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Corporations know exactly what their costs are and how much they need to charge to make a profit. Do you?
How much do you think it costs your practice to see a patient? Do you really know? Over the years when I have asked practices this question, the two most common responses have been “I don’t know,” or “$75.00.” When I ask where they came up with that amount, they invariably answer, "That is what we charge for a 99213." The problem with this gap in understanding is that any medical practice is also a business, and every successful business knows and fully understands how much it costs to make and sell its product or service.
Imagine if a large corporation that manufactured shampoo, for example, didn't know how much it cost to make its product. How would pricing be set? By asking consumers how much they'd like to pay? Hardly. Corporations know exactly how much their costs are - in addition to other expenses such as marketing, research, and staffing - and how much they need to charge to make a profit. As a thriving business the corporation has to know this information to remain successful in maintaining or growing its market share.
So, why is this important to you? For many reasons: First, you are also a business. Second, medical reimbursements will likely continue to decline. Third, payment and reimbursement models will be changing significantly over the next few years - in all likelihood moving away from the current fee-for-service model. As these pressures continue to bear down on medical practices, it becomes increasingly important for you to determine if service A, B, or C is profitable for your practice, and if you should continue to offer it to your patients.
So, if I've caught your interest, you might ask me, "Where should I start?" Now is a great time to determine your cost baseline. To get the big picture, start by adding up all E&M codes billed in 2010, then divide that number into your total expenses for 2010. What is your average cost to see a single patient? $58.62? $48.68? $85.93? Then do the same for the 2009. Has your average cost gone up or down? If you assume, for the sake of comparison, that the most common visit in your office is 99213, how does your average-cost figure compare to your Medicare allowance, and your best and worst payer allowances? Are you making money on that visit? If you add the total compensation paid to your physicians does that make a difference? (If you haven't already counted that as a cost to do business.)
If your accounting system allows, you can drill down into specific codes or departments that you might have, e.g., an in-house laboratory, or radiology services, and get more specific information about visits, procedures, and other services.
You then need to consider what makes up your cost of doing business. There are four basic types of cost:
• Fixed costs are things like rent and malpractice insurance - the cost is the same whether one or 5,000 visits occur;
• Variable costs such as medical or office supplies will vary based upon the number of patient visits - as more patients come to the office these line items will increase;
• Direct costs are those that relate to providing patient care, - e.g., medical supplies and staff payroll (staff who are involved in direct patient care); and
• Indirect costs are those that are necessary to support the practice but don’t necessarily relate to the patient, e.g., office supplies, billing staff, etc.
Your challenge for the coming year is to gain a better understanding of the cost to do business in your practice, and then to develop an approach to control those costs. For example, if you just signed a lease for new office space, it is too late to change that cost. However, if you conducted an inventory of your practice today, you will most likely find excess supplies. Develop a plan to replenish supplies only on an as-needed basis. Find out what is an appropriate supply level to maintain. Examine your supply procedures. Do you send a $20-an-hour employee to Sam’s Club for two hours, or do you have items delivered through next-day service?
Little details make the difference! Take a hard look at your costs over the next year, and make a serious effort to address each one. You will be better prepared to deal with the future by understanding your business in this granular fashion.
Owen Dahl, FACHE, CHBC, is a nationally recognized medical practice management consultant and author of “Think Business! Medical Practice Quality, Efficiency, Profits,” “The Medical Practice Disaster Planning Workbook,” and coauthor of “Lean Six Sigma for the Medical Practice: Improving Profitability by Improving Processes.” He can be reached at firstname.lastname@example.org.