The Great Practice Makeover: Cutting Back Didn't Cut It

April 1, 2006

Karen Stuart, MD, thought she was making her life easier when she quit delivering babies to focus solely on gynecology. Instead, she got a lot poorer. We help her turn it around.


When Karen Stuart, MD, decided to give up obstetrics and focus on gynecology, she thought she was making her life easier. As a solo physician juggling 20 to 30 deliveries a month, call every fourth weekend, and her own two teenage sons, she figured it would be easier to focus on the surgery she enjoyed. So in 2003, the Columbus, Ga., physician prepared a new budget based only on gynecology. She cut back some staff and got set to relax a little.

It didn't happen.

Instead of generating the $752,000 in revenue she expected, her practice's revenue dropped to about $500,000.

Malpractice and rent went up.

Before she stopped OB, Stuart was taking home almost $200,000 a year. In 2004, she made less than her nurse. "Thank goodness I am married to a physician," she wrote Physicians Practice, "or I'd have to apply for welfare."

Instead of spending more time at home with her sons, Stuart now works long hours seeing up to 25 patients a day and then works late going through reams of paperwork.

To top it off, Stuart recently discovered that some of her bills weren't being paid. Her manager, who is struggling with a rapidly dwindling bank account, just wasn't opening some of the practice's bills.

Checks bounced.

"She had bills - some never opened from 11 months ago - junk mail, and other assorted documents in various accordion file folders stashed away in her office in no organized manner," Stuart says of her office manager. Stuart estimates that she paid about $5,000 in late fees and interest charges last year as a result. Now Stuart employs an accountant to handle her accounts payable. But she only has about half the amount she needs to pay her outstanding balances.

After 15 years in private, solo practice, Stuart isn't ready to give up, but she needs to find a way to make her business work.

STAY ON TOP

The first rule of solo practice management isn't about productivity or overhead. It's about knowing where you are at all times.

Stuart's first and biggest mistake is failing to keep track of her financial and office performance. Think of running a practice as attempting to control your weight. It's a lot easier to discover you've put on five pounds and then make a few adjustments to get back on track rather than put on 50 pounds before you start to do anything about it. Stuart is going to have a harder time because she is so far behind on her bills. She now has to pull herself out of debt rather than just try to make a little more cash.

Stuart was smart to create a budget before she stopped practicing OB, but she also should have carefully tracked that budget on a monthly basis, adjusting her expenses and expected revenue along the way. Keeping tabs on a detailed budget also would have alerted her to the mistakes being made in accounts payable. For example, if her projected budget had forecast that $5,000 would be spent on rent in March, but her actual budget revealed that nothing was spent in that area, she would have immediately detected the problem. It is crucial for small businesses to create a detailed projected budget and then track it against actual performance. Profit margins are simply too thin these days to just hope it all works out in the end.

At this point, Stuart needs to create a new budget, one based on her practice's actual performance over the past 12 months. She's already making some changes - adding cash-only cosmetic services and breaking ground on her own building to control her rent and grow equity - but she'll have no idea whether these efforts or others will be successful enough to get her out of debt unless she anticipates and closely tracks her costs and revenues. Stuart has to get her house in order and know exactly what she expects to happen before she does anything else.


A new budget will tell Stuart where she stands, but it won't tell her how she's gotten there. Right now, she knows her income is lower than expected, but she isn't sure why.

Are collections down? Are her allowables worse?

To understand the whys, you often need to dig deeper. Look at these key indicators - at least monthly - by reviewing both your rolling 12-month average and your data for the preceding month alone:

  • Days in A/R - How long is it taking you to get your money in the bank? Faster is better.

  • Adjusted collections rate - What percentage of what you are actually owed (your allowables, not your charges) are you collecting?

  • Overhead rate - Divide your expenses by your revenue so you always know how your costs convert to profit. It doesn't matter what you spend; what matters is what you make.

  • Average number of patients seen per day.

  • Patient mix - How many new patients versus existing patients do you see per month?

Unfortunately, Stuart, like many physicians, has an out-of-date practice management system that makes it very difficult for her to analyze what's happening in her business today.

Her software runs on an ungainly UNIX platform, making her reports difficult if not impossible to run. This remains true even though Stuart has spent nearly $15,000 in 2005 on computer upgrades. Sometimes it's better to stop patching a broken system and just replace it.

MOVING FORWARD

Once she has a plan in place and a method of tracking her expected improvements, Stuart can go about making some changes. Here is what we suggest.

Like any other business, medical practice is essentially about bringing in more money than you spend. So practice analysis starts by looking at both sides of this equation.

In Stuart's case, overhead and staffing costs are all within industry norms, partly because she already slashed staff benefits in 2005 to staunch her losses by cutting a defined contribution to retirement accounts, dropping dental coverage, and raising employee deductibles on health insurance to $500. Plus, a less-than-productive nonphysician provider retired from her practice that year.

As a result, her staff costs are reasonably close to the $184,941 median for OB/GYNs reported in the Medical Group Management Association's (MGMA's) Cost Survey for Single-Specialty Practices: 2005 Report Based on 2004 Data.

