It’s almost the end of the year. But before you break out the party hats, take some time to give your practice its annual exam. What do you need to do before Baby New Year arrives?
Where patient care is concerned, annual checkups are widely considered the most powerful weapon in the battle to prevent and treat illness. By comparing individual test results with national averages, physicians can identify those at risk for developing disease, catch small problems before they become life threatening, and reduce the cost of care by encouraging patients to maintain healthy lifestyles.
It’s much the same with the business of medicine. Practice managers who take the time to conduct a year-end analysis are far better positioned to remain on budget in the coming year, identify cost-saving opportunities, and chart a course for sustainable growth. “It’s the one time of the year where everyone is closing the books, so you’ve got all the records, financial reports, and data in front of you to help you make decisions,” says Michael La Penna, principal of The La Penna Group in Grand Rapids, Mich., a healthcare finance consulting firm. “It’s the only chance you get to compare your numbers against previous years.”
Here’s what industry experts agree should be on your checklist as the calendar year draws to a close:
For starters, says Betsy Nicoletti, owner of Medical Practice Consulting in Springfield, Vt., take a look at productivity metrics and compare them with benchmarks, including your own budget, year-ago figures, and any industry norms you’re able to obtain from trade organizations such as the Medical Group Management Association, the American Medical Group Association, or specialty groups. Such metrics will likely include revenue, work relative value units (RVUs) per encounter, number of new patient visits, and total charges per full-time equivalent physician. “If you’re on the low end of productivity, it’s too late to do anything about it for this year, but it will help you plan for next year,” she says.
Next, you’ll want to review your gross collections rate to determine how much your practice actually collected from third-party payers. “You should watch those numbers, ideally monthly, and compare them with year-ago figures and national averages,” says Nicoletti. Aging reports are equally critical, telling you what percentage of accounts receivable are older than 60 days, 90 days, and 120 days. “Generally you’re doing good if you’ve kept your accounts receivable under 60 days,” says Nicoletti. Finally, practices should look beyond basic revenue to determine how much of their income comes from specific services - lab tests, ancillaries, etc. Such data can help shape your clinical agenda for 2008.
Though you’ll likely project your cash position (along with expected income and expenses) at the start of each year, it’s wise to double check your cash flow during October to determine what, if anything, will be left for physician bonuses and pension/profit-sharing contributions at the end of the year. “Some physician practices that aren’t paying attention find this out the hard way,” says Nicoletti.
From a tax perspective, of course, the way your practice is structured makes a big difference in how you’ll need to manage any shortage of cash versus income, says Lloyd Froelich, a Minneapolis attorney for the WIPFLI CPAs and Consultants healthcare office. With C corporations, for example, any income not distributed by the end of the year is taxed at a flat 35 percent rate at the federal level. “If you’re a clinic manager of a C corporation, you need to be sure you have enough cash available at the end of the year to pay out all of your income,” he says.
If you purchased assets during the year, for example, including furniture, equipment, and/or leasehold improvements, the annual depreciation expense that current tax rules allow may be less than the principal payments on any debt you have taken out to pay for those assets. As a result, you may have, say, $500,000 of income left at year’s end with only $200,000 of cash available to distribute. “The only way to reduce your taxable income by this $300,000 cash shortage without borrowing money from a bank, or from the doctors personally, is if your retirement plan contribution for the year is $300,000,” says Froelich. “In that case, you can take the $300,000 retirement plan contribution as a tax deduction but, with tax return extensions, have until September 15 of next year to make the actual contribution. Then, next year, take excess cash flow to pay off the $300,000.”
Practices structured as LLCs, S corporations, partnerships, and sole proprietorships do not face the same double-taxation issue as C corporations. But they still need to consider how they plan to depreciate any assets purchased during the year. According to Froelich, some tax laws allow immediate deductibility, within limits, for furniture and medical equipment. “You may or may not want to maximize current-year deductions,” he says. “If you have doctors who are going to be in a higher tax bracket in the coming years, it may be best to use regular depreciation rules, which let you depreciate these assets more slowly over the next five to seven years.” His suggestion: Sit down with your accountant well before the calendar flips to discuss year-end tax strategies.
If your practice needs to invest in new space, upgraded technology, or additional personnel, there’s no time like the present to discuss with physicians any short and long-term implications of such a purchase. Be prepared to reveal how it will potentially affect next year’s budget, bonuses, and future profits.
La Penna notes managers should also go back and review any major changes they’ve made to the practice to determine what impact they may have on next year’s revenue. “Has there been a major change in their reimbursement category, a new regulatory announcement, or a change in vendor status?” he asks. Similarly, administrators should evaluate any new equipment, joint ventures, or office sites they have added to determine whether projections were met. “You want to be sure that the lifeblood of the practice, which is cash, remains uninterrupted,” he says. “What do we see on the horizon that is going to make next year’s revenue different than this year’s?”
