Increasing Income – Seven Steps to Controlling Your Practice Expenses

Calculating net income is really a simple formula: revenues minus expenses. For years, neurosurgeons from all types of practices have focused primarily on the revenue side of the equation – do more procedures, see more patients, charge higher fees, perform electrodiagnostic studies, put in a CT scanner – just bring in more revenue. However, with Medicare and managed care companies setting and reducing fees, both private and academic practices also are being forced to reduce expenses in order to increase, or even maintain, net income.

Practices in the process of deciding on new equipment, procedures, partners and staff also need expense information to accurately predict profit potential. Unfortunately, analyzing practice expenses is not easy, and there is no magic formula that is right for every practice. However, there are some simple steps a practice can take to evaluate, and begin to change, practice expenses.

Step One: Faithfully Review Your Practice Expenses
Enclosed with your monthly, or quarterly, financial statements should be an expense sheet. This sheet should be organized in a way that is understandable and makes sense for your practice. If you don’t understand where the numbers are coming from, it is well-worth an hour of your accountant’s time to walk you through it.

The amount of detail and the way expenses are broken down vary from practice to practice. For example, a small-size practice might have one category of “office space” that includes all overhead costs. Another practice may wish to break this down into more detail, including line items for rent, cleaning services, electricity, etc. Accountants often break expenses down into direct, or variable, and indirect, or fixed. Direct costs can be linked to a specific service and include: salaries, supplies and clinical space. Indirect costs are general, non-allocatable costs that include: legal fees, accounting functions, insurance, rent, loan interest and administrative office space.

Step Two: Establish a Practice Philosophy and Expense Priorities
Once a practice’s expenses are in order, there is often a tendency to compare one practice with a “benchmark” or another practice. However, where a practice spends its money should be a reflection of its overall philosophy and reflect how the practice is organized.

“In our practice, rent costs may be higher than someone else’s,” said James R. Bean, MD, managing partner of Neurosurgical Associates in Lexington, Kentucky. “But, our location also is across the street from one of our top referring hospitals, convenient for our patients and in proximity to a large number of referring physicians’ offices. If we moved five to10 miles farther out, we might save some money on rent, but we would see fewer patients every day because of increased travel times, and our referral numbers could drop.

Our philosophy is to make it as easy as possible for our referring physicians to send patients and for our surgeons to save travel time so we can see as many patients a day as possible.”

Some factors to consider when analyzing practice expenses are:

Office location: Why is the office located where it is? What are the advantages and disadvantages? Are satellite clinics used? Is office space optimally utilized?

Referral sources: Where do referrals come from and why? How does the office location and marketing expenses reflect this?

Outpatient services: Are diagnostic and imaging studies sent outside or done in-house? Can some be done by the practice to enhance revenues?

Clinical staff: What is done in the office that requires an RN or physician’s assistant? Why? Can administrative staff perform the same task for less expense?

Administrative tasks: Is payroll done off or on-site? Why? How often are accounting services being utilized? What is the feasibility of bringing these tasks in-house to reduce consulting or expenses or, what is the feasibility of sending these tasks out and opening up office staff for other duties? Is billing and collection done in-house or out-sourced, is it efficient, and are accounts receivable excessive?

There are no right or wrong answers to these questions. Rather, there should be well thought-out reasoning behind each decision.

Step Three: Take A Closer Look at Practice Expenses
After it is established how costs should be allocated, it’s time to evaluate what’s actually happening. There are two decisions to be made in this step: 1) what system for measuring expenses should the practice use; and 2) should this process be done in-house, or by an outside consulting firm?

“It helps to know the practice expense for each office service, patient, or procedure, rather than just the total for all services, as listed on the revenue and expense statement,” said Robert E. Florin, MD, Chair of the AANS Physician Reimbursement Committee. “Knowing the cost to the practice of each patient seen or procedure performed allows the practice manager to decide how much profit, or loss, each service produces from the different payers.”

There are two systems for measuring practice expenses. One method estimates costs according to relative value units (RVUs). The total annual expenses of a practice, minus physician salary and benefits, are added up, as well as the total annual number of RVUs figured by CPT codes billed. Total expenses are divided by total RVUs for an average cost per RVU. This number is then multiplied by the number of RVUs for a given procedure to come up with a cost for that procedure:

One disadvantage of RVU accounting is that all tasks under a CPT code are considered equal. For example, whether a new office visit with history takes 12 minutes or 45 minutes, it is considered the same expense and whether a patient has one follow-up visit after a cervical disectomy or three, it’s all considered the same amount of expense.

“The cost per RVU approach cannot tell which services actually cost the practice more than others,” Dr. Bean said. “Therefore, it can’t be used to decide if some procedures are winners and some are losers for the practice. They are all assumed to have the same average expense, when actually they probably don’t. What it does do is allow a quick decision regarding the adequacy of a contractual fee schedule, by showing the difference in the fee and the average cost for each CPT code.”

The second method for measuring practice expenses is activity-based cost accounting (ABC). ABC uses detailed information to determine all the costs, resources and time associated with a given service or process. Costs are figured by staff time involved, occupancy expense, administrative expense and clinical expense. Often, similar CPT codes are grouped together to define most of the “activities” the practice performs.