Stuart's rent is a little high. She agreed to a balloon clause in her lease to obtain office space near a local hospital. She's paying more than $67,000 a year to rent in rural/suburban Georgia. As mentioned above, Stuart has already broken ground on a new building that she will own. She's trying to arrange a loan that will keep her monthly facility costs the same for now and then allow her to lower them over time.

Still, lowering her rent would be a minor fix in the grand scheme of things. Stuart's real problems lie on the other side of the equation - cash in, not cash out.

Heaven knows Stuart is working hard enough. She is seeing 20 to 25 patients a day - as many as her nurse practitioner does - and she is in the office until 7 p.m. most nights. Together, she and her NP billed for nearly $1 million in charges last year. Her goal should be to work smarter, not harder.

Stuart can collect more of what she charges. The gross collection rate for the practice is 54 percent. Industry norms are closer to 60 percent. Without detailed reports, it's difficult to say where her billing problems lie, but Stuart should begin a manual investigation to identify her problems and fix them. Here's how:

Track denials - Stuart should track how many of her claims are denied and identify why. She should also track how many of her denied claims are ultimately appealed and paid. Stuart's office is disorganized, and she explains that she has a temporary, young receptionist. It's likely that there is inadequate demographic information being collected on the front end of the billing process and slapdash, if earnest, efforts made on the back end. It's the follow-up that makes the difference in collections.

Track patient accounts - Stuart's practice is now transferring more financial responsibility to her patients. To ensure patient collections are on track, Stuart should track copay collections; they should be 100 percent. Her practice should send patients only two or three invoices before sending them to collections. Waiting longer does not make a patient more likely to pay. She should also collect on old patient accounts while those patients are in the office and consider charging for a patient's portion of surgical procedures at the time of service.

Track payer accounts - Stuart should instruct her staff to spot-check some benefit statements and confirm whether payers are paying accurately, especially for high-value surgeries. Her computer systems are as messed up as those in most physician offices, which can lead to practices getting seriously underpaid, even according to already ungenerous fee schedules.

Optimize payer contracts - It's time for this practice to review its payers, comparing fee schedules and hassle factors. Stuart should jettison low-paying contracts that also represent low volume.

Improve physician productivity - No, Stuart doesn't have start seeing 50 patients a day, but with a few tweaks, she and her NP could both pull in a couple more patients daily and have less stress.

Their gross charges and patients per day are OK, but not as high as they could be, especially given the practice's need for cash. First, the practice's scheduling needs an upgrade. It currently schedules electronically. That's great, but it also makes staff feel restricted by their ancient software that doesn't allow for appointments before 9 a.m. and won't schedule two patients in overlapping slots. It would be easy for Stuart to do a five-to-10 minute surgical follow-up visit while her staff takes other patients into exam rooms and records the medical histories of new patients who are in for preventive services. Stuart can then manage longer, new-patient visits once she wraps up surgical procedures.

These days, the practice also often gets behind because of its pre-verification processes. Staff members get on the phone to check on coverage for patients after a patient arrives for an appointment. Since those eligibility calls can easily take 30 minutes or more, causing the patient to grow angrier and angrier in the waiting room, the schedule is always running behind. That means more stress and fewer patients per day.

Instead, staff should get online - it's faster than the phone - and verify eligibility the day before a patient arrives. That way, when the patient arrives, the front desk may already know what copay she owes or even her deductible, and the patient can be roomed immediately.

Stuart can also minimize her paperwork at the end of her day and get home to make dinner and try to capture the attention of her sons. The key is the "fourth exam room" concept. This is a schedule that will allow Stuart to complete her work over the course of the day instead of at 5 p.m. It works like this: Stuart sees three patients in a row. During the next, fourth "visit," she spends time returning calls and wrapping up documentation. At the end of the day, there is no stack of messages and charts to go through. Rather, it is done over the course of the day - and done more easily, since patients and physicians will be available, resulting in fewer "repeat" messages to deal with.
Documenting patient visits as they occur can also translate into more services captured.

By extending her hours slightly, Stuart can actually see more patients and end her day sooner. See the hypothetical, simplified schedule:

These changes will be easier for Stuart than for other physicians because she has an EMR. She currently finds it fairly painful to use except for very routine annual visits. She has templates developed for those, and they take her just five minutes to document. A colposcopy, on the other hand, might take her 10 minutes to chart in the system. Stuart has had her EMR since 2000. She needs to set aside a couple of long weekends to really dig in and create more templates to speed up her documentation. It's hard to set aside such time, but it will save Stuart much effort in the long run.

Her planned expansion into laser-based and other cosmetic services should also help boost revenue and make life as a solo physician a little easier to bear. But most of that rests on the bedrock of careful tracking.

Pamela L. Moore, PhD, senior editor for Physicians Practice, can be reached at pmoore@physicianspractice.com.

This article originally appeared in the April 2006 issue of Physicians Practice.