenues and expenses are all said and done, run scenarios to determine how many procedures or scans you have to perform to break even. 

"In orthopedics, the industry average is about two to three cases per day to break even in an ASC," Bert says. "For a shoulder/knee scanner you need to do one and a half scans per day and for a spine scanner four to five, to break even." Do your homework to see how your venture compares to specialty averages.

If the wrong person does these financial projections, you can end up with bad numbers that could put you in the red for 18 months or more.

"Be leery of attorneys and accountants holding business plans," Spratt cautions. "They may know finance but few know the right assumptions to put into an analysis like this."

Bert advises against consultants who run a demographic ZIP code analysis instead of doing a payer analysis. "I've never seen one that's accurate," he says. 

Bert's chief financial officer ran ASC and MRI projections in-house, but most practices don't have this luxury. And even if they do, many still outsource it. "I did the analysis," Pulaski says, "but we ran the analysis past our consultants to be sure we had the correct numbers." In addition to checking the numbers, the consultant supervised the space planning and construction, hired the staff, provided the policy and procedure manuals, and ensured that the ASC received its state and Medicare licensure. 


Central California Ear, Nose & Throat asked the space design company to run financial projections based on the last three years of average reimbursement data. "The analysis penciled out OK, but if we had it to do over again, we would have done a more rigorous business plan," says Lanier.

You can expect to pay $10,000 to $15,000 for a consultant to run the financial projections. "Unless you decide to go with a company that helps you set up and run the entire project," Pulaski says. There are companies especially for ASCs that set up the entire operation and help you obtain certification and licensure. But these companies also want a percentage of your revenue stream. A standard contract is 15 percent of revenues for the first three years - which could add up to hundreds of thousands of dollars. 

Bert says practices don't necessarily need these companies "if you do your homework, hire the right people, and the physicians focus on feeding the venture." Lanier agrees, noting that, especially in states where managed-care contracting is tough, a national company doesn't know the market well enough. "We've been approached by national companies who want to buy our ASC, but the deal is decidedly in their favor." 

The benefit of planning? Bert's ASC ran in the black in nine months, his MRI in three to four. Pulaski's ASC turned a profit in month four, and Lanier's has been running a steady profit for more than 10 years. "In 1990 we were renegades - everyone thought we were crazy for opening an ASC," says Lanier. 

Today, colleagues still think Lanier's group is crazy - like a fox.

This article originally appeared in the March 2003 issue of

Articles

Ancillary services can be a great revenue-booster. But do some planning and number-crunching first.

Ancillary Service Lines

You've sent three patient statements and still no payment. Time to send the account to collections? Maybe not. Many practices find that negotiating payment, or budget, plans is an effective way to get patients to make good on their debt. 

While methods and logistics for creating such plans vary, practice managers agree that communication with patients is critical to a successful payoff.

"We are in the business of caring for patients," says Lisa Roberts, reimbursement specialist at Obstetrics & Gynecology in St. Louis, Mo. "We want to help people settle their accounts." 

Senior reimbursement specialist Laurel Jones, from Bakersfield Orthopedic Medical Group in California, adds, "You can't just send statement after statement and expect those who need financial assistance to call. You've got to contact them and discuss how the account will be paid." 

Sharon Cardwell, a consultant for Larson-Allen in St. Louis and a former practice manager, agrees. "Having an actual conversation with the patient can reveal a great deal of information," she says. "A phone call can quickly reveal personal situations that are keeping the patient from paying the bill -- or that the patient has a secondary insurance that they assume you filed." But you've got to intervene early.

Roberts' practice sends two or three patient statements after insurance pays its share, and then, if it receives no response, has a pre-collections company call the patient to find out how the account can be settled. "Often, she pays the account right then, with a credit card," Roberts reports. "Other times, a payment plan is established." 

Jones uses a similar approach: "We talk to patients when they come in for their appointment -- before their account gets beyond 90 to 120 days old." The encounter form used by the practice includes the patient's balance; those with a balance of $100 or more are marked with the notation to see Jones first to initiate the discussion.
With those patients, Jones says, "I sit down and ask if the patient can make a payment or if he or she needs to set up payment arrangements. About 85 percent make a payment on the spot." 

