Inflation: Good, Bad, or Ugly?

February 2, 2011

Inflation can be both good and bad for a practice. Therefore, understanding the nature of inflation can save your practice money.

I set out to write an article about whether inflation is good or bad for healthcare, and more specifically, for medical practices. However, there is no easy answer. Inflation can be both good and bad for a practice. Therefore, understanding the nature of inflation can save your practice money.

What is inflation?

Inflation is an erosion of the value of the dollar, your purchasing power. The primary symptom of inflation is a general rise in the price of consumer goods, though higher prices in one sector (e.g., gasoline and other energy measures) does not always mean there is inflation in other areas (e.g., housing prices). Inflation may be a harbinger of a growing or recovering economy, and, as such, there are things your practice can do to deal with it.

In a period of growth, companies may raise their prices. The supplies and resources that are required to run your office and care for your patients may cost more. After all, increased demand for products - be they spinal rods or fishing rods - often results in higher pricing. That's a bad thing since most practices are unable to increase their prices in response to greater demand or higher expenses.

On the flip side, companies hire more employees, which is a good thing. We've all had too many uninsured, underinsured, and unemployed patients in the past couple of years. A larger workforce of insured patients is good news for all of us. Primary-care and chronic-care practices will see an increase in patients who have delayed or ignored basic care. Other practices whose services are elective should see an increase in patient volume, too.

Modest inflation will be part and parcel of a recovering economy. And kept in check, it is not necessarily a bad thing. Prices increase, companies hire, home values return. A slow growth of inflation can be absorbed by a growing economy since corporate profits, individual income, and jobs are also on the rise.

If inflation is indeed in our near future, your practice can take several steps to hedge, and thus preserve its income.

Recommendation 1: If our economy begins a sustained recovery, lock in prices on supplies, medications, and other expenses before your vendors raise prices. My practice has locked in three-year agreements on the pricing of high dollar or high volume consumables to protect the practice against price increases. This also works well when we renew a purchasing agreement because the starting price for our negotiations is the three-year-old price rather than the current market price.

Recommendation 2: Extend service agreements at favorable pricing. Doing so can hedge your practice's operating expenses against inflationary increases. You have the strength in a feeble economy to lock in hourly service rates, to trade up a copier or scanner for a newer and faster unit at the same rates, and to negotiate an extended office lease at a lower annual increase. You need to take a look at these recurring expenses and act now.

Recommendation 3: If you are considering a capital purchase or lease in the next 12 months, lock in pricing now. I have done this several times during my career, promising to buy a vendor's product at some point in the future if they guarantee me today's pricing. I have employed what I call the "one and a promise" strategy, buying one EMG machine at a negotiated price with a promise that if I buy another unit in the next year, I will buy it from the same vendor - provided they give me the same pricing.

Recommendation 4: For primary-care and chronic-care practices whose patient volumes have declined, it is a good time to review your patient lists and identify those patients who have been absent or distant in the past two years. Invite them back, and let them know your practice is still there to care for them.

Recommendation 5: For those practices that thrive on elective work, market to your community. Update your website and engage in your community by offering seminars and attending health fairs. You may have been "out of sight, out of mind" in the past two years, so you want to remind potential patients that your practice remains ready to care for them.

We may be at the start of a sustained recovery that is accompanied by modest inflation. If so, these five recommendations will provide a good game plan for your practice. None are panaceas, but each has the potential to help your practice protect its operating margins, a critical element for long-term success.

Lucien W. Roberts, III, MHA, FACMPE, is associate administrator of business development at MCV Physicians. He also consults with medical groups and health systems in areas such as compliance, physician compensation, negotiation, strategic planning, and billing/collections. He may be reached at lucien.roberts@yahoo.com.