The adage, “where there’s smoke, there’s fire” holds particularly true when it comes to practice finances. Problem signs — from lagging collections to soaring overhead — may start off at a simmer, but can quickly reach full boil. The trick is to look for the smoke so you can put out the fire before it rages out of control.

Consider these warning signs of potential problems:

Your receivables drop — A drop in accounts receivable can be a smoke signal that production is lagging. The trick is to determine if the production hit is temporary (a dip in charges from a physician who has been away on vacation) or if it is something much more serious, such as a loss of referrals.

Put out the fire: Set up your monthly AR summary to show the trends month-to-month as well as year-to-year.

Your collections dwindle — You may be able to see this one coming if you spot an increase in receivables over 90 days old. Here, the culprit could be anything from delayed claim submissions to denials and poor follow-up.

Put out the fire: The best defense is a detailed accounts receivable report that includes not only overall aging, but also aging of patient receivables and insurance receivables.

Your overhead soars — Salaries increase and the cost of supplies inevitably rises. But what is not inevitable are sharp and unexplained increases in practice overhead. Soaring costs demand investigation. Yet, it’s important to remember that revenue also factors in to the overhead equation. Declining revenues are sometimes the culprit behind inflated overhead.

Put out the fire: Benchmark average overhead for your geographic area as well as your area of practice. Break practice expenses into categories (salaries, supplies, rent, etc.) and compare costs from month-to-month and year-to-year.

Your adjustments jump — Over time, a pattern should emerge and your practice’s typical adjustment rate should become obvious. Be wary of any major variation, which can be a sign of anything from changes in billing patterns or payer mix to embezzlement or a recurring data entry error.

Put out the fire: Depending on your billing cycles and productivity, adjustments can follow charges by two to eight weeks. To accommodate for this, compare the current month’s adjustments to charges and collections from the prior month or even the month before.

You start seeing late charges and penalties — A medical practice that can’t pay its bills within 30 days may be suffering from serious cash flow issues. Getting dinged with late charges and penalties is compelling proof.

Put out the fire: Review practice bank statements for any unusual or unexpected withdrawals to rule out fraud. Then, conduct a cash flow analysis to determine where the bottleneck is occurring.

Avoid a Five-Alarm Fire

Your practice finances will let you know when trouble is brewing — if you know what to look for. Your best bet for spotting the smoke is with a regular process of monitoring and review. Start by establishing a basic dashboard* of relevant metrics and key indicators — and keep an eye out for any variances.

Then, put a practice administrator, physician manager or outside accountant on the job of monitoring the practice’s financial indicators on a monthly basis. Finally, schedule a regular meeting to review and discuss the information with all stakeholders in the practice.

Need help monitoring your practice’s financial indicators? Our experienced accounting professionals can help.

* An electronic dashboard could prove very useful to your practice. To learn about dashboards and see an example, click here.

Second in a series

The shift is on as healthcare providers are increasingly being incentivized to provide high-quality care at a lower cost.

Ultimately, the goal is delivery of healthcare that provides patients with:

– the best outcomes,
– from the most appropriate treatment, 
– by the right kind of provider, 
– at the right time, and
– in the most appropriate setting.

Under a value-based payment model, physicians are rewarded for good work — not just good workloads. Current value-based payment models include:

Bundled Payments — One payment is made for the entire range of services provided around a particular episode of care. Payment is typically paid to one entity (e.g., a hospital), which then pays the participating physicians from that bundle.

Shared Savings Arrangements — A physician is rewarded if patients have better-than-average quality/cost outcomes, and is penalized for excessive costs and poor outcomes.

Value-Based Payment Modifier — The Value Modifier provides for differential payment to a physician or group of physicians under the Medicare Physician Fee Schedule (PFS) based upon the quality of care furnished compared to the cost of care during a particular performance period. 
 

