Managing by the Numbers

May 19, 2015

One of my prior articles cautioned readers on the use of overhead rates as a financial indicator of practice performance. I called it “diddling” the overhead since overhead is an easy target in every medical practice. The point I want to make now is that numbers are important in managing a business. But never confuse fixating on numbers as managing the business.

Numbers are data. What any manager needs is information. In many clinical situations, the numbers are information. In business situations, most numbers are data – the value a practice manager brings to the business is applying his or her knowledge, experience and judgment to turn data into information, information that is the basis for decision making.

For the smaller of small businesses, which would encompass most physician practices, cash is king. On a weekly basis, know what your cash position is – the cash available for use by the practice. You should be budgeting cash each week for payables and payroll. Payroll is pretty fixed, so you have to pay the bills that are starting to get closer to the due date. While you don’t have to pay bills the moment they come in, you do need to be setting aside cash and paying every 1-2 weeks to stay current.

On a regular basis – usually monthly, but for solo practices on a quarterly basis – look at actual revenue and expenses compared to the prior year (notice I don’t make mention of comparing these to your budget; in my opinion most budgets are worthless in a medical practice). Items that are in excess when compared to the prior year are neither a cue to be upset nor a cue to stop spending. You have to ask constant questions – why is an item higher this year than last year? Why are revenues lower or stagnant this year versus last year? Many times, there are seasonal variations in both revenues and costs. Also, sometimes you might order a quantity of supplies in order to gain discounts.

You also want to look at productivity, such as: the number of patient visits (office versus hospital), how many diagnostic tests or other in-house services were provided, and the percentage of available time that is being booked for patient services. You should also look at payer mix revenue distribution, physician work RVUs, collection percentages broken down by individual payer class, and a variety of different accounts receivable agings.

When looking at per-patient numbers it is helpful to look at per-new-patient numbers as well as per-encounter/claim. This distinction provides valuable information about the breakdown of a practice by diagnostic or referral segments. For example, in a clinic such as a physical therapy practice whereby a clinician may see the same patient 12 times per incident, it helps to know the revenue/expense/profit on a per-new-patient basis in order to determine which segments of the practice add to and subtract from the bottom line. Knowing the rev/exp/profit on a per-encounter basis can illustrate the relative efficiency, coding, and diagnostic trending of the practice as a whole, or a segment of the practice. For example, a practice may show increasing profits at the clinic level, however when segmented, it is possible to see that only one or two diagnoses (or referral sources) are really “floating” the practice, and the rest of the diagnoses cause an incremental loss. This is not necessarily good or bad in absolute terms, but is very useful information when managing the operations and marketing efforts of a clinic.

Another area look at and manage per-patient revenue, expense, and profit. While overall revenues and expenses can yield valuable information about the profitability of an entire practice, the evaluation of per-patient financial metrics can yield great understanding about the efficiency by which their practice operates. Furthermore, by segmenting patients by diagnosis, referral source, payer, or other meaningful classifications, one can glean valuable information about the patient groups that have a positive and negative impact on the practice’s bottom line. This, of course allows practices to use profitable patients as a means by which to subsidize the care of those with a negative impact on the bottom line.

Finally, look at these metrics on a per hour basis – look at the hours available for patient visits, and divide the total revenue, expense, etc by the number of hours available. Physicians sell their time, and since pricing is pretty much controlled, the way to raise profitability – other than working longer – is to increase revenue (and profit) per hour.

All of these numbers are most useful when put in a context. My main advice to you is always to look at variations over time. You should want to see two years worth of monthly data before getting comfortable making a lot of significant decisions or changes. Usually, the practice hasn’t been capturing data, so you have to start recording data on a monthly basis and build from there. Once you have the basic building block of monthly data, you can look at changes on a quarterly basis. Looking at a data on a quarterly basis smoothes out the month to month variations that occur because of number of days worked (20, 21 or 22), weather, vacations and other factors that impact the workload. Pretty soon, you can see patterns emerge and compare one year to the one past, and then two years and so on.

Remember this: Data vs. information – One leads to the next, but they are not the same thing.

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

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