There’s a reason that the California Healthcare Foundation has raised $10 million to create a low interest loan pool for California clinics serving low-income and uninsured persons - and it’s not because they have cash on hand.

We regulary recommend that private practice owners prepare their practices for unforseen circumstances by building up several months cash on hand.  This isn’t easy to do, and the temptation to bleed cash out of a business for personal income is difficult to resist when building up a stockpile of cash - but, boy can it be worth it.

Having several months of operating cash on hand both prepares a practice for opportunity that may present itself (expansion, new hires) as well as protection against downturns in the economy or other undesirable scenarios.

Have a strategy of infusing cash back into your practice over several months or years in order to meet a reasonable objective for cash on hand.  Whatever you do, avoid having to dip into credit lines that require a bail out such as this.

The state as of August is deferring to providers Medi-Cal payments, which account for up to 50 percent of health center revenue, to address the state’s crisis. According to the California Primary Care Association, the action is costing its 700 member clinics and health centers $1,500 each minute that the state budget impasse continues.

Some 41 percent of clinics report being able to cover operating expenses without Medi-Cal reimbursement for 30 days or less, according to the association. Interest on traditional lines of credit available for these clinics can range as high as 14.5 percent.

In healthcare finance, numbers are - unfortunately - a game.  As much as we’d all like to focus on the practice of quality care and little else, the amount we charge for services and the amount we are paid are distinctly different concepts, and therefore must be understood (better yet, managed) as such.

Fee schedules upon which payments for services are (loosely) based, must be higher than the amounts allowed by each payer if a practice is to maximize their revenue.  You can rest assured that an insurance company is never going to whisper into your ear, “achem…you know you can charge a bit more for that,” or better yet, “you’re charging less than we’ll pay, so we’ll give you the higher of the two.”  This isn’t the way it works, or will ever work.  Practices must look out for themselves, and must keep on top of payer contracts on a regular basis to make sure that they are getting paid to the extent allowed.

Now, the difference between the fee schedule and the allowable amount creates a game of sorts (I prefer backgammon myself) when managing practice financials.  Because the fee schedule can generally be what you’d like it to be, as long as it’s above the allowable amounts, this can inflate (or deflate) gross revenue (total charges based on the fee schedule) depending on where it sits in relationship to the allowed amounts.  Net income will be the same, but there can be wide swings in the amount of revenue “discounted” which can be confusing to the practice owner if not entirely understood.

In this post, Peter Lucash over at the Medical Practice Business Blog makes the point that fee schedules must remain consistent with what services are worth, AND be higher than the allowable amounts per payer contract.  By doing so, an accurate representation of the value of services provided as well as the “value” (or lack thereof) of certain contracts can be properly evaluated.

Some disagree with billing at full (private) fee as an exercise in self-deception. But it’s not – it reflects what your services are worth, and what some patients are undoubtedly paying. Financial statements always have to be in context, which is why any footnotes are very important.

Interesting theory here: pay more money to the initial point-of-contact physicians, allow them to spend more time with the patient, let them perform a more thorough screening, and just maybe it will save money in the long run.  It makes very good sense and early experiments in several states by multiple payers presented in this article show that it might just be true.  It might also entice more medical students back toward primary care.

The idea is that by paying family physicians, internists and pediatricians to devote more time and attention to their patients, insurers and patients can save thousands of dollars downstream on unnecessary tests, visits to expensive specialists and avoidable trips to the hospital.

Nationally, Medicare and commercial insurers pay an average of only about $60 a visit to the office of a primary-care doctor and rarely if ever pay for telephone or e-mail consultations. Many health policy experts say the payments are not enough to let the doctors spend more than a few minutes with each patient.

Are you actively planning for your retirement or will you “work until you drop”?  Healthcare practice owners are no exception to the habit of business owners (and people in general) in delaying the planning of their own retirement.  Many just have enough time in a day to take care of patients, address a few management issues and go home to live their personal lives.  There isn’t much time for long-term planning - especially something as distant as their own retirement.  We all read the frequent stories about the number of individuals in their 60’s that have no savings and are forced to continue working to be able to survive.  Again, healthcare practitioners are no exception to this.

Why [do] doctors do such a bad job planning for retirement? I haven’t found a good answer to this anywhere, but as usual I have a few theories:

1. We are average Americans, and we suffer from the same “oh-well-I’ll-cross that-bridge-when-I-come-to-it” mentality as average Americans.
2. Unlike people who work in other professions, I think we also suffer from the traditional image of Marcus Welby, M.D., who never retired. Heck, he never took a day OFF! There is still an idea out there that doctors don’t really retire until their health no longer permits them to do the job. Even doctors of my generation, who don’t want to work until their bodies give out, haven’t caught up with the notion that they have to plan for the day when they stop working and, consequently, stop earning.
3. We don’t have time to plan our financial future, or at least we don’t think we have time. In truth, we don’t have time to waste and we should be planning right now. Many physicians hire accountants and financial advisors to do the planning for them, but this is an expensive business and doesn’t solve the problem of becoming an informed investor and steward of your own future.