7 Things to Consider

As providers consider entering into value-based and/or risk-sharing arrangements, they will certainly need to focus on the details. In particular, physicians are well advised to evaluate these critical factors: 

1. Risk — What is your financial risk exposure? Does the payment model offer protection by limiting your total risk exposure? Just as important, does the plan penalize you for factors outside of your control? 
2. Reward — Does the contract include appropriate rewards for achievement of performance goals? Will you be given credit for quality achievements outside of stated performance goals?
3. Distribution — How will bonuses from any shared savings be distributed? Are the shared savings distributed equitably between all of the stakeholders? Any agreement should spell out how allocations will be made to each provider (e.g., through utilization and outcome measurement).
4. Performance Goals — Are performance goals set at reasonable levels — and can they be achieved within the current care setting? Just as important, will you have the ability to help establish the goals and measurement criteria?  Does the contract allow for innovation in care approaches?
5. Measurement — Are required tools and processes already in place to accurately measure outcomes, identify at-risk patients and successfully report and monitor quality and cost data? How is that data communicated to the payer? 
6. Providers — Shared savings and bundled payment arrangements typically cover the entire continuum of care — primary care, acute care and post-acute care services. Are the right providers in place for success? 
7. Liability — Traditionally, physicians have been able to accept or refuse to treat a patient or a group of patients, as well as choose physicians or other healthcare professionals with which to collaborate. Is there any additional risk associated when participating with other organizations or physicians? Does the contract limit your ability to do what is right for the patient?

The Payment Train Has Left the Station

It is estimated that in the next 10 years, 50 percent of physician compensation will come from value-based care payment models. Physicians who  think through the issues and opportunities now will be better prepared for success in the value-based world. 

Value-based care is a complex issue requiring careful analysis of its potential impact on physician practices. Please look for our continuing blog articles on this topic.

Second in a series.

So, you’ve landed that first big job out of residency or dental school. All the long hours and training have paid off, and you’re finally enjoying a rewarding salary and benefits.

The trick now is to make some smart moves to maximize the value of your new status as an employed physician or dentist. Here’s how:

Utilize all employer benefits for which you are eligible.

The overall value of benefits packages can add up to 36 percent of pay for health care providers, according to data from HR consulting firm Towers Watson. But to take full advantage of your benefits package, you’ll need to understand the scope and effective date of each benefit. Does disability insurance provide long-term coverage — or only short-term? If your employer has provided an allowance for continuing education, when and how can it be used? Likewise, are paid vacation days a use-it-or-lose-it proposition, or can unused days be banked?

Claim reimbursement for all employee business expenses allowed by your contract.

Unreimbursed business expenses generally will not provide a tax benefit, since you can only claim expenses that are more than 2 percent of your adjusted gross income. So make sure that your employer pays for — or that you are reimbursed for – things like office equipment and supplies, professional dues, medical equipment, and business meals and entertainment.

Think about retirement now.

Employed physicians and dentists should sign up for their employer’s 401(k) as soon as they are eligible and start contributing on a monthly basis — at least enough to receive any employer match. The trick is to start early and let the incredibly powerful effect of compounding work in your favor.

Have a plan for debt.

Of course, any contributions to the company retirement plan should be balanced against the need to pay down debt. Review all your debt, interest rates and due dates.   Here, it’s important to review your options for refinancing credit card debt and school loans. Ultimately, you’ll want to prioritize debt reduction so that the highest-rate, non-deductible interest is paid off first. 

Obtain adequate disability insurance coverage.

Employer-provided disability coverage may leave dangerous gaps. Review coverage with an experienced agent and consider beefing up coverage with policy riders to ensure that you obtain benefits specific to your needs and for as long as possible. Common riders include coverage for own occupation, residual disability and future purchase options.

Obtain adequate term life insurance coverage.

Insurance experts suggest you carry life insurance benefits equivalent to at least five times your annual income, and in some cases as much as nine times. Of course, early career is the ideal time to lock in long-term life insurance since you are young and healthy. If your employer-sponsored policy is not sufficient, consider increasing coverage.

Understand your professional liability insurance.