This strategy has been effective, Jones says. Of the practice's roughly 140 accounts that are greater than 120 days old, 80 percent are making regular payments.

Jennifer Clifton, administrator of Myrtle Beach Internists in South Carolina, sends two statements before initiating a series of three collection letters. "During my monthly account review, I call the patients who have received collection letters," she says. "Usually I get the patient to commit to a payment series that settles the account in three months. The others go to collections, but I've only sent five or six people that route. The budget plan really works."

In hardship cases, Clifton negotiates payment plans using discounts. "In our state, many Medicaid patients need treatment beyond the number of annual, reimbursed visits [permitted by the government]," she says. "We work with these patients to make sure they receive all the visits they need, and get help paying their bill." 

For those Medicaid patients who need visits beyond the allotted amount, Clifton waives 50 percent of the practice's fee when they agree to pay within 90 days. Patients appreciate this, and Clifton reports that their budget payments are on time. Check with your carrier about state laws that relate to this type of negotiation.

But just how much per month can you expect patients to pay? For many practices, the answer depends on the total account balance. "We try to get patients to pay off the balance in 60 to 90 days," says Clifton. "Our patients typically owe $100 to $200 at the time we establish the payment plan, so monthly amounts range from about $30 to $60 per month."

Although patients in specialty practices typically owe more, Cardwell says the bill should still be cleared within six months. "Rarely do you want to stretch it further because the chance of collecting gets smaller and smaller," she cautions.  


Still, some practices are more flexible. Bakersfield Orthopedic sets its payments based on total balance thresholds. For instance, "if the patient owes less than $500, the minimum payment is $25," Jones says, "but we start the negotiation process by asking for at least $50 a month." If the patient owes more than $500, the practice requires a minimum payment of $50 per month, but tries to get a commitment of $75 to $100. 

And Allergy, Asthma & Internal Medicine of Northern New Mexico allows patients to pay whatever they can afford, "even if it's only $10," says Julie Richey, business manager. "Some of our patients have been paying for quite some time. Our physicians continue to treat them as long as they are making an effort," Richey adds.

Be careful if you agree to low monthly amounts, however. Experts agree the cost of sending a statement ranges from $7 to $9, so allowing low payment amounts makes account payoff a slow process.

Cardwell insists on getting the patient to sign a written agreement "because it makes them unable to deny the details." Jones asks patients to sign a "Promise to Pay" letter. You, too, should have patients sign a statement that spells out how much they agreed to pay for how many months. 

Most practices send regular statements throughout the budget plan process, but if your goal is to make payments convenient and decrease costs, ask patients if they would like their credit card to be charged each month. Obtain written permission and a signature, and then simply run the patient's credit card at an agreed-upon date each month. Obstetrics & Gynecology of St. Louis offers this option, but adds an extra precaution: "Even after we have the patient's signature, we call her each month before we bill the card," Roberts says. "Then we mail a receipt." 

The credit card option is a modern version of the old coupon books, which few practices use these days. But if you decide to offer coupons, you can easily make the "booklet" on your computer -- simply create a Word document with multiple coupons that can be cut into individual strips, and mail them to the patient. Each coupon should indicate the patient's name, account, payment amount, due date, and a line for the patient to write the amount actually being sent (look in the Tools section of this site for a sample you can use). 

Whatever the budget plan method, those patients who fail to meet it should incur a consequence. 

In Clifton's practice, the accounts of those who haven't kept their word make their way to her desk. "If the patient is coming in for a non-life-threatening prescription, they've got to pay their budget amount before the physicians write the script." And while defaulters at Bakersfield Orthopedic continue to be seen, for existing conditions, "if they come in for a new condition, I always get at least a partial payment, if not payment in full, before the physician sees them," Jones says. 
 


Savvy practices let the computer track adherence to payment plans. "Once a patient has agreed to a monthly amount, the billing office enters it into the computer's collection module," Richey explains. "If payments are being made, the account remains current. If they aren't, the billing office is alerted on the monthly budget non-payment report." This report alerts the billing staff to make phone calls or take other appropriate action.

