Everyday you give patients advice on how to stay in shape, how to avoid chronic diseases and how to recover from an unexpected health crisis. Keeping your medical practice in good shape so that it runs smoothly and so that you’re prepared to handle unexpected issues means forming some good habits as well.
Here are my Top 10 habits you can implement to make sure your practice stays financially healthy for the long-term.
1. Separate personal and business expenses
If your medical practice has more than one partner, then you know the contention that running personal expenses through the practice can cause. You risk not only running afoul of the IRS, but you also risk stressing the partner relationship your practice will rely on for the long haul. A partner soliciting your management staff to pay personal expenses puts everyone in an awkward position and can create alliances that do not support the practice’s overall goals. Agree that all personal expenses will be considered partner bonuses or eliminate paying personal expenses through the practice altogether. Keeping the records clean will generate trust in your partner relationships and confidence in your financial reporting over the long-term.
2. Review monthly financial statements
If properly prepared, your financial statements offer a real-time overview of your practice’s financial health. You’re probably familiar with your income statement, concentrating on patient revenue and practice expenses. Take time monthly to also review your balance sheet. Unlike your income statement that reflects performance over time, the balance sheet provides you with your current cash position, what fixed assets you own, current debt balances, and your equity investment at a specific point in time. Your CPA can provide comparative statements that allow you to compare your current performance with prior years, while providing guidance on recording transactions properly. A monthly financial statement review will help you spot trends that need to be addressed and help measure financial goals.
3. Adopt an appropriate income distribution method
How you pay yourself and your partners should be just as much about how revenue is generated in your practice as it is about keeping up with your peers. If you agree to split income equally, then take a look at historic revenue per physician in your specialty. If it stays fairly equal across the board, then you may be able to distribute income on an equal share. If schedules or procedures and their respective revenues are considerably different, then you’ll want to develop an income distribution method that takes that into account. Make allowance for costs that are fixed, like rent and utilities. These can be shared equally or on a square footage basis. Other variable costs, staffing and medical supplies being the largest, can be allocated by work performed, i.e. charges, RVUs, or cash revenues. The intent is to associate revenues with the costs it took to generate them. Rewards for focusing on clinical outcomes identified by your practice should also be considered. Set up an annual time to discuss the income distribution with your partners and financial advisor to make sure that it accurately reflects how you want effort rewarded in your practice.
4. Benchmark staff and physician salaries
If you’ve been in practice for any length of time, I bet you could graph the increasing starting salaries for physicians coming out of residency. But do you know what nurses, lab techs and receptionists are being paid? Do you know what your nurse is being paid? If your practice is large enough, you may not. If your practice is small enough, you may be dreading meeting with your nurse to discuss her pending raise. Whether you’re looking to hire or retain a physician, nurse or receptionist, benchmarking salary information can give you some insight into where you stand. Medical Group Managers Association (MGMA) provides benchmarking information for both physician and support staff positions. Member practices that participate in salary surveys can obtain survey information at no cost. Your accountant, if experienced in working with various medical practices, can be a great source for anonymous salary information. Having a competitive compensation package is crucial to attracting good talent and securing the longevity of your practice.
5. Assemble the right professional team
Whether you’re just starting your practice or whether you’ve been in practice for years, the professional team of advisors you choose can be the difference between a healthy practice and a practice with chronic problems. Your attorney, banker, and CPA will listen to and work with you on structuring your practice to meet your goals. Depending on the size of those goals, you may need advisors that specialize in medical practices to get you off on the right foot or to help you manage complex issues. Specialized advisors should have experience in your industry, keep abreast of industry changes, and practice in a firm large enough to call on more specialized services if and when the need arises.
6. Maintain internal production reports
Knowing how much revenue you generate monthly is important. Knowing how that revenue is generated is critical. Good internal production reports can tell you how many patients you’re seeing, what procedures you’re providing to them, and what kind of insurance plans they’re using. Use your internal production reports to track what is important to your practice. If you’ve hired a new physician and want to track how quickly his practice is growing, pay attention to new visits and how quickly his procedures grow. Good word of mouth means he’ll ramp up across all levels of service quicker than normal. If you’re practice is trying to implement a smoking cessation program, track counseling sessions and pulmonary function tests. When negotiating your health care contracts, it’s important to know how many members you actually see and for what services you see them. You’ll want to focus on those services when negotiating for reimbursement. Your internal production reports should highlight top insurance payers, top procedures, and top physician performers.