“The 80 or so individual activities in a neurosurgical practice can be grouped into 13-14 processes,” Dr. Bean said. “The aim of the exercise is to identify these common functions, such as scheduling, patient reception, transcription or billing, and determine how much each of these costs the practice. This is better than determining cost per RVU because it doesn’t average costs across all codes; it finds the actual cost for each group of related codes. It also details which costs are higher for one process as compared to another (i.e: a new patient visit versus a surgical procedure or return visit). It further shows which activity might be excessively costly in the process and where the process can be redesigned to cost less.”

The starting points for ABC are to: 1) determine overall expenses; 2) list the activities performed in the practice; 3) figure a cost per hour for each activity; 4) group related activities to establish the processes in a practice; and 5) evaluate the time needed to complete each process. Following is a basic breakdown of how this analysis might look.

ABC can break down costs into general, or specific, categories, depending on the level of detail the practice would like. The more detail, the more accurate the information, but also the more time-consuming and costly it is to develop the system.

More sophisticated ABC systems are usually developed by healthcare consulting firms like Gary Siegal and Associates or Grant Thornton.

Step Four: Look for Areas to Reduce Expenses
A quick glance and some modest research can lead to a significant reduction in practice expenses right off the top. Areas to watch include:

Utilities: Competition between phone companies has led to price wars in the long-distance arena. Switching long-distance carriers and finding a rate plan that parallels long-distance calling patterns can cut bills. Electricity and air conditioning bills also can be reduced by cutting back on night and weekend use.

Professional fees: Accountant and attorney fees can be a large portion of a practice’s expenses. What information are these professionals supplying, and can it be gathered in-house for half the price?

“Our accountant fees have been reduced by almost half by hiring a practice manager with an accounting background,” Dr. Bean said.”There’s often a fine line between when it is better to outsource a task or bring it in-house and neurosurgeons need to be aware of what that line is for their practice. This is usually something that can be figured out after an in-depth practice expense study has been done.”

Supplies: Group purchasing with other practices can qualify a practice for quantity discounts. Reducing inventory on-hand also can open up cash flow.

Banking: Finance charges and other fees can sometimes be reduced with some negotiations in today’s competitive market.

Personnel overtime: Time-and-a-half for hourly employees and overtime should be avoided as a permanent solution to staffing issues. Outsourcing excess work may save money spent on overtime pay.

Printing: Letterhead, envelopes, business cards and forms should all receive three competitive price quotes each year to insure the best price. Also, printers can provide strategies to reduce the printing costs, if asked.

Insurance: There’s more to insurance than malpractice. Have your agent evaluate your general liability, worker’s compensation and other plans for possible savings.

Step Five: Analyze the Process of Doing Business
There are only so many “hard expenses” that can be reduced without affecting the quality of the services a practice provides. The next step in reducing overall practice expenses is to analyze how efficient the processes are in a business. How are tasks performed? Who performs each task? Is the RN doing basic filing tasks that a high school student could do? Does an out-dated computer system slow down billing clerks? Is work being redone because of quality issues?

“The more efficient you become, the less expensive it becomes to perform each task and the higher the capacity rises,” Richard A. Roski, MD, FACS, of Quad City Neurosurgical Associates, said.

There are two main components to analyze: personnel and facility resources. The first step in analyzing personnel issues is to review job descriptions to see what employees are supposed to be doing. Next, have employees keep a detailed log of what they do throughout the day and also have them comment on how they think their jobs could be made more simple. Compare the employees’ actual daily tasks with their job descriptions and suggestions.

“Finding and eliminating work errors is one of the most effective ways to improve efficiency and reduce costs,” Dr. Bean said. “Claims that are incorrectly filled out or payments incorrectly entered may increase the time spent on a claim by as much as eight times and increase the unpaid receivables by tens of thousands of dollars. Most businesses and industries find that rework is probably the single most important correctable cause of unnecessary expense. It is also important to count the physician’s time during this process to make sure he or she is maximizing billable time.”

Equipment and the office facility should be designed to maximize the number of patients seen, provide high quality service and promote the efficiency of the staff. The computer systems; phone lines; medical record and coding procedures; scheduling process; transcription services; payroll; and patient registration should all be evaluated for efficiency.

“The problem is rarely that people aren’t working hard enough,” Dr. Bean said. “Often, it is the system and process that is driving up costs because of inefficient design or inadequate communication between employees.”

Step Six: Monitor, Evaluate, Revisit
Cost analysis and reduction strategies are not a one-time investment of time and resources. After the initial scrutiny of costs and round of changes, it is essential that practice expenses are monitored and new trends are quickly recognized. Expense reduction strategies and evaluation, along with improving efficiency, need to become a regular feature at staff and board meetings.

Step Seven: Use Expense Data to Make Decisions
If a practice can quickly analyze its expenses, decisions on whether to add a partner, move to a new facility, expand to a satellite office, offer new procedures, merge with another practice, sign a managed care contract, or increase marketing efforts become much more simple and logical.

“Physicians don’t go into surgery without thorough evaluation and testing and they shouldn’t be making blind business decisions either,” Dr. Bean said. “You may not have become a surgeon to learn the finer points of activity-based cost accounting, but if you would like to remain a productive surgeon, you have to master the business side of things as well. How a practice grabs holds of its expenses is going to be a very individual answer.”