The economy is deteriorating. And healthcare is no longer “recession proof.” Here’s your guide for getting through the worst of times.
As a consumer, you’ve no doubt taken steps to safeguard your savings since the economic slump began. Perhaps you put your family on a financial diet to offset the rising cost of gas and groceries, reallocated your investment portfolio to balance risk, or upped your emergency fund for a little extra cushion. If you haven’t made similar efforts to insulate your practice, however, you could be putting your livelihood on the line.
In the midst of a recession, managing your practice ever more effectively can help ensure that it remains viable and financially stable. While the market dips and peaks and loop-de-loops, you can keep your feet on solid ground by accepting the reality of the downturn and instituting smart belt-tightening measures and safeguards. Our experts tell you what to expect and how to make it through.
The business of medicine was once regarded as a bastion of stability, producing steady profits regardless of which way the economic winds blew. After all, people don’t stop getting sick when Wall Street takes a tumble. But market forces, including lower reimbursement rates and the rising cost of overhead, have changed the dynamics of healthcare, rendering the industry far more susceptible to economic swings.
“Historically, healthcare seemed recession proof, but if I’m out of work and I don’t have insurance, I’m going to think twice [before scheduling an appointment],” says Gary Isakov, a certified public accountant and partner with SS&G Financial Services in Cleveland, Ohio, who advises medical practices. “People are watching their medical expenses a lot more closely.”
Making matters worse, he notes, many employers are switching to high deductible insurance plans to lower their premiums as healthcare costs climb. Under such plans, employees are required to meet an annual out-of-pocket minimum (in some cases up to $5,000) before insurance kicks in. “While large insurance companies and Medicaid might not pay physicians as much as they’d like, they do pay quickly, usually within two or three weeks of filing a claim,” says Isakov. Physicians who are forced to collect patient deductibles, however, are having a harder time getting paid. “It’s even more difficult during an economic downturn because money is short so patients hold onto those bills longer,” says Isakov.
By far, the practices most affected by the bear market are those that focus on elective procedures, including plastic surgeons and dermatologists who provide cosmetic services. But the ripple effects are reaching all specialties to a lesser degree, including primary care, pediatrics, and gynecology. “Think about physicals and annual checkups, including mammograms,” says Isakov. “Everyone’s perception is that these are important, especially when you reach a certain age, but really it’s an elective procedure and people are clearly looking for ways to cut costs.”
Ultimately, achieving success in your medical practice, through good markets and bad, requires many of the same strategies you employ at home - a little flexibility, a lot of belt tightening, and some extra cash reserves. Here are tips for surviving the slump.
Lower your costs
The first step, of course, is to lower your costs. As a business owner, odds are you’ve already done the obvious - shopped for cheaper suppliers, renegotiated with your lab, utilized more midlevel providers, revised scheduling to boost patient volume, and delegated responsibilities to maximize productivity. But the market downturn may have opened new windows of cost-cutting opportunity, says Keith Borglum, a healthcare business consultant for Professional Management and Marketing in Santa Rosa, Calif. For instance, “If you’re in a medical office building where three or four other tenants have already moved out, you might be able to talk to the landlord about a reduced rent,” he says.
Smaller practices that lack purchasing power should also consider joining a buyer’s group to receive the bulk rate on pharmaceuticals, medical or surgical products and equipment, and other office supplies, says Isakov. Many trade associations offer such groups to members and there are group purchasing organizations you can join on your own, such as the nonprofit Physicians’ Alliance in Norcross, Ga. and HealthTrust Purchasing Group in Brentwood, Tenn. For its part, Physicians’ Alliance is free to join and the company claims it can save practices up to 65 percent off their supplies. “There is a fuel surcharge to everything you buy today, including paper and pens and all the normal supplies you need to run an office,” says Isakov. “Watching overhead has become a very important factor in being a successful medical practice.”
Larger practices, especially multispecialty groups, might also consider centralized purchasing. “Instead of each department just buying whatever they need whenever they need it, assign one person to look at your total inventory levels and authorize purchases only when needed,” says Isakov. “That saves many of our clients a lot of money. You often find that one person is ordering something the other department has an excess of.”