It’s wise, too, to get annual employee reviews out of the way during the fourth quarter, suggests Carol Aiken, a long-time practice administrator currently in charge of process improvement for Huntsville Hospital in Alabama. “I always found it was best to do them all at the end of the year so we’d know for the following year how any pay raises might factor into the budget,” she says.
Review your fees
Ultimately, of course, the goal of year-end planning is to look for ways to boost profitability in the coming year. To that end, La Penna suggests that practices review their fee schedules to determine whether they remain competitive. Here again, use national and local averages available through trade groups to determine how your practice measures up.
Look over your coding procedures, as well, to be sure you’re not leaving money on the table. This is especially important for larger practices that perform multiple services and consults. “The manager should compare their coding with Medicare norms,” says Nicoletti. “It’s also sometimes revealing to compare individual doctors within a group. You might notice that Dr. Jones has been billing his consults at a Level 5, while Dr. Smith has been billing at Level 3. That makes a big difference in revenue.”
Now is also the time to start shopping the market to be sure your service provider fees, including accounting and legal, remain on par. Where insurance coverage is concerned, La Penna recommends reviewing your policy and premiums every two years. Normally, he adds, it’s safe to evaluate your banking relationships every three years, but 2007 is an exception. A growing number of online security breaches have prompted new regulations requiring banks to limit consumer liability against fraud, but not all banks are up to date, says La Penna. Physician practices should ask their bank how much they are liable for if someone hacks into their account. “You change your locks on your door and keep paper checks in a lockbox, but many practices forget to address Internet security or change their passwords,” says La Penna. “This is the time to find out how vulnerable you are, and check and be sure that your electronic security related to funds transfers and access to accounts are secure.”
Lines of credit
During the fourth quarter, La Penna says all practices should consider whether any change in interest rates makes it wise to convert all or part of their variable rate line of credit to a standard fixed loan. They should also determine whether the amount of their credit line is appropriate, given any growth they may have experienced.
Reviewing claim denials
Many practices write off claims the insurance company rejects without so much as an appeal or second attempt. “You want to know why your claims were denied, and if it was an appropriate denial based on your contract with the payer,” Nicoletti says. “Determine if your staff really understands what they’re supposed to write off and what they’re supposed to appeal. They may not understand that the insurance companies play games with you, and you should take the time to challenge some of those rejections.”
It doesn’t always make the to-do list, but taking time to review requests for charts can be instructive, especially for practices struggling to maintain patient volume. “If management watches that figure, and they see that it starts to rise, they can call five patients who left the practice and ask them why,” says Nicoletti. “Sometimes you find that one associate is alienating people.” (If increased patient volume is among your top priorities for next year, you might consider implementing checkup reminder cards and preappointment confirmations starting Jan. 1.)
Practices should also look closely during the fourth quarter at employee retirement plans, says Froelich. “You have to worry about the participants in your plan, who qualifies for contribution and whether your contribution limits are being met,” he says. “Otherwise, if you get audited, you may be subject to monetary penalties or even plan dissolution.”
Meet the board
Sit down with your board of directors to review your 2008 budget and business plan, and discuss new financial goals for the months ahead, be they cost control, higher patient volume, or increased productivity.
As part of your year-end checkup, Aiken suggests managers review payer contracts, hospital licensure, and medical directorships for individual physicians to determine which are slated to expire and when. At her own practices, she also reviews any requisite CPR certifications and tuberculosis skin tests for the staff, making sure the proper documentation was on file at the local hospitals.
Get a calendar
Purchase a 2008 calendar as soon as possible, making notes of any OSHA, HIPAA, and annual compliance training courses already on the docket. Getting next year’s calendar on the wall ahead of time allows physicians to claim vacation days and plan for their own on-call schedule well in advance, making it less likely for scheduling conflicts to arise.
Ask your board of directors how much of next year’s budget they are willing to allocate toward advertising, including the local phone book, online ads, and Web site improvements. For a few thousand dollars, many Web designers will help practices launch a brochure-style site online to attract new patients and provide better outreach to those they already have.
Though time consuming, effective year-end planning provides a rare opportunity for office managers to step back, redirect, and put practice performance under the microscope. Like annual health exams, it’s often the only chance you get to address concerns and identify opportunities for improvement in the New Year. “It is critical that you have a snapshot at least once a year of how you’re doing as a practice,” says Nicoletti. “Well-managed practices should be looking at a dashboard of metrics quarterly, but a lot of times it gets too busy to stay on top of those. In that case, you’d better be looking by about month No. 10 to be sure [your finances are in place to support salaries, bonuses and next year’s operating budget].”
Shelly K. Schwartz, a freelance write in Maplewood, N.J., has covered personal finance, technology, and healthcare for 12 years. Her work has appeared on CNNMoney.com, Bankrate.com, and Healthy Family magazine. She can be reached via firstname.lastname@example.org.
This article originally appeared in the November 2007 issue of Physicians Practice.