Cutting Overhead

July 15, 2002

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

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.

Scrutinize the numbers

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."

Where not to skimp

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.

Cuts that make dollars and sense

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.

Malpractice discount opportunities. "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.

Evaluate advertising costs. "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.

Buy supplies in bulk. 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.

Work the phones to your advantage. 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."

Examine services and equipment. 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.

Finally, look at facility costs. 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."

Cheryl Toth can be reached at editor@physicianspractice.com.

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