Overtime can also be a budget buster. If you ask your staff to put in extra hours once in awhile you’re probably fine, but if they’ve come to rely on that extra pay as part of their regular salary you’re doing something wrong - either your workload is sufficient to hire an extra worker (which is probably cheaper) or your employees are not managing their time effectively. “Medical practices should really never have to pay overtime to more than one person per day, but if you have a loyal staff what happens is that everyone will stay late,” says Borglum. “You need to make it clear that you only need one person to stay.” Remember, you’re paying time and a half for every hour an employee stays late. “A lot of employees like that overtime pay and want to stay late so they don’t care about being efficient - which is detrimental to the owner,” says Borglum.
Depending on your financial position, you may also need to reduce your employee benefits to get your expenses under control. “Physicians have historically been very generous when it comes to employee benefits but unfortunately, with things becoming tighter, you have to really look at how much your benefits cost,” says Isakov. While most of his clients continue to cover their employees’ healthcare costs at 100 percent, many are reducing their coverage for spouses and children on their plan to half or 60 percent. “Rising health insurance costs affect physicians as well, because they have their own staff,” notes Isakov.
One solution that helps take the sting out of lowering your benefits is to implement a cafeteria plan (section 125 of the U.S. tax code), which enables employees to pay unmet healthcare or childcare expenses using pretax dollars. An added bonus: Because the pretax benefits are not subject to FICA withholding, you will not have to match the Social Security and Medicare taxes on those dollars. You will also save on federal and state unemployment and worker’s compensation insurance.
Look onward and upward
Obviously, if your practice is strapped for cash or having a hard time making payroll, you’ll need to put the kibosh on future expenditures that are not mission critical. Delay planned remodels, computer replacements, new software purchases, and costly equipment upgrades - even new hires where necessary.
That said, however, you must be careful not to slash your budget at the expense of future growth, warns Peter Lucash, chief executive officer of Digital CPE, a medical practice consulting firm. “Practices need to forge forward right now, not hunker down,” he says. “For many physicians, this is the first recession and serious financial problem they have faced, but this will pass.” All practices, Lucash says, should set aside a small amount of money every month to maintain their office and cover future capital improvement, including new carpet, extra lighting, and a fresh coat of paint. “You must keep your office looking clean and professional,” he says. “That doesn’t have to cost big money.”
Offer flexible financing
Depending on how severely the economic downturn has hit your patient population (think Motor City and the automotive industry layoffs), you may also need to consider a new billing model. “If you’re in a community where job losses have been significant, a lot of your patients are going to put their doctor bills further down the list of things that need to get paid,” says Borglum. “You need to think about how you are going to handle patient financial hardships.”
In some cases, if you know a patient has lost his job you may wish to extend charity - either writing off his bill entirely or reducing your physician’s fee. “Normally you send patients to collections after 90 days, but you might defer that for families that you know have lost employment,” says Borglum.
Many practices, too, help patients by establishing payment plans, whereby patients agree to pay back their bills in smaller increments over time - interest free. Other offices, particularly those that offer costly elective services such as plastic surgery, are also extending financing plans to patients to help maintain volume. Banking Web sites that offer patient financing plans include capitalonehealthcarefinance.com, plasticsurgeryfinancing.com, surgeryloans.com, and patientsource.net. “It’s like repackaged consumer financing, much like you’d use if you were buying furniture or a car,” says Borglum. Be forewarned, though. There are two varieties of available financing; recourse and nonrecourse. Recourse means if your patient doesn’t pay, the bank can come back to retrieve the funds it gave you upfront. Nonrecourse financing means the bank cannot collect from you if the patient fails to meet his obligation. Because the bank bears that risk, however, you can expect to pay a higher account fee for nonrecourse plans.
Ultimately, your goal during the economic slump is to keep your finger on the pulse of your community so you can budget ahead for any changes that need to be made to your billing procedures.
Collect, collect, collect
According to Isakov, one of the biggest killers for many practices continues to be unpaid copays and patient deductibles. “You’d be amazed at how many practices don’t do this well,” he says. “You really need to post signs that say copays and deductibles are immediately due and stop your patients as they leave to say, ‘You haven’t met your deductible or I need to collect your copay.’” Empowering your front-desk staff to collect at checkout is crucial to successful collections.
