Small Business Lessons for Physician Practices – Part 3 of 4 : Financial Basics

Laurie Morgan November 28th, 2011

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Laurie Morgan advises key points to watch in the financial management of a medical practice

You know that old saying, “Take care of the pennies and the dollars will take care of themselves”?  That expression has a lot of relevance for small businesses – and perhaps especially for medical practices.  That’s because variances that seem small individually add up to a lot of money when the variance occurs repeatedly – and, in the financial management of a medical practice, the same types of transactions occur over and over again.  Being diligent about capturing those pennies can make all the difference to practice profitability over the course of a year.

In our consulting work, when we take our first look at a practice’s financial management discipline – i.e., that attention to pennies – our top-level assessment includes three main areas:

  • How much of what the practice earns is it receiving?
  • How much of what the practice receives is it keeping?
  • How productively does the practice invest its financial resources?

Receive what you’ve earned

Too often, small businesses are concerned primarily with what they’re charging and give too little attention to what they actually collect.  They bill customers who would have willingly paid with a credit card instead. And they assume – incorrectly – that uncollected amounts will be small, and that small differences in collections versus charges have little impact on profitability. 

Unfortunately, this goes double for medical practices – and has only gotten worse with changes in insurance programs that have made collecting full payment more challenging.

Here on Kareo.com, there are many helpful articles about improving your collection process, including this one by my colleague Judy Capko.  Besides all these excellent tips for refining (or even revamping) your processes to improve collections, it’s also important to develop an unapologetic financial mindset. 

What do I mean by this?  Too often, practice managers and physicians are too quick to waive co-pays or reduce charges when faced with the difficult prospect of confronting a patient and asking for money.  Usually, this is rationalized by the “trivial” individual amount.  The problem is, these “trivial” amounts quickly become non-trivial when multiplied over dozens of instances.  Waiving one $20 co-pay is insignificant alone; doing the same thing twice a day adds up to $10,000 in a year – multiply that by several physicians in a practice, and you’ve lost a decidedly non-trivial sum of money.

The same bias can apply in billing and coding.  Under-coding to “avoid hassles” may seem like it saves time – but losing $20 or $30 per visit adds up to thousands of dollars when under-coding happens several times a day.  Don’t shave a “small difference” off what you’re paid without considering the multiplicative effects.

Keep what you receive

Pennies count on the expense side, too.  Just as with practice revenues, seemingly small differences make a huge difference in profitability when they occur repeatedly.

One example: credit card fees.  As co-pays and co-insurance have increased in importance, so have credit card transactions.  The transaction fees charged by your credit card processor can add up to thousands of dollars per year.  Saving just a few pennies on each transaction can add hundreds or even thousands of dollars to practice profitability at the end of the year.  It costs nothing out-of-pocket to research and renegotiate – and the savings you receive go 100% to profitability!

Dozens of items a practice requires have this multiplicative effect.  Monthly bills like phone service, internet service, energy and postage are all opportunities for small monthly savings that accumulate to significant amounts over the long run.

Becoming aware of small variances is a discipline – and it pays off in many ways as you develop it.  Small changes in appointment bookings, for example – a one-time variance or a trend to be checked out?  Being aware of small differences also makes it less likely that your practice will experience embezzlement, since internal theft almost always starts small.

Invest productively

Small variance discipline also applies to your spending – or, rather, your investment – on operating expenses.

For example, are you spending too much or too little on staffing?  Having competitive compensation is essential for retaining staff – and avoiding the costs of recruiting and training replacements.  But, spending even a few percentage points more than you need to on weekly payroll adds up to a huge variance by the end of a year.  Compensation data – e.g., from local or national surveys – can be a big help in developing a salary matrix for your staff. 

Staffing is almost always the single biggest expense for a medical practice, so it’s also crucial to be sure you’re benefitting as much as possible from their efforts.  Is staff time being used on tasks that could be more cost-effectively outsourced?  Are staff members spinning their wheels on low-payoff tasks like collections?  Could they be reassigned to projects or duties that could bring more value to the practice?  Have new technologies rendered some of their routine tasks obsolete?

Analyze your staff’s duties regularly – at least annually – to ensure they’re still generating the most value for your practice.  This provides a great opportunity to get input from staff about how to improve operations, too.

Small variance discipline applies to your investments in technology, too.  Sometimes, we see practices move slowly to replace antiquated technologies – whether a phone system, PCs, billing or EHR. The delay is often justified by avoiding a significant cash outlay, especially when the immediate savings in return are “small.”  But often those small savings add up to a profitable investment in less than a year – and, investing in productivity tools usually frees up more staff time that can be profitably reinvested as well.  Often there are even energy savings that should be considered. Don’t forget to consider all the savings that could accrue from a technology investment before rejecting it to “be frugal” in the near term.  Pennies saved add up fast!

Small Business Lessons for Physician Practices is a four-part series.  Next installment: Operating efficiently. Read the previous installments on Getting Started with Marketing and Human Resources now.

Laurie Morgan is a management consultant with Capko & Company. She specializes in marketing, management and technology for medical practices and blogs about practice management issues at www.capko.com/blog . Laurie has a BA in Economics from Brown University and an MBA from Stanford.

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