David J. Norris, MD, MBA, CPE

Five Financial Ratios to Know about Your Practice

As physicians we are quite familiar with methods in discovering the health of our patients. We use measures such as HDL:LDL ratio, waist to height, waist to hip, and many other measurements to determine the health of our patients. In fact, we’re pretty good at it. We can even use this data to predict what problems the patients will face and even how long they might live.

Did you know there are similar ratios and methods that accountants and business leaders use to determine the financial health of a company? These ratios can tell you the financial health of your practice. I’ve listed the top five financial metrics that every physician should know and use every month.

These are just a few the financial ratios physicians can perform using the income statements and balance sheets provided to them by their accountants and office managers. These ratios will help you determine the level of financial stability of your practice and help you make better decisions for your future. Financial health is hard work. Just like we ask our patients to keep track of their diet and exercise activity, we should also closely monitor the financial health of our practices. We must be diligent actively manage our business.

David Norris, MD, MBA is an anesthesiologist at Wichita Anesthesiology Chartered in Wichita, Kansas and also with the Center for Professional Business Development

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Just like there are ratios that gauge your patients’ health, there are ratios to gauge the financial health of your practice.

Here Are Five Financial Ratios to Know about Your Practice

Often, physicians I work with think their signed payer contracts are set in stone for the duration of the agreement. 

For example, I was working with a physician group that thought they couldn’t renegotiate their contact with a large payer. They were losing money on those patients but thought they were stuck. Wrong. We were able to successfully renegotiate a stronger contract. 

If you feel stuck in a lousy deal with your payers, you can renegotiate. Here are six steps to renegotiate your contracts and improve your revenue. 

Start by locating your contracts and, if they don’t already have one, give them a designated home in your office. If you cannot locate the agreements, request copies from payers. 

Gather all your contracts, review the terms, and know the effective dates of your contracts. Study your payer mix and learn who is your largest payer. Create a database where you can track the terms of every contract and when each is up for renewal. Keep copies or detailed notes of all interactions with your payers, including the last time you renegotiated the contract. 

Payers are hoping you have so many payer contracts and too little time to review all the agreements, especially at small practices that don’t have a dedicated team to review them. They are counting on you to not be diligent. That gives them the opportunity to skimp here and there. Don’t let your payers cheat or hoodwink you.

Warning: This will be a time-consuming process. 

Anticipate that each payer will establish speed bumps to slow down your claims process. Some payers might require different procedures to submit claims, such as the use of a web portal, special emails, and the like. They will use vague language to give them wiggle room-and the opportunity to deny claims. Beat them at their own game. 

Create another database for your most common codes separated by each provider. Note how each code should be submitted. Make sure you capture all of them. Building this central repository will require time upfront, but it should ultimately speed up the daily claims process, reduce the number of days bills are in accounts receivable/accounts payable, lower the volume of denied claims, and make it easier should you to resubmit. 

Once you have assembled all of your data, you can compare each payer to one another. Now you have the information you need to begin the process of renegotiating your contract with a specific payer. 

Initiate the process according to the terms of your agreement but do so with a formal notice. Pick a payer that you think you’ll be able to get the desired changes from. It might be based upon the fee schedule, the time to the end of the contract, or the volume of business you do with them. I would recommend starting with payers that offer the lowest rates and those with the least amount of time left on the contract. 

Research who you should send the notice to and ask for confirmation of receipt. I would recommend sending your notice to as many people at the payer’s organization as possible.

Remember: These payers aren’t your friends and being friendly won’t yield the desired results. You must approach this process without fear.

Now that formal negotiations have begun, hold the line. Remember, negotiations start with a “no.” Payers will push back and even refuse to open up talks. Press on, and don’t give up. 

Stay focused on your mission and purpose. The key to any successful negotiation is knowing what you want. Be specific with your desires. Don’t let their fear tactics intimidate you, and always be comfortable exercising your right to veto.

