Financial Analysis Pays Off
Cover Story — March 2014
By Crystal Zuzek
Tex Med. 2014;110(3):16-23.
Austin family physician Kevin Spencer, MD, and his colleagues at Premier Family Physicians have developed a formula for financial success that benefits patients and the business' bottom line. The practice is flourishing, and Dr. Spencer credits the collaboration between Premier's physicians and Chief Executive Officer (CEO) Rich Steinle with the group's ability to adapt in a changing health care market and grow in a challenging financial climate.
Premier Family Physicians opened the new Southwest Medical Village in January. The 80,000-square-foot facility houses about 70 physicians representing 20 specialties and features a pharmacy and optometry practice. But before breaking ground on the new building, Premier Family Physicians did extensive financial analysis and fine-tuned its business plan. Each business decision was strategic and well-researched, Mr. Steinle says.
"When we brought on our CEO three years ago, we wanted to expand the practice, hire more providers, and bring in more patients. We used financial forecasting to transform the service culture within our practice, and it really paid off," said Dr. Spencer, a member of the Texas Medical Association Ad Hoc Committee on Health Information Technology.
Premier Family Physicians, Dr. Spencer explains, wanted to improve patients' experience with their first point of contact with the practice. To that end, he and the physician leaders of the practice worked with Mr. Steinle to determine whether an idea to revamp front-office phone procedures was financially feasible.
"We wanted to get rid of our automated call answering system and have nurses answer all patient calls. We knew we'd need to hire more staff to achieve that, so Rich did some forecasting and determined at what point the move would pay for itself. It required an increase in overhead early on, but we were able to get all the doctors on board with the idea by showing them the financial model," Dr. Spencer said.
Financial forecasting involves estimating the business' projected income and expenses and using the information to determine profitability.
The result: Premier Family Physicians unintentionally increased its volume of appointments — and its revenue. Additionally, Dr. Spencer says satisfaction surveys indicate Premier's patients like speaking to a person each time they call the office.
"We found that once nurses started taking calls from patients directly, they were able to more efficiently assess patients' needs and schedule appointments. With the help of our CEO and his financial staff, we're able to measure the financial impact these kinds of decisions have," Dr. Spencer said.
He adds that since implementing the change to phone-answering protocol, the practice has gone from seeing 400 new patients per month to seeing 900. Dr. Spencer acknowledges that having nurses take patient calls isn't the only reason for the revenue and patient volume increase but says it certainly has made a difference.
"Physicians are full of ideas to make patient care better, but they may be reluctant to put some ideas into action because they don't know how to make them work from a financial standpoint," he said.
Dr. Spencer's story illustrates the importance of physician involvement with the financial management of their medical practice and why they need a basic understanding of the business side of medicine.
Dr. Spencer realizes not all independent physicians have the resources to hire a CEO to run financial reports and assess the practice's financial health. He encourages physicians to turn to TMA for help. (See "Business Management 101: Help From TMA.")
"Independent physicians need someone's financial expertise if they want to remain independent in the current health care environment. TMA has a number of resources to help physicians get a handle on their practice's finances," he said.
Get the Full Financial Picture
Seven years ago when Christopher Crow, MD, a Plano family physician, set out to launch Village Health Partners and Legacy Medical Village with his physician partners, he sought the expertise of Lance Spivey, who ran the financial services firm StratiFi Partners at the time. Dr. Crow says the collaboration with StratiFi Partners grew into a new business venture. Dr.Crow and Mr. Spivey started StratiFi Health, which provides independent physicians with strategic, financial, and operational advice. Dr. Crow is StratiFi Health's CEO, and Mr. Spivey serves as president.
Dr. Spencer and Mr. Steinle actually met with Dr. Crow and partnered with him to model Southwest Medical Village in Austin off of Village Health Partners and Legacy Medical Village. Dr. Crow, a member of TMA's HIT committee and past chair of TMA's Council on Socioeconomics, says the partnership shows the value of physician collaboration.
"When I met Lance, he helped the practice see the full financial picture, analyze important data, and make strategic growth decisions. At the time, we had one office location and three physicians. We have three locations and 30 physicians and nonphysican practitioners today and hope to have 50 by late 2015," Dr. Crow said.
That level of growth wouldn't have been possible without dedication to financial oversight by the practice's physician leaders and the help of Mr. Spivey, Dr. Crow says.
"The practice is at a point now where we can consistently trend and forecast. The numbers tell the story, and then we can look at what's affecting the practice's actual financial output and production to guide our decisionmaking," Dr. Crow said.