Indeed, copays are typically less than $20 making it cost prohibitive to recover that fee once your patient walks out the door. “Now you’re sending out mail and wasting your staff’s time to collect $10 or $15, but when you have a big practice copays really add up,” says Isakov. One suggestion: Pay the fee to allow patients to use their credit cards at checkout. “It may cost you 1 percent to 3 percent from the credit card companies, but 3 percent on a $20 copay is just 60 cents,” says Isakov. “It costs 42 cents to mail a bill, never mind the time you pay your staff to do it.”
It’s good advice in any weather, but today’s yo-yo economy makes a rainy day fund all the more critical. Consumers are usually advised to sock three to six months of living expenses away in a liquid, interest-bearing account. Physician owners should secure a line of credit from their bank equal to six months worth of practice expenses, plus living expenses for themselves if they haven’t already set that money aside, says Borglum. “It’s harder to get lines of credit now than it was a year ago, but most financially healthy practices should be able to get one from their bank,” he says. “Think of it as a short-term disability policy. Most private disability policies don’t kick in for six months to a year and how will you pay your bills if something should happen to you?”
Worst case scenario: If you’re forced to relocate (because your expenses are too high or your patients move away to find employment), the line of credit will also provide the cash flow necessary to keep your practice afloat.
Expect to pay a few hundred dollars to set up the line of credit, but you won’t owe interest unless you use it. Plus, any interest you do pay is tax deductible.
Instead of offering across-the-board raises this year, which most practices can ill afford, consider changing your compensation system to one based on productivity. “The best way to track productivity in smaller practices is patient count per day,” says Borglum. “I do this as a team at smaller practices. If you’re currently seeing X number of patients per day, tell the staff that for each day you see 2 or 3 more patients, everyone gets a $10 bonus.” Not only do productivity models foster teamwork, but they also give your staff a vested interest in the practice’s success. “The staff learns how to play that game pretty quickly,” says Borglum.
Stay ahead of the curve
Now is also the time to prepare for any cuts in reimbursement that may be looming large. Some third party payers, for example, have articulated plans to reduce reimbursement rates for certain services, which may affect your practice. And although the Centers for Medicare and Medicaid Services implemented a 1.5 percent across-the-board payment increase for 2009, it’ll revert back to the less generous sustainable growth rate formula in 2010 unless new legislation is passed. Recall that the sustainable growth rate called for a 10.6 percent cut to physician reimbursement in 2008. That cut was delayed by congressional statutes that ultimately resulted in a 0.5 percent rate increase. Barring any additional statutes, CMS says it’ll use new data to revise its sustainable growth rate formula for 2010. Other insurance payers are likely to follow CMS’s lead.
“How are you going to be ready?” asks Borglum. “You need to get ready now and start trying to live on less income to ease into it. That’s something that you need to prepare for. You don’t want to get into a situation where you’re forced to borrow or close.”
If double-digit rate cuts do take effect, for example, you might choose to discontinue services that would no longer be profitable, replacing them with more lucrative ancillary services with unmet demand. You might also need to reconsider accepting insurance plans that pay the least. “If you have a patient wait list of 2 weeks or more you shouldn’t need to take poor insurance,” says Borglum. “Dropping the worst payers allows you to do a better job and render more timely care to a narrower group of patients.”
Improve your process
Getting through the economic downturn won’t happen overnight and it won’t be pretty. If you’re a shareholder, in particular, you may have to forego a percentage of your salary during the least lucrative months to make payroll or invest in upgrades to strengthen the practice. “You may need to take home less in order to build your practice,” says Lucash.
In the meantime, he notes, practices need to focus on what they do best. Now is the time to invest your energy in improving your patient interview skills and quality of care, as well as bring your practice up to speed in the digital economy. “Instead of getting hung up on how much time you’re spending with patients or rushing through the interviews, you need to learn to do what you do better,” says Lucash. “Devote more time to face-to-face contact with your patients. Implement an electronic health record to improve efficiency, create Web sites, and move toward e-consults with patients. When you focus on what you’re supposed to do and doing it better, the time and money will be there.”
Shelly K. Schwartz, a freelance writer in Maplewood, N.J., has covered personal finance, technology, and healthcare for 12 years. Her work has appeared on CNN-Money.com, Bankrate.com, and Healthy Family magazine. She can be reached via email@example.com.
If you'd like to learn more about cutting back in tough times, read "We Will Survive" and "The Frugal Physician."
This article originally appeared in the January 2009 issue of Physicians Practice.