An old friend of my often said, “form follows finance,” and indeed his sentiment is very true in medical practice. Whether you’re a solo family physician or a member of a 300-physician multispecialty group or any combination in between. The drivers are the same, cash in and cash out, with the balance going to you as the owner. So why does your office seem so complex – many reasons but let’s focus on the financial.
A lesson taught to me many years ago by a very wise practice management consultant was to create a revenue budget first. It may sound like jumping through hoops, but a solid revenue budget will make your life much easier by knowing realistically how much money you’ll have to spend on staff, facilities, equipment and other practice needs, and how much income you should really expect.
Look at it this way, practice financials are pretty simple:
Determining your Revenue In is your cash or revenue budget. If you’re already practicing, it’s easy to look at month-by-month collections to create your budget. Your present level of revenues is “actual.” However, is it what it should be? This is an opportunity to evaluate your patient management (production and coding), your billing staff’s performance and payor contracts. Also, if you can produce this information over a period of three to five years, you’ll also be in a position to build a monthly revenue cycle chart – but that’s another paper in this series.
If you’re new to practice or starting a new practice you’ll need to estimate your production, patient visits, surgeries, etc… and then determine a reimbursement rate. While you can estimate or use some established payor mix to develop this data at a very micro level, you could also simply take a combination of the largest payor group and the lowest payor group and build your revenue from those reimbursement rates. Unless you are planning a nearly exclusive Medicaid practice, I begin my revenue modeling based on the lowest payor. I do that for two reasons. First, while we rarely like surprises, a revenue model based on the lowest payor will usually yield a pleasant surprise. After an appropriate surprise period, perhaps six months, you can then adjust your revenue model to actual performance. Second, the value of payor differences is truly macro while revenue budgeting is micro. That is, if Medicare is your lowest payor and you’re reimbursed $55.00 for a certain CPT code but another insurance company reimburses at 130% of Medicare, then the other payor is paying $71.50 or an extra $16.50. When you consider what $16.50 will buy, you need a very strong payor based focused on the higher paying payor to warrant initial or projected budgeting at a higher level.
Now that you have a revenue budget, how are you going to spend it? Controllable Medical practice expenses fall mostly into:
It’s a short list. Also, depending on your specialty, these may be your largest expenses in that order. Malpractice costs as well as technology costs will likely be on your top five list as well.
Regardless, let’s begin. How many staff doing what do you need and what will they cost. Second, how important is facility to your practice? Do you need to spend a lot on an office environment to support a necessary image for your practice, do you need a prime access location for the ambulatory restrictions of your patients, etc… Don’t buy more than you really need. It’s your office and your practice, not your home (although you may feel like you spend more time there than home), and it’s going to depreciate in value.
Any reputable supplier, medical or otherwise, will be more than happy to sit down with you to create a monthly budget. Of course they’ll want you to spend more than you want to spend, but it’s a budge, not a contract.
It’s the same with all expense line items.
The issue is what’s left. After you’ve created your expected revenue and subtracted you expected expense, do you have an income that is desirable and appropriate? If it is not, look at cutting expenses. I say that because I’m assuming you created a revenue budget based on how you want to practice, patient volume and service. So reduce expense to allow you to be both successful economically and happy professionally.
If the result of the equation is an acceptable income level, then make it work. Monthly reporting is a combination of actual and budget with variances between the two pursued vigorously. But just because there is a variance isn’t necessarily bad, it’s simply not what you planned for – it’s a surprise and we don’t like surprises. If the surprise is that expenses are proving less than budgeted or revenues are higher, it’s that surprise we said we could initially live with, but it’s still a surprise that needs correcting. Your personal cash management is a product of these numbers, and if you are always planning for less you may be underfunding retirement, college funds, mortgages, etc… While the extra cash may seem nice, it’s still not accurate budgeting – it’s surprise-based.
If all this seems simple, it’s because it really is. But it does take some time and thought and the commitment to track and follow through. However, with today’s sophisticated office practice systems and knowing what reports to request, it can take as little as an hour or two a month to keep your practice running according to a well developed and fluid budgeting process.