Now is a Good Time to Assess the Financial Health of Your Medical Practice

February 10, 2017

Medical practice operations are being reviewed, analyzed and redesigned like never before. As the healthcare industry changes and over time, revenues can stagnate and overhead can continue to rise. This loss of profitability has definitely turned up the spotlight on medical practice operations. Every practice must strive for maximum efficiency. In addition to efficiency pressures, government and third party issues have brought coding and billing compliance pressures to bear. With substantial civil fines and criminal penalties risk, medical practice billing operations are under the microscope for compliance issues.

These pressures, as well as good management principles, dictate a closer look at medical practice operations. This usually leads to the need for an objective review of operations. This is commonly referred to in the industry as a medical practice assessment and evaluation.

An assessment can happen for many reasons: (1) an operational problem, (2) acquisition, (3) merger, (4) creditor review, (5) efficiency concerns, (6) compliance issues, (7) good business sense, (8) embezzlement, and (9) change in management. In some situations, the manager or the practice owners might want an independent verification of how well the practice is really doing and what, if any, can be done to improve it.

There is usually a call for an assessment and evaluation when a problem is suspected. Simple causes include when receivables begin to grow unexpectedly, cash flow slows down or decreases, there are concerns about practice production and growth, or when some operation issue is brought before practice management. For example, problems at the front desk could result in an assessment and evaluation of not only this particular area of the office, but its entire operations as well.

So what is a medical practice assessment and evaluation? Think of it again as when a person goes to his or her family doctor for a complete physical checkup. Think of it as the owner taking his car to the dealership for its annual tune up. Think of it like getting your car tuned up each year and whatever problems there are, they get fixed. A medical practice evaluation is a comprehensive diagnostic review of all aspects of a medical practice, or as you will see throughout this book, any specific aspect of office operations.

So instead of working in the dark, use the time now to assess your financial success or lack thereof. Last year is closed so now is the perfect time to do some analysis. Compare the following statistics/numbers to the prior year – did you do better? If worse, investigate and correct. When looking at numbers, be sure to not only look at them at the practice level but at the individual provider level as well. Also, compare to national benchmarks (MGMA. AMGA, etc.). The MGMA book about Better Performing Medical Practices should be on your reading list. I’ve included my personal benchmarks as an initial guide as you look at your numbers.

General

  • Gross Collection Percentage [Benchmark: Better than last year]
  • Net Collection Percentage [Benchmark: 95-99%]
  • Days in A/R [30-45 days]
  • A/R in excess of 90 Days Old [18-22%]
  • Clinical/Procedure/Ancillary Encounters [Better that last year]
  • Provider Work RVUs [Better than last year]
  • Charges and Collections by Payor
  • Referring Physician by Physician [Increased referrals from new referral sources]
  • E/M coding comparisons [Look for the undercoders and overcoders]
  • New to Established Patient Ratio [Better than 1.0]
  • Average Wait Time in Reception Area – Customer Service!!! [15 minutes]

Overhead

  • Operating Overhead as Percentage of Revenue
  • Five largest Overhead Accounts Compared to Prior Year
  • Personnel costs, personnel per FTE physician, overtime costs
  • Are Vendors Paid on a Timely Basis (Aged Accounts Payable List) 

Revenue Cycle 

  • Front desk collection percentage [90% collection rate for any patient who can pay $1.00 at the time of the visit]
    • Copayments
    • Patients that come in with A/R balances
  • How quickly visits/procedures are billed [Next day for office visits; 5 working days for all other services]
  • How long does it take to get paid by payors [30-45 day average]
  • Percent of scheduled patients vs. available visit/surgery/procedure appointment times
  • Percent of insurance eligibility verifications vs. total scheduled patients
  • Recall visits vs. recalls available [95%]
  • Percent of denied/rejected claims vs. total claims filed [Less than 5%]
  • Percent of denied/rejected claims appealed successfully vs. total denial/rejections [95%]
  • Average days between receipt of payment and payment posted [1 day]
  • Average number of unpaid claims resolved by day per collector [25-30]

Managed Care 

  • Individual Payor Assessment
    • Gross collection percentage
    • Days in A/R
    • A/R aging
  • Analyze reimbursement rates
    • Compare rates to Medicare rates (what % Medicare)
    • Compare rates to other payor rates
    • Compare to prior year

Finally, Signs of Financial Problems in Your Practice 

  • Sudden Change in A/R Tendencies
  • Falling Collections
  • Failing to Reach Benchmarks
  • Sudden Changes in Production by Provider
  • Escalating Overhead Costs
  • Doctors Holding Their Paychecks
  • Cannot Pay Vendors Timely
  • Borrowing Money 

Reed Tinsley, CPA is a Houston-based CPA, Certified Valuation Analyst, and Certified Healthcare Business Consultant. He works closely with physicians, medical groups, and other healthcare entities with managed care contracting issues, operational and financial management, strategic planning, and growth strategies. His entire practice is concentrated in the health care industry. Please visit www.rtacpa.com

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