7. Examine your contract fee schedules
As I just mentioned, negotiating insurance reimbursement contracts requires mining some of your own data. You’ll be negotiating with an insurance company on how much they’ll adjust your reimbursements. You need to know what is valuable to you and what is not. Negotiating reimbursements is all about market share and cost savings. If you’re market share is large enough, you may get some movement on fees for services that are critical to your practice. If your insurance membership is high enough, you may be able to save the insurance carrier money and be able to enter into an agreement based on shared savings. These types of agreements involve interacting with care coordinators appointed by the insurance company but they can be minimally invasive to your practice and the coordinators can do a lot of the work necessary to complete care plans and to coordinate follow up. While you’re examining your insurance fee schedule, don’t forget to take a look at your practice’s fee schedule – the gross amount you bill for your services. Workman’s comp aside, your billing personnel should have a standing order to notify you any time they receive 100% payment for what was billed. You could be leaving money on the table by billing less for services than your insurance carriers will pay. Be financially smart. Examine how much you’re getting paid and what you’re charging for your services.
8. Develop a good Buy/Sell agreement
How will the value of the practice be determined when new partners want to buy in? What happens when a partner retires? What happens in the untimely event that one of the partners die? Will you allow physicians to continue owning stock if they significantly cutback their schedule? How will partners be released from debt guarantees? These are some of the questions that should be addressed in your Buy/ Sell agreement. In answering these questions, you may find you need life insurance that will buffer the practice against the loss of revenue you’ll experience with an unexpected loss of a partner. Disability insurance can help purchase partner’s stock if they cannot continue to work for medical reasons. Addressing these questions in a Buy/Sell agreement takes the confusion and guesswork out of decision making in some of the most stressful times a practice can face. Work with your attorney to determine what is legally appropriate and with your CPA to determine what tax consequences you may face when buying and selling the practice stock
9. Offer clear, competitive employment agreements
Your practice longevity and to some degree, your retirement, rely on your ability to attract and keep quality physicians. Unless you can sell your solo practice at a premium, which rarely happens, you’ll be relying on your partners to buy you out and keep the practice running profitably until that buy out is completed. You’ll want an agreement that is competitive and one that clearly outlines how and when a physician will be paid. If bonuses are to be received, describe exactly how bonuses are calculated and when to expect them. Every contract should contain a non-compete agreement unless you are under an agreement to provide medical care in underserved areas. If there is a penalty clause for underperformance or for not reaching practice outcomes, be clear about the reason for the clause and how the practice can support the candidate on achieving those goals. In my experience, physician candidates are more leery about what is not addressed in the agreement than what is clearly spelled out.
10. Review monthly Accounts Receivable statistics
Sometimes medical practices can overlook their accounts receivable reports because those numbers often don’t appear on the financial statements and/or practices are relying on separate reports from a third-party billing service. Accounts receivable reports will tell you how much in services you billed and how much revenue you received in return. You can also keep a handle on your charge-offs for bad debt and professional courtesy. Examine your days in A/R, the average time it takes you to collect from the date of service. This figure will let you know if you’re experiencing longer collection times than usual. Your collection percentage will tell you the average amount you expect to collect for every dollar billed. For example, you may bill a $100 service but consistently collect .75 cents on the dollar, or $75.00. Use this % to predict short-term future cash flow or to get a truer value of the billings you have outstanding. Review the aging in your accounts receivable by insurance payer to determine if claims are being held up for reasons you can mitigate. A monthly review will alert your billing department or service that you are not only concerned about the money that came in the door but you are also mindful of the money that should have come in the door.
Like staying physically healthy, keeping your medical practice in top financial health is a group of habits consistently applied over time. Apply the right habits, work with qualified professionals and if a crisis does happen, you can be prepared and back on your way to recovery in no time.