Should you charge interest on delinquent accounts? You can, but it's a double-edged sword. Many patients who have trouble paying the principal will have even more difficulty paying the principal plus interest, and some may simply stop paying altogether, figuring they'll never catch up.

"We tried charging interest in the past," Roberts says, "but it's difficult to collect and you usually end up writing it off." Cardwell adds, "for the small amounts you do get, you burn up a lot of staff time -- and patients may view the tactic as punitive." If you decide to use interest as a deterrent to missed payments, check your state banking laws to find out the amount you are legally allowed to charge. 

When set up and managed properly, payment plans are a great alternative to sending patients to collections or writing off accounts to bad debt. Ask your staff to make the first move by calling patients and setting up a workable payment solution. You're sure to see more money in your pocket. 

This article originally appeared in the January/February 2003 issue of 

Negotiate a payment plan with patients for better collections

Payment Plans for Patients

Is there a certain comfort that comes from seeing large amounts in the accounts receivable (A/R) every month? Don't be lulled into a false sense of security. Some of the dollar signs you see are probably a mirage if you don't write off uncollectable accounts.

"When you don't write off old balances, the receivables become inflated and give a false view of what's really collectible," says Sarah Wiskerchen, of Chicago-based consulting firm Karen Zupko & Associates. 

Pediatrician Paul Weiner, of Bethesda, Md., agrees: "Letting old balances sit skews your numbers. That old $5,000 balance that rolls over for a couple of years makes your A/R appear high, but because the amount is probably uncollectable, at some point it's best to cut it out of the picture. That way, the A/R report contains account balances that you have a chance of really collecting."

Not only do inflated receivables give a fuzzy financial picture, they can become a problem when a third party is asked to provide a valuation of the amount. Case in point: A physician going through a divorce realized the folly of holding old accounts when the settlement was based on the practice's receivables. Wiskerchen also points out that if you plan to sell the practice or get a loan, the receivables should accurately represent what the practice is owed. 

Finally, keeping old accounts can become expensive. "If you don't write them off, you'll spend a lot on statements and follow-up time," says Alexandra Babcock, administrator of Somerset Orthopedic Associates, in Bridgewater, N.J. "Let's face it, if you've sent six statements without a response, you're fighting a losing battle. Send it to collections or write it off -- do something, but don't let it loiter in the A/R."

"Creating write-off policies is a critical part of having an efficient reimbursement operation," says Gary Houck, practice administrator of Murray Women's Clinic in Murray, Ky. "Without written rules, staff [members] don't always know what to do with lingering accounts. Policies also become useful when there is turnover -- collective intelligence is maintained." 

The financial policy you create should delineate exactly what can be written off, when, and by whom. "It should include how to handle accounts sent to collections, small balances, bankruptcy, deceased patients, and denials for ineligibility or no referral," says Wiskerchen. 

Houck drafted a policy, then discussed it and received approval from the physicians in the practice prior to implementation. "Because we have a clear set of playing rules, we don't have to approach them with every write-off issue," he says, "only when the policy needs updating or fine-tuning." 

Weiner's group, The Pediatric Care Center, hasn't put pen to paper, but has discussed and agreed to unified policies. "We derived the policies from the experience of our five physicians over the years. As certain issues arose -- like when to turn an account over to collections -- we created a policy for it." 

After all physicians have given their OK, distribute the policy to the billing office and put a copy in your practice's procedure manual -- and make sure everyone on the staff follows one standard. "It's inefficient for staff to apply eight different policies for eight different physicians," Houck says. "Plus, it's a bad idea from a public relations standpoint. The practice's image suffers when patients hear that their friends were given a different financial 'deal.'" 

If your policies aren't yet written down, ask your office manager or billing staff to put the policies they are currently following in writing. Doing so gives you a leg up on drafting a complete list of rules. "Once you have a framework, determine how you will streamline the policies into one set of rules, and approve them," Wiskerchen says.