Like Dr. Spencer, Dr. Crow agrees that having a clear picture of the business' financial performance requires collaboration with an expert.
"Most physicians and their staff have access to financial reporting tools, but most of us need someone to pare them down, analyze them, and summarize the challenges and areas for opportunity," he said.
Mr. Spivey says it's crucial that physicians keep their finger on the financial pulse of the medical practice and regularly review business reports.
"Most physicians didn't go to business school. They need to consult internal or outsourced expertise to provide them the financial information they need, analyze it, and help them take appropriate action based on the numbers," Mr. Spivey said.
Transforming the financial side of a medical practice into a model of success is no easy task. At Premier Family Physicians, for instance, Mr. Steinle says he generates reports on cash flow and patient visits for physicians each week. On a monthly basis, he produces a physician financial summary, quality reports, and a revenue cycle management report that details claims submissions and error rates; payments and charge totals; outstanding claims; a breakdown of aging accounts receivable; collection rates; and more.
"Our mantra for the financial side of the business is 'We can't manage what we can't measure.' We've developed a best practice that involves analyzing every piece of the business — the revenue cycle, banking, claims, collections, etc. We measure each component, look at the key indicators, and determine how to be more efficient and profitable," Mr. Steinle says.
Reports Reflect Financial Health
While the business side of medical practice may represent foreign territory for many physicians, being involved in financial management is vital to practice sustainability. At a minimum, physicians need to request a weekly management report from the practice manager and use it to monitor the practice's charges, adjustments, revenue, expenses, patient encounters, and billing.
Ginger Douglas, an Austin-based practice consultant, recommends physicians meet at least once a month with the practice manager to review and address operational concerns and the practice's financial performance. She says glancing at financial reports isn't sufficient. Physicians need to work with practice managers, accountants, and financial staff to understand the data and to compare them with prior reports.
For example, the income statement should list income and expenses for the current period and also list the same income and expense categories for the prior period, side by side. She says this comparative income statement allows a practice to see quickly how it's performing now compared with the prior year and whether any revenue or expense items look unusual.
In addition to income statements, the most important financial statements physicians should understand and review are:
Ms. Douglas says cost reports typically break down expenses incurred by physician, by procedure, by specialty, by department, by office location, and by health plan. She says the reports can also help physicians and staff compare incurred expenses and use that information to craft an operating budget.
As explained by the Medical Group Management Association (MGMA), the balance sheet lists the assets and liabilities in the order of their liquidity (how quickly they convert to cash). The most liquid assets and liabilities are current assets and liabilities because they will likely convert to cash in less than one year. Examples of current assets include cash and accounts receivable. Examples of current liabilities include accounts payable, payroll withholdings, and long-term debt.
Cash flow statements indicate how much cash came into the practice by category (revenue, loans, sale of equipment, and capital invested by the owners) and how much went out by category (salaries, rent, supplies, payback of loans, and purchases of equipment) over a certain period. Ms. Douglas says knowing how much of the cash collected ultimately ended up contributing to business operations is empowering and helps physicians run their business as efficiently as possible.
More information on generating reports and understanding financial statements is available in TMA's new publication, Business Basics for Physicians.
Because proper billing for services, complemented by a well-managed collections process, can make or break the practice, collecting every cent owed requires diligence.
Ms. Douglas says whether a practice outsources billing or handles it in house, staff should prepare, and physicians and practice managers should review, these monthly reports:
Ms. Douglas recommends physicians also review at least annually lag reports that identify services completed for which the practice has not processed claims or statements and credit balance reports that indicate any refunds the practice owes.
Complete the Equation With Analysis
Generating these reports and reviewing them isn't enough. Physicians need to go a step further, Ms. Douglas says.
"Running reports without analyzing the data is like ordering lab work for a patient without reviewing the results. The information is useless without analysis and must be analyzed to measure the successes or failures of the practice's revenue cycle and bottom line," she says.
Financial analysis, typically done by the practice manager, involves consistently producing reports, monitoring key metrics, benchmarking data to establish trends, keeping a record of reports and trends, and taking appropriate action to ensure a healthy bottom line and to address concerns.
Staying abreast of key metrics, such as average service entry lag time, is crucial to a practice's financial health. For example, after calculating the amount of time between the date of a service and entry of the charge into the practice management system, a practice may discover charge entry delays, which can result in increased past-filing-deadline denials from payers and potential lost revenue. (See "Key Metrics and Formulas.")
