In order to effectively evaluate a practice, the operational structure and daily operations of the office must be understood.
The operational efficiencies, or inefficiencies, can have a direct impact on the economic return, both short and long term, and should not be ignored. A lack of understanding of how the medical practice operates, as well as how day to day decisions are made, can at a minimum cause a great deal of frustration and discord. Remember, it is often relatively easy to change the processes in an office to improve the overall results but not as easy to change the underlying foundation and philosophies which govern those operations. Taking the time up front during the evaluation process to complete an operational assessment using this ToolKit will help to ensure an educated, informed decision is made based on what the total practice has to offer.
I. Medical Practice Revenue
What are the sources of revenue to the practice?
The medical care and services provided to patients are what generates the revenue to a physician’s practice but that revenue can come from a variety of sources and varies from practice to practice. The revenue source is usually a combination of professional fees and technical fees.
Professional fees are those fees charged by the physician for the professional services rendered to a patient. The actual charge is generated by the use of Evaluation and Management codes (E&M). An example of an E&M code is a 99204 charged for a complex office visit on a new patient. Professional fees can be charged by the physician regardless of whether the patient is seen in the hospital, out-patient setting, or in the practice.
Technical fees are those fees charged on behalf of the physician for ancillary services provided to the patient. These services include, but are not limited to, procedures, chemotherapy, laboratory, etc. The actual charge for these services result in fees generated from the use of CPT codes. An example of a CPT code is a 96410 charged for the 1st hour of a chemo infusion. Technical fees are primarily charged for only practice based patients, as a hospital based oncology center would more than likely capture the technical revenue for patients treated in their institution.
The ratio of professional to technical revenues is important as physicians may be compensated differently on each source of revenue. The actual credit a physician receives for each source of revenue will vary widely and can depend on the volume of technical revenues generated by the practice and/or the presence of a management company who shares in the technical revenue stream. Therefore, it is important to understand the relationship the practice has with the hospitals, out-patient treatment facilities, physician practice management companies, etc. Additionally, the volume of technical revenues generated by a practice contributes more significantly to the overall practice expenses than does the professional revenue, thus impacting the net income of the practice which in turn impacts physician compensation and salary.
Issues Impacting the Ability to Generate Revenue
The ability for a physician to quickly generate revenues the first year of affiliation is based on several factors. Those factors include the following:
1. What is the average number of new patients per day seen by the practice?
The historical data for the last 2 years should be examined to determine if the # of new patients per day/per month/per year has increased, decreased or remained flat? Have any new specialists moved into the area over the same period of time which will compete for the same patient base? What is the trend in overall cancer cases in the area?
2. How are new patients assigned among the physicians?
The practice may assign all new patients to the new physician, unless the referral source specifies a particular physician. They may also rotate new patient referrals among all of the physicians in the practice.
3. What is the historical patient referral information?
Where does the majority of referrals come from? Who are the top 5 referring physicians? Have total referrals increased, decreased, or remained flat over the last 2 years?
4. What percent of those patients belong to managed care plans which require the
physician to become a contracted member?
It can take 9 months to a year for a physician to be credentialed and become a provider on many managed care plans. The physician will not be able to accept new patient referrals until he is a member of the primary managed care plans for the practice and has appropriate provider numbers.
5. What marketing support is available to introduce the physician to the medical community?
It is reasonable to expect some efforts will be made by the practice to introduce a new physician to the medical community. This introduction often takes the form of announcements, an open house, yellow page ads, dinner with key physician leaders, and/or a marketing piece profiling the physician, the physician’s specialty, education/training, family, etc.
II. Business Services
What is AR?
Accounts Receivable (AR) is the balance due from a debtor, such as an insurance company and/or a patient, on an account which is currently being carried on the practice’s financials/books. The total Accounts Receivable of a practice indicates the total number of dollars which remain outstanding as a result of charges being billed.
Why are the charges and charge processes important?
Many practices lose revenues, often significant, on an annual basis due to poor management of the charge process. In order to maximize reimbursement on the back end, close attention must be given to the charge process on the front end. Determining who in the practice is accountable for the ongoing monitoring and updating of the charge processes is essential, as is examing the processes to ensure charges are complete, accurate and updated. The following questions will help to focus on the areas of importance:
1. On average, how many days does it take to enter/process charges for billing from the date of service?
Charges should be processed within 24-48 hours of services being rendered. This will prove to be a challenge for many practices, particularly as it relates to in-patient professional charges. Often physicians only submit their hospital patient rosters weekly which the office staff then uses to process charges. However, if the practice routinely enters practice based patient charges later than 24 hours from the date of service, there is reason for concern. This could be due to poor management of the process, lack of adequate personnel to complete the job in a timely manner, etc.