This recent post on ruraldoctoring.com not only lists some theories as to why it might be difficult for healthcare practitioners to work on retirement planning but goes on to give practical steps in actually creating a good plan for the future.  Check it out…it is not too early!

How often do we as healthcare practitioners answer medical questions for our family, friends, co-workers and/or colleagues with little thought of getting reimbursed for our time and knowledge?  Probably quite frequently.  How often do we do so for patients?  I would assume less frequently, but probably still quite often.  For example, answering patient’s questions when they sit in on their spouses medical visit, when you see them at the local store or at the kid’s games, when they call you on the phone, or when they send you an e-mail.

A recent post I read calls these types of interactions “Curbside Consults”.  The article provides a rough estimate of cost per minute for the practitioner to provide these “free” consults.  Now, with the particular example in this post, consult was given to a colleague - another physician - via e-mail.  The author calculates that it cost him about $6.00 to offer this advice.  I think the majority of practitioners would offer this same type of support to a colleague without question.  However, how frequently is one willing to do so for patients?  These $6.00 consults given for free to patients could pile up over a year’s time.

What really struck me in this post, however, is the last paragraph:

The sad fact … is that curbside consultations don’t fit into any reimbursement model for health care.  And by the way, the “price” for a curbside consult isn’t even $6 — it’s $0.

I have a small correction to this statement: historically, “curbside consultations” have not “fit into any reimbursement model for health care”.  True, if one continues to bill CPT codes for when the patient is face-to-face in the office, then they are stuck with the philosophy that there is no other reimbursement model.  However, it really is time to begin thinking outside the box like so many entrepreneurial practitioners throughout the country are already doing.  We have some prime examples in Steven Knope and Jay Parkinson who have cash structures that allow them to cover these types of consults regardless of whether they are in the office, at the patient’s home, in the grocery store, or answering a patient’s e-mailed question.  We need to reshape our thought patterns when it comes to getting reimbursed for ALL of our valuable time and knowledge…

I’ve seen providers cringe when discussing financials, especially when breaking them down to a “per-patient” basis - as if by having the discussion we are boiling down human lives into mere numbers, and not as “people” as they so deserve to be discussed.  As an entry level practitioner years ago, I found myself cringing in the same way, choosing to live in my own professional world that somehow didn’t acknowledge that economics actually do have a part in healthcare.

It was years later that for the first time I heard the adage, “No margin, no mission.”  This resonated with me, not because it was a bold or particularly interesting statement, but because I heard this from a very compassionate, experienced, and business savvy pediatrician with whom I worked.  Wow, you mean if we can’t achieve a margin on what we’re doing, we’re not going to stay open to fulfill our mission?  Pretty straightforward, and pretty true I thought.

It was years after this that I went back to school and earned a degree in business, after which time it became crystal clear to me that physicians, physical therapists, dentists, and anyone else in the healthcare industry really need to know the numbers.  It’s not that the numbers are more important than our patients - they’re not.  They are important BECAUSE of our patients. 

Without a margin on the services we provide we will not be open for long, and we’ll do no good to anyone.  And if we want to be involved with the provision of free care to the medically underserved, which I encourage of all my clients, then we must make sure that we have good margins in the aspects of our practices that allow for it, so that we can afford to pass on these economic benefits to those that need them.

This post from Medblogger.net speaks to a recent Medical Economics publication that discusses the financial breakdown of a $100 office visit.  It’s a good read, and an important concept.

If you’re an internist who receives $100 for a 99214 office visit, expect to pocket only $41 in profit. The rest of the money goes for overhead such as malpractice insurance ($3.50), equipment and its repair and maintenance (another $3.50), supplies such as tongue depressors and copy paper ($6), rent and utilities ($7), general operating expenses such as telephones, accounting fees, advertising, medical journals, licenses, and taxes ($11), and employee salary and benefits ($28).

I love working with numbers to model sound business decisions for healthcare clinics.  I haven’t always been that way, and in fact it wasn’t until after business school was well underway that I began to understand how truly important numbers are to making good decisions.

One of the most valuable concepts I learned in business school is the concept of opportunity costs.  Opportunity costs are the costs associated with the “opportunity” foregone when decisions are made, or resources are allocated to a certain area - necessitating that those same resources can no longer be applied elsewhere.  By nature, opportunity costs are easily obscured, and for those unfamiliar with the concept, poor decisions can be made in the absence of an opportunity cost analysis.

This concept has tremendous applicability in business, and especially in healthcare.  As the industry becomes more resource intensive and as reimbursement for healthcare services dwindles, making the right decisions about the allocation of resources is critical to the survival of healthcare practices.