"I review each day's transaction report and randomly select accounts based on dollar amounts," says Houck. "If a write-off seems out of the ordinary, I question the billing office." This puts staff on notice that someone is watching what they do, and minimizes the opportunity for them to collect money and write off the balance without putting the money in the bank.

Physicians should randomly monitor write-offs too. In the case of a four-physician group outside Chicago, the responsibility was left to the manager -- until an outside consultant discovered a number of large write-offs that couldn't be explained. 


Ask the billing office for a report that details all patient account balances that have been written off each quarter, and scan it to be sure policies are being followed. "Our managing partner reviews the write-off report monthly," Weiner says, "and the group as a whole discusses the data during partner meetings several times a year." 

At Thunderbird Internal Medicine in Glendale, Ariz., accounts receivable and write-off reports are evaluated monthly on multiple levels. "The business office evaluates detailed reports, which include both receivables and write-offs," says managing partner, Brian Riveland, MD. "The information is also presented to the partners monthly."

Reviewing write-offs can also help identify preventable reimbursement errors. "Create categories such as 'missed filing deadline' and 'procedure not precertified,' so claim denials for these reasons are tracked in the computer system," Wiskerchen suggests. "Then review these write-off categories quarterly to identify reimbursement system glitches and areas that need improvement." 

For instance, if no one is verifying the eligibility of patients before they are seen, that write-off category will probably contain thousands of dollars. After it began tracking these non-contractual write-offs, an eight-physician practice in Denver learned that 6 percent of its charges were being written off for denials that could have been prevented -- failure to obtain referrals and submitting charges past the filing deadline were the biggest culprits. This led the group to tighten both referral processing and timeliness of charge submission so less revenue was lost. 

It's a good idea to set a policy whereby accounts are peeled off as they reach a certain age -- most managers and consultants believe six to nine months is a good time to review old balances and decide what to do. Otherwise, you could be in for a rude awakening. A four-physician practice in Charlotte, N.C. let the A/R build up to about $5 million over several years' time, and ended up writing off $500,000 in one fell swoop. "And that doesn't take into consideration wasted staff time and statement costs -- which probably reached into the tens of thousands," Wiskerchen says. 

"Our business office works the accounts by sending two statements and two collection letters," Houck says. "Most patients have either paid or set up a payment plan by then. If not, the account is prepared for collections." Houck's patient representatives take the account to the physician and ask for a determination: write-off or collections? 

Pediatric Care Center has a similar policy. It sends several statements and messages, with a final letter notifying the patient that inaction will result in the account going to collections. 

Other practices are more lenient. Multispecialty group MedProvider in Dallas doesn't turn accounts over to collections. According to internist Amy Anderson, "we send five bills, then the patient receives a phone call. If the account is still not settled, it is given to the patient's physician, who determines whether to continue trying." MedProvider physicians treat patients regardless, unless the patient elects to seek their care elsewhere.

Somerset Orthopedic Associates takes a little different tack. "If our patients haven't paid or responded to statements after six months, the physicians determine whether the patient is a hardship case, or can be pursued in small claims court," Babcock says. If hardship is established, the account is written off to "indigent" and if not, it's written off to "small claims" and sent to court. Seventy percent of the claims are paid before the court date, she says. 

If a patient truly can't pay the bill, treat it as a hardship. According to Houck, "the physician makes the call on indigence. He or she has cared for the patients and has a more intimate knowledge of who is capable of paying and who is not." 

Written documentation is advised for hardship cases. Somerset Orthopedic Associates obtains information such as W-2s or paycheck stubs, then presents it to the physician before writing off the balance. "We are always careful to document hardship to the point of verifying that the patient's signature matches the original signature in the chart," says Babcock.

"However the account is ultimately handled, a physician must approve the action taken," Weiner says. He notes that physicians often have additional information about a patient's financial difficulty, or have made an arrangement with them during a visit. Riveland agrees: "All of our physicians provide direction as to when it's OK to send an account on to collections. Staff present the account history to us using a form, and we make the final approval of how to handle the balance." 