2. Is there an audit process in place to ensure all charges are captured?
It is relatively easy for charges to be lost in the process resulting in legitimate charges never being billed. The busier the practice the more need for concern. A quick daily audit comparing the patient schedule to the charge tickets is one way to help capture missed charges.
3. Are fee schedules updated on a scheduled or routine basis?
The practice can be charging less than is reimbursable unless fee schedules are reviewed and updated on a scheduled, routine basis. Medicare adjusts fees annually, as should the practice. In addition, drug and supply costs change frequently so adjustments to the fee schedule are necessary to ensure the fees being charged to the patient are more than the costs being paid by the practice.
4. Is coding monitored closely for accuracy?
It is critical that the coding of charges is accurate. Erroneous coding, either by the physician or the physician’s designee, carries serious legal implications, as well as can result in lost revenues. Regardless of who is coding, the physician is ultimately responsible for any coding in his name and should ensure coding is accurate from both a revenue generation standpoint and compliance perspective. Submission of erroneous charges, regardless of whether it is the result of innocent oversight or actual intent is fraudulent and can result in sanctions, fines, and/or criminal prosecution.
Is the practice responsible for the billing and collection function or is this outsourced?
Regardless of whether the billing and collection processes are done in the practice by practice personnel, outsourced to another agency, or a combination thereof, it is necessary to evaluate the performance of the billing/collection efforts. The ability to effectively collect dollars billed, in a timely manner, requires an experienced, focused and diligent effort on behalf of those involved in the billing process.
If the entire billing function is outsourced, the practice is probably paying 4-8% of net collections, which will vary depending on the volume of professional and technical charges.
Standard Billing Reports
There are standard billing reports which should be generated on a monthly basis and should be available for review. These reports include:
1. AR Aging (last 6 months, by month for 0-30, 31-60, 61-90, 91-120, 120+ days)
This report will show the total outstanding AR for each of the day range categories listed above. Pay close attention to the outstanding AR listed in the >90 day columns and the aging trends over the last 6 months. The age of the AR is more often than not reflective of the ability to collect those dollars. The older the AR, greater than 90 days, the less likely the dollars will ever be collected.
2. Charges, Payment, Adjustments (by physician, last 6 months, by month)
This report will provide specific information regarding adjustments, to include the amount of contractual allowance taken by the payor, the reasons for denials of charges/claims, and any adjustments made by the practice. Payors often short pay (pay less than the contracted amount), deny claims for poor diagnosis, missing filing deadlines, etc. Close monitoring of this report can uncover reimbursement trends which will allow the practice to change internal processes, as well as hold the payors more accountable.
3. CPT Code Frequency (by physician, last 6 months, by month)
The CPT code report provides an understanding of what specific services are provided by the practice, as well as what specific services contribute to the revenue of the practice. In addition, it provides a good tool for monitoring the coding trends by physician.
How frequently are patient statements sent?
The consistency of sending patient statements is important and should be done at least monthly. This will not only help collection efforts but will minimize patient frustration caused by receiving late invoices/bills. Additionally, by law, the practice must demonstrate consistent efforts to collect patient balances and not automatically write off the patient portion.
What is the % of Net Collections?
Of the total gross dollars billed to an insurance company, the expected reimbursement/collection amount is often considerably less. This difference is known as contractual adjustments. The payor mix of a practice, ie; what % is Medicare, Medicaid, HMO, managed care, etc. greatly impacts the amount of dollars which can be expected to be collected from the gross dollars billed. The dollars actually collected result in the net collection rate for the practice. Determining the payor mix of the practice will help determine if the Net Collection % of the practice is reasonable.
Example: $100.00 Gross Revenue (Patient Charge)
– $ 20.00 Contractual Allowance (Payor Discount)
= $ 80.00 Net Collections (Expected Reimbursement and AR Amount)
What is the bad debt for the practice?
Bad Debt is the nonpayment of an expected reimbursement. The bad debt for a practice varies significantly depending how it is accounted for in the practice. It is important to understand specifically how a practice differentiates/defines bad debt verses contractual allowances so you in turn understand how the bad debt percent effects the practice’s profitability, and subsequently the physician’s income.
Medical Practice Management
Is there a Practice Manager responsible for the entire practice operation?
If the practice has a Practice Manager or Administrator, spending time with this individual can provide an important insight to the overall operation of the practice. Try to obtain an organizational chart which will facilitate your discussion efforts and understanding of the reporting structure of the practice. Questions to ask:
1. Who employs the Practice Manager?
The Practice Manager can be employed by the practice, the hospital or the practice management company. In some cases, the salary of the Practice Manager can be shared between two parties. For example, the practice and the hospital shares in the expense, or the practice management company employs the manager but their salary is subsidized by the physicians. It is critical to understand this relationship as it can influence and impact future decision making.