I published an article on this topic in Advance for Directors in Rehabilitation that I’d like to share with you here.  The article goes into detail about the concepts that underlie the definition of opportunity cost as well as some practical examples of using opportunity cost analysis to make good business decisions in private practice healthcare.  The principles apply whether your business is a medical clinic, physical therapy practice, dental facility…or even a used car lot.

Opportunity cost is the trade-off associated with a decision or purchase-something that must be given up in order to get something else. Stated differently, opportunity cost is the cost related to not putting your resources to their best alternative use. When speaking of purchases or monetary decisions, the monetary cost of something plus the opportunity cost yields the true cost of the decision.

When working with clients, we often find 2 things: (1) practice owners want to be more profitable, and (2) cutting expenses is not always an option.  At its most fundamental level, a healthcare practice’s profit is based on the equation: revenue - expenses = profit.  So, if expenses can’t be reduced significantly, the next place to look is at the revenue side of the equation.

Revenues are controlled by 2 elements, volume and price.  Increase either and you increase revenue.  We love to see increased volumes, but sometimes the easier (and quicker) fix is to make sure a practice is collecting the maximum amount allowed by its payers (i.e., “allowable” price is maximized).

Enter fee schedules.  In the complex healthcare environment we live in, selling a healthcare service is not as easy as charging a price, getting paid, and going home.  A healthcare practice that gets reimbursed from insurance companies must set a fee schedule which dictates how much the practice will charge for each procedure performed within the practice.  It is off of this fee schedule that the insurer will allow payment for the procedures performed.

If there are multiple payers for the practice it can be a bulky task to have a fee schedule set for each individual payer, so practice owners sometimes opt to use one fee schedule for all payers.  Getting back to the revenue issue, this is where problems sometimes lurk.  Insurance companies have different rules and allowable expenses for medical care, and they don’t all reimburse the same.  So, if a practice has a fee schedule set for one insurer that doesn’t exceed what they “allow” as payment, money is left on the table by the practice.  This can easily happen when using one fee schedue for all payers and is of obvious concern to practice owners.  The good news is that, relatively speaking, it’s an easy fix.

To make sure fee schedules are maximizing reimbursement from payers, make sure that they are set above the allowable amounts for each payer, for each charge.  If one fee schedule is to be used for all payers, then make sure the fee schedule exceeds the amount allowed by the highest reimbursing payer (for each charge).  If multiple fee schedules are being used, make sure that each schedule establishes a fee that exceeds the allowable amount for the payer (again, for each charge).

As you can see, the concept is fairly simple, but the time necessary to establish and maintain proper fee schedules for a medical practice can appear daunting.  It is recommended that the time and energy is spent however, as a significant sum of money can be easily left on the table by not establishing appropriate fee schedules. 

This article excerpt from the Medical Group Management Association (MGMA) provides more information on this important topic.

Medical practices may leave large sums of money on the table because they don’t devote enough attention to developing and maintaining fee schedules. Your practice’s fees should match or exceed reimbursement levels from your best payer to maximize the negotiated amount it can receive.

Of course we don’t “plan” on it happening, but we should have a plan nonetheless.  Running out of money in private practice does happen, and as this post from the Independent Urologist points out, this has an obvious (and usually immediate) impact on a partner’s take-home pay.  It pays to be prepared and this post has some great ideas for how to be ready should a cash crisis strike your practice.

If you have savings or a source of income that can last 1 year, you can go off on your own. Otherwise, I don’t believe that this is a viable option, unless you have an established practice, a loyal patient and referral base, and an unenforced no-compete clause. In that instance, you may be able to become cash positive in 2-4 months. Here’s how to start.

We frequently review practices’ insurance contracts and reimbursement rates when consulting on their overall revenue cycles.  Unfortunately, time and time again providers have signed contracts with payers in which they are making less money per visit than it costs them for that visit.  Net for the business is in the red for each of these visits.  Begin seeing more patients with these insurances and the business has less and less of a chance of survival.  Ultimately, the business may have to close.  We consistently coach practice owners to know what their cost per visit is so that they can make smart decisions when it comes to signing up for or remaining in contract with an insurance company.

Obviously, we consult in this fashion to look out for the best interests of the particular practice that we are working with.  However, what if this trend spread throughout the country and more practices started paying attention to their costs per visit relative to their reimbursement rates?  The end result may be health care reform on a much bigger scale.  I recently ran across this post that speaks to this idea.

As dealing with insurers becomes less rewarding monetarily and the hassle-factor continues to increase, the time will come when it will no longer be worth my while to contract with them. At that point, I will stop doing so. As it happens, I believe that many other physicians in situations similar to mine will come to the same conclusions as I, and will also choose to terminate those contracts. The eventual result will probably be that no outpatient primary care physicians will participate with insurance.

At that point, the insurance companies will almost certainly adjust their business model to take the new reality of non-participating physicians into account. With any luck, they will move towards something that looks like actual insurance (think home and auto; coverage only for catastrophic care) and will therefore be considerably less expensive. Who knows; they may even have to make do with less revenue. That’s what capitalism is all about, isn’t it?