Make sure you understand the policy limits. Is it “claims made” or “occurrence made”? Likewise, determine if tail coverage is provided if employment ends.

Consider umbrella liability protection. 

Finally, protect yourself against non-occupation-related liability. Typically, that entails increasing the liability limits on your personal insurance policies (e.g., homeowners, auto, boat, etc.) and then adding on an “umbrella policy”. 

In the end, understanding the issues and economics of employment can help providers make wise choices. Contact our office for assistance with “running the numbers” and evaluating your options as an employed physician or dental professional. 

Every day, some 10,000 baby boomers turn 65. At that rate, the day may soon come when a baby boomer physician is ready to retire from your practice.

Ideally, everything from required notifications to payout of deferred compensation will be spelled out in a partnership agreement or employment contract. But you’ll still want to take steps to ensure a smooth transition in patient care and minimize disruption to the practice. Here’s how:

1. Review contracts. Review any legal agreements that the retiring physician is party to — equipment and building leases, bank notes and any shareholders’ agreement (for practices structured as a corporation) or operating agreement (for LLCs).

2. Develop a plan for patient notification. To avoid charges of patient abandonment, physicians must scrupulously adhere to state and federal guidelines regarding patient notification — including, in some cases, publishing notices in the newspaper. The practice can do its part by displaying announcements in the waiting room and adding a message to its voice mail system informing patients of a physician’s departure.

3. Notify third parties. Your state licensing board, the Drug Enforcement Administration, third-party payers and your malpractice carrier will all need to be notified of the change in status. While the individual doctor may do some of this legwork, it's ultimately the practice's responsibility to make sure that everyone is properly notified.

4. Think through capacity. Switching patients to other physicians in the group is certainly an option if the practice has the capacity. But if you’re planning to replace a retiring physician, consider whether you’ll need to bring in a locum tenens or tap a local physician to cover until you are able to recruit the right provider.

5. Evaluate malpractice coverage. “Tail coverage” may be necessary to cover any claims filed against a retired physician for treatment that a physician provided while employed at the practice (especially if he or she has previously been insured on a “claims made” basis). The employment or shareholder’s agreement should spell out exactly who is responsible for procuring the coverage, and the party securing the coverage should provide a certificate of insurance to the other party.

6. Make plans for records. Ultimately, physicians own their patient’s records and are responsible for archiving them. But to ease the transition, the departing physician can authorize the practice manager to coordinate patient access to their medical records and/or facilitate transfer records to other physicians. Physicians will also need to check with their Electronic Medical Record (EMR) vendor on policies for retrieving and archiving their particular electronic health records.

7. Address IT issues. A physician’s departure also requires dotting the technology I’s and crossing the T’s. This could be as basic as changing passwords and login credentials, or it could mean modifying contracts for scheduling, billing and/or EMR software.

Start Planning Now

To bring some order to the process, some practices negotiate a formal separation agreement with departing physicians to clarify and solidify the terms of departure, including the settlement of any money owed. The key to a smooth transition is to create a transition plan well before the retiring physician’s departure — some practice consultants say as much as 18-24 months in advance. 

The active involvement of a physician owner is ultimately the most effective control against fraud. However, in the current demanding environment for physicians and dentists, the reality is that this responsibility may need to be delegated to a practice manager.  

• Make sure that every patient encounter on the daily schedule has a charge and a payment. All payments received must be accounted for in the reconciliation at the end of the shift or end of the day. The total receipts in the general ledger (posted from the deposit slip) must agree to the total receipts posted in the billing system daily.
• Randomly conduct spot checks every few days and routinely review adjustments to ensure there was a valid reason for making them. Often, just the knowledge that someone is looking over their shoulder is enough to keep would-be fraudsters in line.
• Ensure that there is a regular check signer in the practice, preferably an owner, and that the authorized signer is familiar with approved vendors. There should be an invoice—stamped “paid” so it can’t be paid a second time either accidentally or deliberately—attached to each check, and the invoice should be reviewed by the signer for reasonableness before signing the check.  