Making decisions about uncollectable balances is one thing. But what about the small balances that occur when copays go uncollected or an insurer pays all but $9.82? A three-physician group in California discovered that letting small balances go dormant can become costly. A review of patient statements revealed that the practice had been sending about 150 statements every month to patients with balances of $20 or less for at least two years. If you consider that the average cost to process a statement is $8, the practice had spent approximately $28,000 on these small account balances, with no appreciable results. 


"We brought this to their attention, and it wasn't easy for them to accept," Wiskerchen reports. "But we did get the physicians to let go of the fantasy that these patients would pay someday, and allow the billing manager to write off the amounts to 'small balance.'"
Just how do practices define "small?" It depends. Houck's practice writes off anything under $5, although "we are soon changing that to anything under $10." Riveland's group has made $10 its small balance threshold, and Babcock writes off anything under $20-- the group's computer system makes it easy by automatically identifying all balances below that amount. 

"We call [the patient] as a last resort, then write off the amount to uncollectable balance and note this on the patient's master file." If the patient comes back, he is asked to pay the amount before being treated. 

If you think your write-offs need attention, review this month's statements before they are mailed, or look over an account ledger of all patient balances more than six months old. And work with your billing or practice manager to create standard policies. "The key is to get started," Wiskerchen advises. "Review the old accounts, look at the number of statements sent and phone calls made, and calculate what you've invested in accounts that probably won't be paid." Like many physicians, you'll succumb to the reality that writing it off often makes the most financial sense. 

This article originally appeared in the November/December 2002 issue of 

Write It Off!

A California practice made up of three orthopedists was struggling to maintain income levels and keep overhead in check. The group had been inundated with managed-care contracts, many of which required more staff time but delivered less reimbursement. But instead of focusing on the real problems -- poor contracting, inefficient operations, and an inadequate computer system -- they decided to cut costs by putting a moratorium on staff raises for three years, and taking away coffee in the break room.

The not-surprising result? Low staff morale, decreased productivity, and increased staff turnover.

Clearly, physicians across the country are frustrated by declining reimbursement, skyrocketing malpractice costs, and increasing operating expenses. Multispecialty group costs rose 35 percent in the last 10 years, but revenues have only risen 21 percent -- and things are getting worse. But if you are about to embark on a cost-cutting campaign, be smart about where you slice. Taking a machete to operating expenses may seem like your only option at the outset, but the long-term costs can be much more costly, a lesson those California orthopedists learned the hard way.

Before you start slashing your budget, understand the details behind the numbers, which allows you to analyze expenses more precisely and compare your expenses to national benchmarks.

"Most practices' income and expense statements don't provide the right level of detail," says Sarah Wiskerchen, a consultant with Chicago-based Karen Zupko & Associates. "Physicians see a category with big dollars in it, like salaries, and immediately want to figure out how to decrease the expenditure by X-percent." 

Wiskerchen points out that categorizing your funds in more detailed "buckets," or line items, is a good step toward effective cost cutting. "For example," she explains, "a line item called 'supplies' does not tell you enough. There should be detailed sub-categories such as medical supplies, injectibles, office supplies, and so on. The same holds true for salaries. You need to see the breakdown of staff benefits, payroll taxes, education expenses, and overtime."

With detailed categories like these, you can compare expenses and overhead against national benchmarks, such as data from the Medical Group Management Association's (MGMA) Annual Cost Survey. If you find your practice spends more than others in your specialty on specific line items, salaries, supplies, or rent, turn your attention to the details. 

Wiskerchen says to keep this caveat in mind: "National averages are just that --  averages. If you find that you are spending more on staffing, evaluate how you might be different from other practices." For example, if you offer extended hours, your staff expense percentage might be higher, but your volume may drive higher revenues than other practices. 

Tracy Paris, office manager of Thunder Basin Orthopedics and Sports Medicine in Douglas, Wyo., agrees. "We are above the MGMA data for staff expenses," she says. "But our overhead is still below most orthopedic practices. We're growing so much we're looking to add a partner, so we don't plan to cut staff anytime soon."

Again, while it is tempting to trim the largest numbers on the ledger, remember that cutting back in some areas can cost you in the long run.

