With expenses rising faster than revenues, making more money often starts with gaining an understanding of your cost structure in order to achieve cost reduction. For many practices, that entails first taking a critical look at overhead, as well as the specific expenses involved in providing patient care. Here’s how:
Start with Good Information
Understanding your practice costs requires relevant, reliable data — preferably a well-though-out report that groups expenditures logically at a reasonable level of detail. Unfortunately, this is typically where the problems start. Sure, your practice income and expense statement has expenses listed by category (generally defined by the practice’s general ledger categories). But problems occur when the statement doesn’t provide enough detail for informed decisions.
For example, a line item titled “supplies” or “salaries and wages” simply does not tell you enough. Detailed sub-categories — such as “drug supply,” “medical and surgical supply,” “office supplies,” “mid-level salaries and wages,” “nursing salaries and wages” and “office salaries and wages” — enable you to make better decisions about how to manage those costs. Detailed categories also allow you to compare practice expenses and overhead against national benchmarks, such as data from the Medical Group Management Association's Annual Cost Survey or your local medical or dental association.
Depending on the practice, even more detailed categories may be appropriate. For example, primary care practices are incurring more costs these days for injections — thanks in large part to changes in Medicare reimbursement and to increasing costs of new medications. Here, it might make sense to break out those injection costs into more specific categories, such flu vaccine, pneumonia vaccine, etc. Proper expense data can help with better drug purchasing and inventory control.
Conduct a Unit Cost Analysis
After grouping expenses logically and at the appropriate level of detail, you’ll want to get a handle on the actual cost of providing particular services. The most effective way is through a unit cost analysis.
1. Define the unit of service. First, identify the type of service (such as adult physicals, well-baby check-ups, and injections). Then define the unit based on what makes the most sense for your practice. For example, if you and your staff are already accustomed to thinking in terms of 15-minute increments, use that as your basic unit of service. You can further break down units of service to provide more detailed cost data about particular types of patients (e.g., a diabetic patient who requires more time with the physician or mid-level provider and also patient education time with a nurse).
2. Determine how many units of service were provided. Now that you’ve defined what a unit of service is (e.g., 15-minute intervals), use your practice management software to determine the number of units of that service that were provided during a given time period.
3. Calculate the direct costs. Of course, the most substantial direct cost to know is the provider time (physician or mid-level) allocated to a unit of service. You can capture this data using anything from a simple provider time diary to tracking patients from check-in to checkout (cycle times). You can use the same methods to determine time for other clinical staff. Plug in salary or hourly wage data, and you should be able to determine your cost for those 15 minutes. You’ll also need to determine the cost of drugs and medical supplies, lab tests, specialized equipment and other resources associated with the given service.
4. Add in the indirect costs. Make a list of indirect costs, such as administrative staff salaries and benefits, facility costs, office equipment and supplies, insurance and other general and administrative expenses. Next, decide how much of these costs should be allocated to the service in question. For example, if 15 percent of a practice's visits are for diabetes management, then it’s probably safe to attribute 15 percent of the practice’s indirect costs to diabetic care.
5. Tally it up. Add the costs from steps 3 and 4, and you should get a total cost per unit of service. Armed with solid unit-cost data, you can then make sound financial decisions to keep your practice successful.
Our experienced accounting professionals can provide anything from a full-scale unit cost analysis to simply helping you determine what the data from your own analysis means to your practice.