Tip: Throw away all signature stamps!  

• Bank accounts should be set up so that transfers can be made only between specified accounts at the same bank and only by authorized individuals.
• Require that overtime be approved in advance by owners. Practice managers and/or owners should periodically review payroll rates to make certain that the agreed-upon rate is in use for each employee.
• Require written annual competitive bid proposals from vendors. The process of obtaining written bid proposals prevents employees from entering into fraudulent, long-term relationships with vendors.

Who Is Opening Your Bank Statement?

• Scan the bank statement and look for unusual withdrawals during the month.
• Review the cancelled checks and make sure they are signed by authorized signers.  
• Review the payees on the cancelled checks to make sure the payees are familiar.  
• For smaller practices, a CPA firm or outside bookkeeper could open the bank statements or download them directly from the bank and reconcile the cash to strengthen internal controls.

Generally the two largest costs for most professional practices are staffing costs and space costs. Staffing at the proper levels to ensure practice efficiency and to meet all contingencies represents a difficult challenge for practice managers in an environment of increasing costs.

Where to start in evaluating your staffing levels and costs?

A good first step is to gather benchmarking data from reputable sources, such as the Medical Group Management Association, the American Medical Association (AMA), the American Dental Association and the American Medical Group Association (AMGA), as well as your local medical and dental societies. For the broadest perspective, consult multiple sources. As you do, look for data that address the following:

• The number of support staff per full-time-equivalent (FTE) provider

• The percentage of gross revenue spent on support staff salaries

As you review the benchmarking data, keep in mind that practices that have historically been identified as better performing practices consistently have higher staff ratios than their peers. For example, MGMA surveys have shown that better performing groups focus on the delivery of care and invest in additional staff so that providers work up to the level of their licenses and as a result spend more quality time with patients. “Right staffing” generally results in a stronger bottom line since practices with appropriate staffing levels provide a better patient experience and allow for more efficient patient flow in the office.

If your numbers don’t line up with those of similar practices, it might be time to dig a little deeper. As you do, remember that a “slash-and-burn” approach isn’t always the best answer (and can actually be counterproductive). Rather than reflexively eliminating personnel, seek out ways to utilize existing staff to make providers more productive.

Look for inefficiencies. Are clinical staff performing duties that non-clinical staff could perform at less cost? For example, are nurses and medical assistants performing clerical duties?

Cross-train. Train billers and medical records people to run the front desk or phone patients with appointment reminders. This can pay off when you don’t have to hire a temp to cover for a staff member who is out sick or on vacation. You might also consider developing a list of secondary duties for staffers to tackle when they’re not busy with their primary job function in non-peak hours of the day.

Control overtime. Generally, substantial overtime costs indicate poor planning and scheduling. If extra hours are necessary, make sure that overtime is approved in advance and closely monitored. In many cases, it may be cheaper to hire another full time employee and pay salary plus 15 to 20 percent benefits, than to pay overtime at 150 percent.

Try some alternatives. Run the numbers on outsourcing your billing, payroll processing or bookkeeping functions. And don’t be afraid to explore job sharing (e.g., two practice nurses each working 20 hours a week), which can reduce the cost of benefits. Just note that too many part-timers can result in inefficiencies and redundant training costs.

Avoid “salary creep.” Instead of automatically giving raises year after year, establish a salary range for each position (high, low and median) that is competitive with your area of practice and location. If a high-value employee hits the top of the salary range, consider an incentive-based bonus instead of a salary increase.

Bid out the benefits. Fringe benefits, such as health insurance, represent a substantial portion of staff costs. Be sure to solicit competitive bids for your benefits every year or two. Also consider alternative benefit options, such as 401(k) and cafeteria plans, which are perceived as high-value benefits yet actually come with little cost to the practice. 

Don’t get stingy. Finally, don’t be penny wise and pound foolish when it comes to compensating high-quality employees. Remember, great employees can get jobs anywhere. Ultimately, recruitment fees, training costs and the loss of productivity associated with turnover is much more costly than properly compensating high-quality staff.