For starters, consider carefully before putting a hold on hiring. The overtime an overly busy staff generates could cost more than what you hoped to save, and it may contribute to employee burnout and turnover. Wiskerchen describes a two-physician practice in Phoenix, Ariz., that she says "refused to hire new employees until we pointed out that overtime for the preceding six months was about $65,000. That amount could have paid the salaries of nearly two front-line people."

Don't go too lean when it comes to technology, tools, and training. Requiring employees to share computers is a sure way for productivity to decline. The staff person who "can't get on the computer" can't do her job. If you skip paying for ongoing software training -- preferably, directly from the vendor -- you risk the computer not being used to its fullest. PCs cost less than $1,000 each these days, and ongoing training will catapult efficiency more than it will set you back financially. In short, "give employees the tools they need to do their job effectively," says Wiskerchen.

Slicing staff education is another questionable way to trim expenses. A two-physician neurosurgery group in Florida decided to cut the staff continuing education budget for one year. After the office manager begged to attend a coding course the following year, she was able to calculate that the practice had lost $30,000 in revenue due to just one coding rule she hadn't known a year earlier during the freeze on staff education. 


Finally, avoid going cheap on clinical tools that can make physicians and staff more efficient. One ear, nose and throat practice in Georgia decided to save money by purchasing an inexpensive medical chart product, with no dividers or organizational tools. "The physicians and staff spent so much time flipping through the chart to find information, the lost time cost them more than the 75 cents per chart they saved," buying a less-expensive tool, notes Wiskerchen. 

So that explains where not to cut. But just which of those specific budgetary line items can you save on without putting the practice in peril? There are quite a few. 

 "Talk to your malpractice carrier about discount opportunities," suggests Robert Haralson, medical director of Southeastern Orthopedics in Knoxville, Tenn. "We negotiated a rate cut after we merged with another group, and we have entered into a risk-sharing arrangement with the carrier for even more savings." Some carriers give 10 percent discounts for practices that attend a risk management course and others cut rates for those using an electronic medical record (EMR) because of its ability to improve the documentation and delivery of care.

 "When we were building the practice, we advertised heavily in the Yellow Pages, local newspapers, on the radio, and on billboards," says Paris. "But now that the practice is flourishing, we've reevaluated these expenses." The practice still advertises, but it's more focused. "We analyzed that few patients [were generated from] the Yellow Pages, so we cut our ads there." The practice also decided to pull back newspaper advertising to every other week or month in surrounding towns. Those changes saved the practice $6,600 between 2000 and 2001.

 And remember to bill. Contracts for injectibles, vaccines, and soft goods are all negotiable, especially if you have high volume and the vendor wants your business. Allergist Gary Gross of Dallas Asthma & Allergy Center has found purchasing success through a loose affiliation with other allergy groups in his area. "We all decide how much flu vaccine and other injectibles we need," he says, "then one of the office managers negotiates a volume discount. One practice orders the supplies and we share the savings." Hospitals and local medical associations offer similar advantages, as does being a large group. "We have entered into several group purchasing agreements that have been very beneficial to the bottom line," adds Haralson. 

But watching the cost of supplies is only part of the picture. Be sure that billable supplies receive reimbursement that at least equals their cost. "This can be a black hole in many practices," notes Wiskerchen. She recently visited a practice that had spent $40,000 to $50,000 in cast supplies but never billed for a cast, and $15,000 for injectible medications but never billed for the medication when they performed joint injections. Those lapses added up to big losses.

 Competition among phone service providers can be a boon for practices looking to cut costs. "Scrutinizing the phone bill is an area where we have saved," notes Gross. "We got competing phone carriers to analyze our existing call patterns and volume and give us a better service package," saving Gross's two-physician practice hundreds of dollars each month. 

"The phone company also conducted a busy signal study," Gross continues. "We have been working toward using the Internet and computer to decrease phone calls, and the study revealed that this is working. We were able to eliminate two lines, which lowered costs even more."

 Wiskerchen suggests analyzing the accounting services you purchase, for instance. "Many practices pay $1,000 or more per month for essentially bookkeeping work and payroll." Consider outsourcing payroll and making someone in-house responsible for accounts payable. 