Know what you want-and the outcome you seek-even before you start the renegotiation process the. You’re renegotiating these contracts so that you have capital to continue to provide excellent care to their beneficiaries. If the payer isn’t moving the needle enough, don’t be afraid of walking away. Remember, the payer sold a contract to the patient or their employer, and they must fulfill the terms of that contract. Their contract with you helps them meet their contractual obligations to the other party. 

Know what you want and why you want it. Plan your negotiation steps carefully and accept that you might need to change things as the talks progress. However, you should understand what you want from a specific negotiation event, meeting, or email. It might be another meeting with someone else, an acknowledgment of your proposal, or acceptance of your offer, but you must be explicit on this issue.

If you ever feel you’re in over your head, ask for help from someone who isn’t as emotionally invested as you are, such as a negotiation coach. Having someone with experience and a fresh set of eyes on your talks can provide insight and propel your success. More importantly, bringing on someone who is not as emotionally involved to help you through the negotiation will help you stay calm and obtain the best results for you and, ultimately, your patients.

David J. Norris, MD, MBA, is a practicing anesthesiologist in Wichita, Kan. He is the author of  

The Financially Intelligent Physician: What They Didn’t Teach You in Medical School

and a frequent speaker on physician finances. Read more about David at 

Don’t settle for a bad deal. Boost your profits by renegotiating your payer contracts.

How to renegotiate payer contracts

All business owners should know their break-even point. If you don’t, then you’re likely shooting from the hip as you attempt to “manage” your business. 

The break-even point is a simple concept. It’s the productivity point where the revenue earned equals the expenses incurred. Those expenses include both the fixed and variable costs. When productivity is above the break-even point, a profit is earned. When productivity is below it, a loss is incurred.  

There are two ways you can look at the break-even point: the revenue needed or the productivity level needed. You might be asking yourself, “Why bother?

It might be a little challenging to arrive at your cost and revenue functions but calculating this will give you great insight into your practice’s financial health. 

previous column, I wrote about understanding the different costs of doing business. 

 We looked at how you can determine your fixed and variable costs using a graph. With your revenue calculation in hand, you can plot both your cost formula and your revenue formula. That graph allows you to determine your break-even point by identifying the point where the two lines intersect. 

Shift your productivity levels to the left where the red line is above the green line, and you’re losing money. Move productivity to the right where the green line is above the red line, and you’re earning a profit. 

Using this simple yet effective visual method, you can approximate your practice’s break-even point. In this example, it appears the break-even point is about 150 patient visits per month. 

Not a fan of making graphs? No problem. The break-even point can also be calculated using simple algebra. All you need to determine your break-even point is your cost and revenue equations. Simply set the revenue and cost equations equal to each other and solve for the volume. The final equation looks like this: 

The final number represents the number of patient visits you will need each month to break-even. See more patients, and you will be earning a profit. See fewer patients, and you’re in for a loss. 

Determining your break-even point is the fastest way to learn if your charges or expected volume will cover the costs of your services. If they don’t, then you know where to focus your efforts. Here are four things to consider if you find yourself near the break-even point. 

Go back to all of your payers and renegotiate for higher rates. Identify your lowest-paying payers and negotiate for a rate that matches or is close to your highest-paying payers. Another fruitful exercise is to do some market research see if you are charging below the prevailing market rate, then negotiate to be on track with your peers. 

How well are you scheduling your day? Is your clinic at capacity, or do you have downtime? Look for ways to increase the patient traffic in your clinic. Start with existing patients. Do you send out regular reminders for preventive or follow-up appointments? Do you have extended hours at nights or on the weekend? Do you offer same-day appointments? If so, make sure your patients know about these convenient service offerings. If you’re not already accepting new patients, do so-and make sure to alert providers so they can update database of in-network providers. You might also consider marketing your practice, increasing your marketing efforts, or trying new marketing techniques to draw patients into your practice. Educational videos and social media are a great low-cost place to start.