2. What authority and autonomy does this individual have in the practice decision
Understanding how decisions are made and what involvement, if any, the physicians have is important. Does the individual attend physician meetings in order to keep the physicians informed on material issues? How is information communicated to practice personnel? Are regular meetings held with office personnel?
3. What is the experience and competency level of the individual?
Does the individual have a pure clinical background/experience? Do they have a solid understanding of the business aspect of the practice? How closely is the office managed from a financial and clinical standpoint? Does the individual spend an equal amount of time overseeing both the clinical and business aspects of the practice? Can they readily answer basic business questions regarding the status of AR, expenses, etc.? Do they receive income statements and can they walk you through information as it relates to the day to day running of the office such as trends in payroll, G&A.?
What are the qualifications of the clinical personnel?
Does the practice employ PA’s, Nurse Practioners, RN’s, LVN’s, Medical Assistants? Are the clinical personnel covered under the practice malpractice policy or have individual policies?
In many cases, the clinical personnel of a practice are covered under an umbrella policy attached to a specific physician’s license.
Are any of the nurses an Oncology Certified Nurse?
In many states, the administration of chemotherapy requires a Registered Nurse.
Is a specific nurse assigned to each physician? Does this nurse make rounds?
To ensure patient continuity and equal nursing attention to a new physician joining a practice, it is wise to have a designated nurse for each physician.
Are any nurses on-call after hours and on the weekends for emergencies?
If there are no nurses on-call, then do the physicians triage their own phone calls?
Does the practice employ adequate levels of support personnel and are they tenured?
Salaries and benefits are the #2 greatest expense in a practice after pharmaceuticals. If a practice is overstaffed, it can effect practice income and subsequently physician income. If a practice is understaffed, it can create havoc, effect patient care and effect a physician’s quality of life.
How are hiring decisions made and are the physicians involved?
Although involvement in the hiring of ancillary staff may be not be important, many physicians want some level of involvement in the hiring of clinical personnel.
What is the turnover rate of personnel in the practice?
By investigating this aspect of the practice, pertinent information regarding work environment, office dynamics, office politics, etc. can be uncovered.
Is the spaced leased or owned?
If the space is owned, it is important to understand who owns the building and how the cost is allocated.
Are there an adequate number of exam rooms to support an additional physician?
As a rule of thumb, 3 exam rooms should be available to each physician when seeing patients.
Any limits to accessing office after hours, weekends, holidays?
Access should be available at all times; however, often professional office buildings may turn off air/heat on the weekends and holidays, making work uncomfortable at best.
Does the practice have any outreach locations? How are they staffed?
Does the nursing staff travel with the physician to outreach locations?
It is necessary to understand the expectations for covering outreach/satellite locations before joining a practice. Remember to take into account the commute time to and from other locations, the time away from your main practice location, and call coverage.
What is the current, as well as projected, status of the information systems for the practice?
Information systems can be very costly to install and upgrade. Being aware of any large capital outlay in the near future which could affect the physician’s earnings would be important, as well as knowing if the system in question meets the needs of the practice and physicians.
Are there any binding contracts, agreements and/or leases of any material value which would become the responsibility of the physician?
Assuming responsibility for certain contracts, agreements, leases, etc. could mean the physician will incur personal liability; therefore, this should be examined and understood.
What additional services are provided within the practice?
Imaging (MRI, Xray) Lab
*Pharmaceutical/drug expense is the single greatest expense to a practice; therefore, it is important to know the drug revenue and costs for the practice whether or not the practice has an actual pharmacy. Revenues from pharmaceuticals contribute a significant amount of income to an oncology practice and the ability to purchase those pharmaceuticals at a competitive price is essential to ensure maximum profits are realized. (Drug costs as a % of drug revenue can range from 40 to 50%, depending on the volume of pharmaceuticals purchased, the specific drugs being purchased and how those purchases are made.) It would also be helpful to investigate how the practice monitors manufacturers pricing increases and implements fee schedule revisions.
About the Author:
Wesley D. Millican, MBA, CEO and Physician Talent Officer of CareerPhysician Advisors, LP, and CareerPhysician, LLC, provides comprehensive talent solutions for academic children’s hospitals, colleges of medicine and academic medical centers across the nation. He possesses a longstanding passion for career development of all young physicians and serves as a go to career resource for training program directors and their residents and fellows. In continuing his commitment to the “future of medicine”, Mr. Millican speaks nationally at residency and fellowship programs. His Launch Your Career® Series is a proven resource for today’s residents and fellows and has served as a go to resource for program directors over the last 15 years.