What about your leased equipment? Have you done a lease-versus-buy analysis of what it's really costing? "We helped a surgical practice in Texas discover that it had been leasing a large printer for $800 per month, for more than five years," says Wiskerchen. This practice had spent nearly $50,000 for the printer during this time, when an outright purchase could have been financially wiser. Your accountant can work with you to ensure you've made the wisest investment in your equipment and furnishings.

 Be realistic: Does each physician need a private office? Are all exam rooms used to capacity during every clinic session? If the answer is no, it may be time to downsize -- or rent some of the unused space. And if you've got satellite offices, ask your accountant to help with a cost center allocation analysis to determine if those offices are moneymakers or balance sheet breakers. Not only could satellites be bleeding dollars, they might also be causing a drain on physician and administrative energy. 

"You've got to look at multiple office sites in a sophisticated way," says Wiskerchen. "Don't just keep a satellite open because it is convenient for one of the partners, or you simply think you need to maintain an additional facility. Run the numbers and make your decision based on objective data." 

This article originally appeared in the July/August 2002 issue of 

If you are about to embark on a cost-cutting campaign, be smart about where you slice.

Cutting Overhead

June Fabiano, who manages a four-surgeon practice in Glendale, Ariz., has seen it happen before: A new physician starts work only partly credentialed, or not at all. Starting out on such rocky ground can be problematic, for both the physician and the group.

"It's a mess," Fabiano laments. "Scheduling becomes a nightmare because staff can't consider all patients for the new physician's schedule. And things in the billing office get confused, too. Billing staff has to be careful that they don't accidentally bill an insurance plan the physician isn't credentialed with." 

Whether you are adding a new doctor, or are a solo physician opening a practice, you need to start the credentialing process far in advance -- sometimes six to nine months before you plan to see patients, advises Kimberley Pollock, a Dallas-based consultant with the practice management firm Karen Zupko & Associates Inc. "Consummating health plan contracts can take time, and if you are not on the plan, you can't see its patients," she says.

Don't let this happen to you or your practice. If you or your physicians want to get paid you must be credentialed; to get credentialed you need to plan ahead.

A good system helps the credentialing process flow smoothly. Get organized and mobilize staff as soon as you know a new physician is coming on board -- or, if you're starting out on your own, as soon as you know where you will be setting up practice. Typically, physicians need a license and proof of malpractice insurance before they can get hospital privileges; and they need hospital privileges before they can be credentialed by the plans. Since some hospital committees only meet quarterly, it's critical to get the necessary paperwork in order well ahead of time. 

"Because our manager started both the hospital and managed-care plan credentialing process months in advance, our new spine surgeon had a full appointment schedule on the day he began seeing patients," says Alfred Coppola, MD, of Bakersfield Orthopedic Medical Group in California. "We could bill and be reimbursed right away without any problem."

Coppola's practice manager, Diane Arechiga, credits her credentialing success to planning ahead. "While waiting for the hospitals to credential the new surgeon, I began obtaining managed-care plan applications," she says. Arechiga used a document management software program to manage the variety of plan applications she received. "After scanning each form, I can easily make changes, update information, and keep a new master copy of the application." This tactic saves significant time during recredentialing; Arechiga simply prints out the master form she needs.

Greg Hrasky, MD, a pediatric orthopedist relocating his practice from Wisconsin to Arizona, warns that the credentialing process is very labor intensive. "Every plan has a different application form," he says. "Completing applications and making phone calls can eat up hours of staff time." 

In Fabiano's practice, the staff maintains individual hanging files with each physician's important documents. "I have someone in charge of the credentialing and recredentialing process and she keeps multiple copies of each document in her files. All she needs to do is fax or mail them as needed," Fabiano says.

Managed-care plans are notorious for "losing" physician applications and other paperwork. Sue Parks, president of Parks Healthcare, a Phoenix-based physician billing and consulting firm, suggests mailing all materials "return receipt requested." 

"That way, you can prove that someone received your materials," she says.In addition, it helps to have someone else review the application before sending it. "If you leave even one field blank, your application can percolate to the bottom of the pile," she warns. 

