Business School Concepts

Many independent physicians feel they have no choice but to respond to declining reimbursements and increased costs by seeing more patients. As the editor’s letter in the March 2006 issue of this magazine pointed out, private practices are the ones being squeezed the most by recent declines in insurance reimbursements, increasing costs, and Medicare and Medi-Cal cuts. And what the magazine calls “a bleak outlook for physician reimbursement in 2006” was made even worse in August with the announcement of a planned 5.1 percent cut in Medicare physician-payment rates next year.

Yet hyper-productivity — measured in number of patients seen — is not the way to improve the outlook for beleaguered California medical practices. In fact, taking this hyper-productive approach could set in motion a negative cycle of cause and effect that is likely not only to cause further financial deterioration for the practice, but also to impose constraints on how it operates, the quality of care it can provide, and its ability to expand and prosper.

There’s a better way to respond to the current deteriorating situation. More positive results for practices and their patients can be achieved by adopting a two-fold strategy of:

1. applying fundamental business school principles to improve profit margins; and
2. finding opportunities to expand into services that both fulfill unmet patient needs and bring profitable income into the practice.

In fact, practices that take steps to get a handle on their finances will be in a position to invest in adding new services, which, in turn, will contribute to financial well being — a virtuous circle to replace the current downward spiral of rising workloads amidst declining take-home pay. These measures can start earnings moving again in a positive direction that properly reflects all the years of experience and commitment to patients of California physicians, particularly in the outstanding healthcare community here in San Diego.

In this article, I explore some of the key concepts and opportunities for improving finances and expanding services. My message is that by borrowing a few tricks from business school, you can improve not only the financial health of your medical practice but increase the flexibility and freedom to run your practice the way you see fit, aligned to your professional values and for the benefit of your patients.

You’re Productive, But Are You Profitable?

Let’s say you’ve just spent the past 12 hours running from patient to patient, and you finally get to take a breather and assess the day. You know you were productive, but do you know whether or not this high-energy day was profitable?

Usually, we assume that productive days are profitable ones, and sometimes this is the case. Quite often, however, there is no causal relationship between productivity and profit; often, not even a correlation between them.

How can you determine whether your practice is both productive and profitable? Here is a quick and easy method for roughly calculating your profit margin and applying the technique to your practice in various ways that help you better understand the profit dynamics of your practice.

Quick, Easy Method for Calculating Profit Margin

You can approximately calculate your profit margin by dividing the bottom line (net income) of your monthly income statement by the top line (revenue). Note that for this quick and easy method, your top line number can be straight gross revenue. This is the amount you charge patients and insurers for your services — basically “revenue in the door.”

Now let’s apply the calculation to your business in more specific ways:

Profit Margin for Most Common Procedures: Are you making money on the procedures you’re spending most of your time doing? You can find out by doing the following quick calculation on your five most commonly performed procedures. For each procedure, write down what you charge for it — that’s your top line (revenue) for the procedure. Then roughly figure out what it costs you to perform the procedure (you can quickly rough out procedure cost by adding the cost of practitioner time for the procedure with any cost of goods used, an allocation of daily overhead multiplied by the percentage of the day required to perform the procedure, and an allocation of the lease or capital amortized cost of any special equipment used in the procedure.) Subtract that cost from the revenue. What’s left is your bottom line (net income) for the procedure. Then, following the formula above, divide the net income by the revenue. The following is an example of calculating the profit margin, here for lesion removal:

• Revenue (lesion removal procedure) of $70.00
• Less Expense (practitioner allocation) of ($26.00)
• Less Expense (overhead allocation) of ($17.00)
• Less Expense (cost of goods) of ($4.00)
• Equals Net Income of $23.00
• Profit Margin [$23/$70] = 33%

Profit Margin for Busy Days: Are you getting a decent return on investment on your days of most concentrated effort? To get a quick idea, take one of your busiest days during the past month and list the procedures performed on that day. Get your revenue for the day by adding up what you charged for those services. Get your net income for the day by adding up the cost of performing those procedures using the method described above. Divide net income by revenue to obtain your profit margin for the day.