But monitoring key metrics is only part of the equation. Practices need to know how they're doing compared with their competitors. That's where benchmarking comes in. MGMA defines benchmarking as simply "comparing performance to industry standards." Benchmarking allows medical practices to evaluate their financial performance against that of similar practices and provides a means of identifying problems and opportunities for improvement.
MGMA says by periodically conducting benchmarking, practices can evaluate and compare with industry standards their physician compensation, productivity, patient volume, revenue, operating expenses, and accounts receivable. MGMA offers complimentary benchmarking webinars and resources on its website.
Benchmarking can help restore a practice's financial health. Eight years ago, Ms. Douglas assisted a practice that was losing money but didn't understand why. She conducted a revenue cycle assessment and benchmarking and soon realized the billing department was six weeks behind on entering payments and posting charges. At that point, the practice decided to outsource billing, Ms. Douglas says, adding that the practice has a healthier bottom line today.
"The practice could have gone out of business. The truth is, if they'd managed and reviewed key metrics on a regular basis and stayed on top of billing, the situation probably wouldn't have been so dire," she said.
Crystal Zuzek can be reached by telephone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by email.
Key Metrics and Formulas
Gross Collection Ratio (GCR)
Percentage of charge dollars collected: GCR = Total collections ÷ Total charges
Net Collections Rate (NCR)
Percentage of collectable dollars collected: NCR = Total payments ÷ Net charges
Days of Gross Fee-for-Service (FFS) Charges in Accounts Receivable (A/R)
Gross charges are the full-dollar value, at the practice's established undiscounted rates, of services provided to all patients. Using this formula will show you how long it takes, on average, to collect a day's worth of gross charges: Days in A/R (gross) = (Total accounts receivable) ÷ [(Gross FFS charges) x (1/365)]
Days of Adjusted FFS Charges in A/R
Adjusted FFS charges are the difference between gross FFS charges and the amount expected to be paid by patients or payers. Using this formula will show you how long it takes, on average, to collect a day's worth of adjusted charges: Days in A/R (adjusted) = (Total accounts receivable) ÷ [(Adjusted FFS charges) x (1/365)]
Average Service Entry Lag Time
The amount of time between the date of a service and entry of the charge into the practice management system: Average service entry lag time = Sum of lag times ÷ Number of charges
Clean Claims Rate
The number of claims rejected by the payer or clearinghouse or edited for missing or incorrect data compared with the total number of claims submitted during the month: Edit or rejection rate = Number of edited or rejected claims ÷ Total claim count
The number of claims denied compared with the total number of claims submitted during the month: Denial rate = Number of denied claims ÷ Total claim count
Business Management 101: Help From TMA
Not every practice has the resources to hire a chief financial officer or a robust financial management staff. Given the innate complexities and regulations of the business of health care and their potential impact on a practice's bottom line, it's critical that physicians have a grasp of fundamental financial principles. The Texas Medical Association has resources to help.
For a fee, TMA Practice Consulting offers a revenue cycle assessment that entails a comprehensive diagnostic review of billing and collection procedures, evaluation of front-office processes, and analysis of accounts receivable.
The revenue cycle assessment identifies opportunities for operational and billing efficiencies that can boost a practice's bottom line. Staffing efficiency and workflow are major components of the assessment. A maximum of 20 AMA PRA Category 1 Credits™ per physician will be awarded upon successful completion of the assessment. For more information or to schedule an assessment, contact TMA Practice Consulting by calling (800) 523-8776 or by email.
In addition, TMA's Physician Services Organization (PSO) will equip practices with the tools and strategies they need to remain competitive in the future health care environment. The PSO is expected to launch early this year.
For more information on the PSO, read "Most Valuable Players" in January 2014 Texas Medicine (pages 23-27).
TMA has a new publication that provides physicians and their staff members with a helpful overview of the business side of medicine. Business Basics for Physicians guides physicians in setting the vision, direction, and policies that help ensure practice viability and helps them gain a basic understanding of financial management and other business topics.
To purchase the book, visit the TMA website.
The new TMA Financial Trend Tracker is a free online tool to help association members and their administrative and management staff track monthly and yearly net collection ratios, accounts receivable percentages, and new and established patient visits. The tool presents a practice's key performance indicators via easy-to-read graphs and charts. The Financial Trend Tracker allows users to identify potential problems, use the information to make decisions that will improve the practice's financial performance, and set goals.
Before logging on to the Financial Trend Tracker, gather your month-end practice management reports. Visit the site and enter the data requested into the My Practice Data entry form. The program will generate information on accounts receivable, collection ratios, and productivity, allowing you to monitor your data monthly and to make annual comparisons.