If problems crop up, Parks suggests speaking to a manager at the managed-care plan, rather than a front-line employee. "If you build a relationship with someone who has authority, the chance of materials getting lost is lessened." Arechiga finds that hand delivering applications works well, too. "It helps that they put a face with a name," she says. 

If materials do get lost, consistent follow-up helps. As Pollock suggests, "call the plan regularly and ask to speak with the same person each time. You want them to know your name."


"Despite our diligence," says Coppola, "a local plan with both an HMO and PPO lost the paperwork we sent for the PPO. Even though the PPO was in the same building as the HMO, we were still required to reapply, and the process took a year." Luckily, this plan didn't deliver a high volume of patients to the practice.

Hrasky had a different type of problem: "I got a call from a plan asking why none of my references had responded four weeks after the agency sent reference letter requests. When I investigated, I found that the plan had mailed the letters to addresses that were different from the ones I provided." 

When Hrasky asked where the addresses were that he had sent in, the managed-care employee responded, "I don't know. These were the ones in our database." The lesson? Double-check all aspects of your applications.

Hrasky eventually gave up on doing the credentialing legwork himself and hired Parks' firm to help him. State medical societies and local hospitals can recommend firms to perform credentialing services. "Hiring an outside service was totally worth it," he says. Depending on what is provided, fees may range from $5,000 to $7,000 -- but compare that with the time an assistant or office manager must take away from her job to perform the function. Time spent on credentialing keeps staff from other valuable duties that, if neglected, could end up costing the practice. 

"The cost of having staff do it adds up fast," says Hrasky. "Each hour they spend on paperwork takes them away from revenue-generating activities, such as claims follow-up, patient collections, or management duties." And the costs are minimal compared to the revenue that is lost when a physician's services aren't billable because he was not credentialed in time. 

Hrasky says Parks Healthcare's credentialing manager, Cindy Leonard, is familiar with many local plans; she also uses software to streamline the process, which a solo physician like Hrasky typically cannot afford. 

While manual systems may work for some, a large group may be wise to invest in software. There are a number of applications available; generally, users enter the physician information just once. 

"The software automatically populates multiple application forms," says Leonard. This keeps her from completing the myriad of different forms from each plan. Another great feature, Leonard says is "you can set the software to remind you when a recredentialing deadline looms, so you have time to get your documents to the plan in time."

A drawback to many credentialing software packages is that they do not contain applications for every health plan in America. Before making a software purchase, compare the list of plans in your area with the list of applications the software includes. Also ask about the ability to add new forms. Some software companies allow users to fax new application forms to them, and they add them to the database.

By the middle of this year, the Coalition for Affordable Quality Healthcare (CAQH), a group of 26 health plans, hopes to offer an online database that links practices and plans. CIGNA, Aetna, FirstHealth, Great-West Life & Annuity Insurance Company, and a number of Blues plans are already involved. Practices will complete a registration application and fax copies of licenses and other credentials to a secure data center. Authorized plans can access the database for both credentialing and recredentialing purposes. Physicians can expect to pay about $5,000 or more for credentialing software, or a subscription fee for Web-based applications and CAQH's service.

Although it is not typical for plans to require a site visit for initial credentialing, plan representatives may visit you during recredentialing --  or if the plan is experiencing problems with your practice. 

To prepare for a site visit, contact the National Committee on Quality Assurance (NCQA) and request their site audit checklist. Most plans use it in their credentialing process.

Parks' advice is to take this visit in stride. "Primarily, you should make sure there aren't any glaring general liability issues. For example, if you are a pediatrician, make sure the reception area is devoid of dangers such as cactus or poisonous plants, and that safety plugs are in place." Parks also suggests making sure there are no drugs in exam rooms, samples are stored, and narcotics locked up. 


"Keep the reception and clinical areas clean, and the chart room tidy," she adds. "Rarely do plans review charts during the initial credentialing process --  but do have your fire extinguishers ready. They always seem to check those." 

This article originally appeared in the March/April 2002 issue of 

Easier ways to get credentialed and get paid