Particularly in today’s medical practice, controlling costs is among the most important management functions.

 

Poor processes or cost controls prohibit a practice operating efficiently. If physicians do not receive paychecks in line with their productivity, it is time to take corrective action.

 

To effectively manage overhead, you must understand what is overhead. Every expense not associated with physician or nonphysician compensation or fringe benefits are practice operating costs (overhead). Managing the margins is more important today because of declining revenues. When evaluating a clinic I focus on two metrics; total operating cost as a percent of total medical revenue and physician compensation. Some may debate on what to include in operating costs and what is called physician expense. 

 

All costs that are not directly part of provider compensation (paid salary or authorized fringe benefits) are part of a practice’s overhead. If it’s part of administration, the facility or a business expense, a cost is part of overhead.

 

Not every overhead cost can be easily controlled. With the exception of personnel and supply expenses, most costs are fixed, at least in the short run.

 

Many physicians talk about their overhead. 

 

Medical specialties based primarily in hospitals or ambulatory surgery centers have lower operating and personnel costs, since these expenses are incurred by the facility where the specialty occurs. Specialties such as primary care, orthopedic surgery and other specialties have greater overhead since the physicians have busy office schedules, and the practice has to pay the clinical and ancillary staff costs and occupancy costs for the clinic.

 

Comparing data that compares median total support costs, median total general operating costs, median total general operating costs as a percent of total operating costs as a percent of total medical revenue, are the common metrics that should be used.

 

Compare the median operating costs to similar specialty practices. No one likes to be considered average, so comparing the median to higher percentiles to “best of practice,” nationally is the goal I use with physician groups.

 

One last area I want to touch on is tracking key indicators by payer. With the numerous insurance fee schedules, at a minimum look at the days in receivables outstanding, outstanding credits, aged trial balance and adjustments by category. I suggest perform audits at least quarterly. You can do this by reviewing 10 accounts by payer chosen randomly. 

 

The areas discussed here are helpful in re-negotiating contracts with different payers. This is the type of information for negotiations with payers and also setting the bar higher for your practice.

 

Today environment requires you to be more diligent in managing your practice. There are other areas that a clinic can look at, however starting with these performance measurements are the most likely areas in monitoring your overhead and maintaining a pulse on your medial group practice.

 

 

Bill Appling, MBA, FACMPE, is president of Watkins Uiberall Health Care Consulting.  He has faculty appointments at the University of Memphis in the Fogelman College of Economics and Business, where he teaches in the Masters of Health Care Administration program.