The biggest career decision you will make following your medical training may be joining a practice. A medical practice is a small business and you will be entering into the business of medicine. Very likely, you will have business partners in this enterprise.

As with any investigation into a business’s financial health and stability, you must perform a rigorous analysis of the practice’s finances and business metrics.

There are two key areas where you, as a prospective partner, should concentrate your initial efforts when assessing the basic business fundamentals of a practice: revenue analysis and financial statements. In this, the first of two companion articles, we discuss what you should look for in your analysis of a practice’s revenue structure.

Operations Impact on Revenue

To effectively evaluate a medical practice, you must understand its operational structure and daily operations. Operational efficiencies and inefficiencies both have a direct impact on economic return ? both short and long-term ? and cannot be ignored.

A lack of understanding about how a practice operates and how day-to-day decision-making is handled could cause you a great deal of frustration and discord. Remember, it can be relatively easy to change the processes in an office to improve the overall results. However, it is not so simple to change the underlying foundation and philosophies that govern those operations.

Taking time up front to engage in an operational assessment will help ensure that you make an informed and educated decision as to whether to join a particular practice based on a realistic and accurate appreciation of what the total practice has to offer.

Practice Revenue Sources

Medical care and services provided by an ophthalmology practice to its patients is what drives revenue. That revenue can come from a variety of sources and each practice is unique. Overall revenue, however, is usually a combination of two types of billable fees professional fees and technical fees.

Professional fees are those charged by the physician for professional services directly rendered to a patient. Actual charges for these services are determined by referencing the Evaluation and Management code, commonly referred to as “E&M code”. As an example, here is a range of E&M codes used to charge for services typically delivered by an ophthalmology practice:

99211 – 99215 Office or other outpatient visit for the evaluation and management of an established patient
92012 – 92014 Ophthalmological services: medical examination and evaluation, with initiation or continuation of diagnostic and treatment program; established patient

Analyzing the trends of fees billed and collected by looking at a practice’s E&M codes is a helpful and informative look into how the practice positions its business and delivers its services.

Professional fees are generally charged by the physician regardless of whether the patient is seen in the hospital, in an outpatient setting, or at the practice.

E&M Codes vs. Ophthalmology Codes

Medical decision-making patterns and culture in a practice are an important point to focus on during your practice evaluation. How a practice establishes its coding and billing policies in this regard is a good window into their business mind-set.

Many practices feel they are insulated from being audited by using only ophthalmology codes because the documentation guidelines are not as rigid as E&M codes. Some healthcare analysts are coming to believe that using a combination of E&M codes and ophthalmology codes, when used appropriately, offers the best way to meet the guidelines of insurance companies and Medicare.

A practice’s approach to medical decision-making has a direct effect on its revenue generation. Complex medical decision-making which is well documented will usually allow a practice to bill at the higher level E&M codes, while very straightforward “medical decision-making” often only justifies the use of the lower level codes.

When evaluating a practice, be sure to probe this area to determine the practice’s billing practices and guidelines. Remember that, as a general rule, it’s a mistake for a practice to hide behind an ophthalmology code if, on a consistent basis, its documentation is poor.

Technical Fees

Technical fees are charged on behalf of the physician for ancillary services. These services frequently include, but are not limited to procedures, laboratory work, chemotherapy, etc. Actual charges for these services are generated from the use of the CPT codes.

CPT codes (Current Procedural Technology) are used to standardize the coding for all technical procedures and treatments. Here are a few examples:

CPT Code Description
11310 Shaving of epidermal, dermal lesion eyes, diameter 0 .5 or less
11440 Excision other benign lesions eyelids, diameter 0 .5 or less
12014 Simple repair of superficial wounds to eyelids, 5.1cm ?

Technical fees are primarily charged for practice-based patients, as a hospital-based center would most likely capture technical revenue for patients treated in their institution.

Revenue Ratios

The ratio of professional to technical revenues is an important business metric for you to learn when assessing a practice, because physicians in the practice will likely be compensated differently for each source of revenue.

The actual credit a physician receives for each source of revenue varies widely and can depend on the volume of technical revenues generated by the practice.

Another factor that can affect physician share of compensation for professional and technical sources alike is whether the practice uses the services of a management company that shares in the revenue stream.

Issues Impacting Revenue

When assessing your earnings potential at a particular practice, there are several key business metrics you should analyze while making your decision:

  • average number of new patients seen per day;
  • method for assigning new patients among the physicians;
  • sources of new patient referrals;
  • percentage of patients under managed care plans; and
  • marketing plans and budgets for promoting new practice partners.

Each of these factors will have a direct impact on your ability to generate revenue during your first year in the practice.

To analyze the average number of new patients seen per day, you should request and review patient data for the previous 24 months. Your analysis should focus on identifying the new patient volume trends, that is, has the average number of new patients seen per day, month and year increased, decreased, or remained flat.

Do the necessary research to determine if any new ophthalmology specialists have moved into the competitive market area over the same period. Remember, you will be competing with these physicians for the same patient base. Another trend to analyze is whether the overall ophthalmologic disease patterns in the area have changed over the same 2-year period.

How a practice assigns new patients is clearly a critical factor to consider when assessing a new professional opportunity. In many cases you will find that the policy is to assign all new patients to the new physician, unless the referral source specifies a particular physician. It’s also common for a practice to rotate new patient referrals among all of the physicians in the practice.

Look back at least 24 months to analyze the sources of new patient referrals in the practice. Identify the top five referring physicians in the area. Find out whether total referrals have increased, decreased, or remained the same during the period covering your analysis.

It is also crucial to know the percentage of patients seen by the practice who are covered under managed care plans. As a new physician embarking on the medical physician in transition phase, it can typically take up to nine months or more before you are credentialed by the provider. You may not be able to take on managed care patients during your first year in the practice.

Finally, be sure to understand the practice’s commitment to make the required marketing efforts to promote you as a new physician when you join the practice. Such marketing activity will often include mailed announcements, published advertising, open houses, dinner with key physician leaders, etc.

Your primary professional goal during your first year in private practice will be to begin building a loyal patient base. Your job is to create your own “brand” – as it were. This “brand” is what you will leverage in driving your future sustained growth by creating a solid reputation by word of mouth and patient referrals that will build from your initial, satisfied patient base.

By starting your medical career with the ability to accurately assess a practice opportunity, including its various business metrics and policies, you increase your odds of associating with a group that operates at the same high standards you have already set for yourself.

About the Author:

Wesley Millican is the Founder and CEO of CareerPhysician Advisors L.P., one of the Nation’s leading providers of comprehensive career and business education resources to residents, fellows, and training program directors.  For over nine years he has dedicated the CareerPhysician delivery models into being a premier leader in physician career management and education. In addition to CareerPhysician, he is the Founder and CEO of MillicanSolutions, Inc., the Nation’s only executive search and consulting firm focused exclusively on strategic leadership initiatives for children’s hospitals.