When you better understand your profitability, you can make informed decisions, balancing patient and business needs, to evolve your practice: Practice Advancement: Are you making the right investments in new equipment and techniques to stay at the forefront of your field in the procedures that are most profitable to your practice? Staffing: In some cases you may want to consider allowing a qualified registered nurse or nurse practitioner to perform negative or narrow profit margin redundant procedures. Scheduling: You may want to rethink about how you are scheduling elective procedures and train your staff to try to create a balance that helps make every day — especially your busiest days — profitable. In other words, you want to make sure that you’re taking in enough each day to sustain your fixed and ongoing operating expenses. Collections: You could code low-margin procedures to prompt staff to make sure they collect the correct co-pays and submit timely, accurate and complete claims to insurers.

It may even be worthwhile to perform a profit margin analysis on patient segments. While at first glance this might seem incompatible with your values as a physician, let me make clear that I am not suggesting restricting services or in any way diminishing care to less profitable patients. What I am suggesting is that knowing which patients groups are contributing most of your net income will lead you to some very legitimate considerations about who these patients are, what their unmet healthcare needs might be, and how you can become more valuable to them by responding to these needs. Rest assured, in this era of customer relationship management, every successful business is asking these kinds of questions — and medical practices have every right to do the same.

Opportunity: Fulfilling Unmet Patient Needs Can Lead to Higher Profits

Sometimes the opportunities for adding profitable new services are fairly obvious. For instance, a general medicine or internal medicine practice serving predominantly patients age 50 and over might benefit from offering in-office treadmill tests, a procedure that, as shown in Table 1, usually has a substantial profit margin. Other profitable procedures needed by individuals in this age group include lesion removal and skin biopsies. By performing straightforward procedures of this type within the practice instead of referring to a specialist, practices can increase their earnings stream.

In other cases, focusing on your most valuable patients and their unmet needs may lead you to think about profitable new possibilities you might otherwise not have considered. Why, for example, would an OB/GYN practice want to incorporate cosmetic laser procedures into its service offering? Actually, this type of service expansion is a natural fit, since OB/GYN practices see the perfect candidates for these and related treatments all day long.

Table 1: Sampling of Services That Meet Patient Needs and Help Practices Thrive Financially — Explanation: Estimated data can be found in the table below based on a mid-sized, two-physician practice augmenting their revenue with these example procedures.

Procedure: Average Charge per Procedure (3) • Est. # of Procedures per Month • Estimated Annual Revenue • Estimated Net Profit Margin

EKGs: $50–$60 • 20 • $13,200 • 60–63%
Skin Biopsies (1): $110–$125 • 10 • $14,100 • 40–43%
Treadmill Tests: $225–$250 • 6 • $17,100 • 60–63%
Lesion Removals: $60–$70 • 60 • $46,800 • 33–35%
Botox Injections: $250–$275 • 30 • $94,500 • 40–50%
X-rays (2): $85–$100 • 100 • $110,000 • 50–55%
Laser Treatments: $500 • 25 • $150,000 • 55–65%

1. Charge and revenue include physician procedure only, does not include labs work processed outside of practice
2. Margin includes all overhead but not allocated capital cost of original equipment purchase
3. Procedure charges are dependent on many factors and vary based on fee structure, co-pay, insurance reimbursement among other things.

Today, women of all ages are interested in looking better, taking better care of their skin, and, in increasing numbers, are willing to pay for expert medical and scientific help. Another way physicians can respond to today’s more health-conscious and proactive population is to make themselves available on a fee basis to answer questions by e-mail or even set up a website where patients can obtain information from the practice and interact in a structured, manageable way with their own physician.

Many of the services I’ve just described offer another advantage: They can be cash-based, bringing the practice additional revenue without reimbursement overhead.

I hope I’ve left you with a sense that you needn’t exhaust yourself and your staff trying to offset reimbursement cuts. In fact, one of the best first steps physicians can take toward improved profitability is to forget the notion that being super busy equates with being profitable. Instead, I encourage you to consider the many steps you can take to improve your profit margins, provide greater service to your patients, and increase the value of your practice for everyone involved.

*Price, cost, fee, and profit margin information contained in this article is for discussion purposes only. It does not represent any practice or individual physician. It was compiled from public information and a private market research survey. The data has not been audited.