Fixed costs have a significant effect on your break-even point. Do what you can to drive down your fixed costs. Renegotiate your existing contracts with your vendors, such as your office lease or other medical services. Create a robust accounting system for accounts payable and accounts receivable to make sure you’re managing your bills properly, and the invoices you receive match what you are expecting to owe. 

Look for ways to reduce your variable costs, too. This may mean staff reductions, outsourcing, cheaper alternatives or substitutes for goods or services, or switching vendors. Your variable costs won’t have as great an impact as the fixed costs on the break-even point, but it’s still important regularly review them to ensure they are in-line with market prices. If not, adjust accordingly so you can start saving.

Caring for your financial well-being is an important, yet often overlooked, aspect of practice management. You need to make sure you aren’t worried about your practice’s finances while seeing patients. If you are, then you’re not helping anyone, least of all your patients who depend on you for life-giving treatment and advice. 

David J. Norris, MD, MBA, is a practicing anesthesiologist in Wichita, Kan. He is the author of 

and a frequent speaker on physician finances. Read more about David at www.davidnorrismdmba.com.

Knowing your break-even point will help you plan for the future.

Determine your break-even point

It’s unfortunate, but even in today’s era of two-factor authentication and hyper-alert security, we still hear stories of physicians being defrauded by their employees. To help protect yourself from financial fraud, consider adopting these five approaches in your practice.

The most common place for fraud to occur is in the back office of small businesses where only one person handles the cash and books. Train more than one person on the cash conversion cycle. Rotate people through the various processes, too, so that no single person operates in a silo. When multiple people know the process, they can check each other’s work for mistakes and anomalies. Cross-training employees helps to create an open and transparent environment. It also reduces the chance of theft by assuring no one person wields too much power. Ultimately, it would be best if you also knew the process, so you can be an effective leader and fiscally responsible business owner.

Make sure you receive and regularly review financial statements. Spend time with your office manager or accountant to understand what each line item represents. If they cannot wholly explain each line item, then it might be time for a new accountant or an external audit. Refer back to past reports to see how the numbers compare. Ask questions if you see a line item growing, but it makes little sense. 

Budgeting is more than planning for the future. A budget can also be a tool to detect fraud. Compare your productivity reports with the income statements to see how they measure up. Do the cash receipts match the productivity reports from a few weeks or months ago? Do the expenses stand in line with the productivity reports? If the cash coming into your practice isn’t in line with your budgeted forecast model, alarm bells should be ringing. The same alarms should sound if expenses are above the forecast model.

Understand the effects of timing on your cash flow.

Most small businesses use the cash-basis accounting method rather than the accrual method because of the ease and simplicity of the accounting system. With a cash-basis system, cash is recorded or booked when the money comes into the business and when it leaves.

However, with an accrual system, revenue is booked when it is earned, not received. Also, with an accrual system, the expenses are booked at the same time as the revenue because of what is called the matching principle. In a cash-basis system, revenues and expenses become uncoupled.

When you examine the income statement of a business using a cash-basis accounting system, what you see is the cash that was earned weeks before that has now been received and recorded. The expenses associated with the revenue generating activity were paid a long time. If you aren’t aware of the uncoupling effect of the accounting method in your practice, it can become easier for someone to “slip in” some expenses or skim a little off the revenue top. 

Always, always, always do a thorough background check on all your employees, particularly those who handle your money. The background check should review both criminal and financial records. It doesn’t matter if the candidate is a family member of one of your partners: Always conduct a thorough background check, preferably using a reputable third party.

David J. Norris, MD, MBA, is a practicing anesthesiologist in Wichita, Kan. He is the author of 

The Financially Intelligent Physician: What They Didn’t Teach You in Medical School 

and a frequent speaker on physician finances. Read more about David at www.davidnorrismdmba.com.

Follow these simple tips to detect-and prevent-financial fraud in your medical practice. 