Are you wondering if your practice’s staffing costs are appropriate for your practice?  Our experienced professionals can provide an objective, third-party perspective.

A variety of factors over the last decade have changed how physicians view their careers in medicine. Now physicians may look at their practice as a vehicle for achieving financial independence rather than primarily as a life-long calling. Financial independence for most physicians means having the resources to allow you to choose the age to retire and to have a comfortable life style in retirement. 

Start With a Plan

Financial Planning Best Practices

• First, use discipline at the practice level. Annually review practice expenses and compare them, particularly your largest expenses for staffing and office space, to those of your peers. Determine what expenses could be reduced and prepare an annual budget to measure how the practice is doing in relation to the budget in holding down expenses.

• Max out your individual 401(k). In a tax-deferred retirement plan, such as a traditional 401(k), every dollar that you put into your plan grows tax-free until you withdraw that money during retirement and you achieve current year tax savings as well. 

• Set aside money for Uncle Sam. Tax planning is an important component of financial planning. The goal is to have enough money available at year-end to pay your tax liability in full every year. Since interest rates in savings accounts are low right now, it would be better to withhold the maximum federal and state income taxes from your paycheck rather than face the possibility of having to pay interest and penalties if you can’t pay off the tax bill. Your accountant can help you plan for the amount of tax that you will need to withhold each year.

• Anticipate the unexpected. Most of us expect to work full time until we are ready to retire. But what if something happens—such as a disability—that makes that impossible? Adequate insurance coverage (disability, life and liability) is essential to provide the income that you and your family will need to make it to retirement if the unexpected happens.

The cash basis of accounting records income as it is received and expenses as they are paid. The accrual method of accounting, on the other hand, recognizes income when it is earned and expenses when they are incurred, regardless of when the money actually changes hands. For most professional practices, the cash basis of accounting is the most practical approach and the most commonly used, and frankly, it’s the method of accounting that is most easily understood by practice owners. However, it can also lead to some pitfalls. Practices that don’t plan for retirement plan expenses, fixed asset purchases and other periodic payments can face an unwelcome surprise at the end of the year or the quarter.

3 Financial Statement Blind Spots

1. Retirement plan contributions. Cash basis financial statements that do not include monthly accruals for retirement plan contributions can result in unrealistic compensation numbers for medical/dental providers.  At a minimum, the CPA or bookkeeper should assist the practice with cash flow discipline by accruing retirement plan expenses throughout the year as the liability is incurred. This will allow owner/provider monthly compensation calculations to be based on reality.  Also,  by accruing the retirement plan contributions monthly, the annual retirement plan contributions will have been saved by year-end.
2. Capital expenditures. Generally, purchases of fixed assets are recorded as assets on the balance sheet, and depreciation expense is recorded monthly or annually on the practice books for those fixed assets. However, depreciation will likely not accurately reflect the actual effect of the purchase of fixed assets on the cash flow of the practice, so professional practices need to determine the accounting entries that will most accurately reflect the effect on cash flow.For some practices, this method may simply be to record Section 179 expense (election to expense the cost of fixed asset purchases) as a journal entry in the month fixed assets are purchased.  However, if there is uncertainty as to the availability of the Section 179 deduction or if fixed asset purchases are financed, an adjustment on the income allocation worksheets to reflect the monthly cash required for debt service may be the best way to reflect the effect of fixed assets on the cash flow of the practice.
3. Expense allocation. Determining how to allocate costs to the owners/providers in your group is an issue that can make any practice manager’s hair turn grey. While there is no perfect professional compensation method, better information about your costs can help you and practice owners arrive at the most equitable approach. If your current financial statements don’t provide the level of detail you need about the costs that are being incurred and allocated to each provider in the professional compensation calculation, ask your CPA to help you set up a more detailed chart of accounts or prepare special reports from your accounting system.

Take Time to Communicate