Increasing revenue and decreasing expenses in a medical practice are often misguided goals. Each is a proxy for the more effective goal of increasing net income, the difference between actual receipts and expenses, e.g., the money you actually get to keep. Here are three principles you can use to substantially and sustainably increase net income.
1. Plug the holes
Earning money can be a bad thing, if you don't collect it. Providing services incurs expenses. If you never actually receive payment for those services, you have lost money. Revenue holes in a medical practice are regularly the result of failure to:
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• Confirm insurance coverage
• Obtain prior approval for procedures
• Collect copays at the time services are provided
• Collect accurate and complete insurance information
• Adequately explain to the patient his financial obligations (Most offices have patients sign an acknowledgment of responsibility, but most patients do not read it and dollar amounts are seldom even estimated.)
• Take advantage of opportunities, through affiliation not buyouts, for better reimbursement schedules
Other revenue holes result from not getting it right the first time:
• Re-filing insurance claims because of errors and omissions in the original submission
• Choosing not to re-file short-paid claims because it is not worth the costs
• Re-filing short-paid claims for an increased payment that does not exceed the cost of the extra work
• Multiple billings and subsequent write-offs of patient balances
2. Reduce operational waste
Operational waste comes in the form of wasted money and wasted effort.
Wasted money comes from spending more than is necessary to get the required result. It is not a function of value, not price: An inadequate product or service is expensive at any price.
Any activity that does not affirmatively serve the objectives of the practice is waste. It can, therefore, be eliminated without negative consequences. The rule of thumb is that 30 percent of the work in any office, medical or otherwise, adds no value. Identify it, eliminate it, and increase the practice's productive capacity by 30 percent.
Reduced operating costs are a natural side effect of reducing operational waste. The simplistic goal of reducing expenses often impairs both productivity and profitability.
3. Increase revenue
Increasing revenue is the last in the list because that is where it belongs chronologically. It is the best use of practice resources only after the holes have been plugged and operational waste has been minimized.
The practice can use its increased operational capacity to increase revenue by seeing more patients. It can also leverage that productivity by applying the additional capacity to more lucrative services.
More expensive services are not necessarily more lucrative. The net income attributable to a service is a function of both the difference between receipts and expenses, and volume. A high margin service with a small market often yields less eventual net income that a low margin/high volume service.
Be cautious about adding products and services not directly adjacent to current offerings. These always carry higher startup and operating costs because the practice is not already set up for them.
In improving financial performance, the real goal is to increase net income. Do not be distracted by popular proxies.