Implementing Financial Controls

Payer reimbursements show little hope of increasing to offset rising administrative and clinical expenses necessary to run your medical practice. Therefore, physicians need to focus carefully on overhead. Cutting costs, however, is no easy task. Rarely does our firm find practices with staff taking leisurely breaks or standing around with nothing to do. Most practices have a lean workforce with few obvious expenses to cut. The step-by-step process outlined in this article will help you plan your strategy for evaluating your overhead and improving your practice’s bottom line.

Review Internal Controls
Financial controls are crucial for reliable data. The practice must know how much money is flowing out of the business in order tocontrol expenditures. While most people think of internal controls as a means to safeguard against fraud, they actually are the key to making sound management decisions. Proper internal controls help prevent and detect errors. Medical practices today are fast-paced, complex businesses. Mistakes happen. A good system of checks and balances helps minimize inadvertent mistakes. In addition, the mere presence of formal control procedures encourages adherence to policies. The staff can sense when an office environment emanates a lack of accountability and controls. In this environment, financial data becomes useless.

Perform Due Diligence
Determine where the practice stands in relation to its peers. It’s very difficult to assess the appropriateness of expenses if you don’t have some benchmark data to measure against. Gather the necessary reports – financial statements, month-end and year-end management reports, billing reports, and budgets. Study the trends from year to year and month to month. Compare your data to specialty-specific industry statistics, first making sure that you group your data the same way they do. Analyze and explain variances between your practice and the associated benchmarks. For example, look at ratios of expenses to revenue, amounts per-physician or per-provider, and full-time equivalents (FTEs) per-physician or per-provider.

Review Your Largest Expenses
Focus first on overhead items that represent the largest individual expenses. For most medical practices, staff compensation may be the largest expense, followed by marketing costs, clinical supplies and rent. Be sure that current staffing levels are appropriate in relation to the number of providers in the practice. Whenever possible, allocate personnel to broad groupings such as front office, clinical staff, and back office or even individual job categories. Consider the practice’s overall productivity (volume) in your analysis of staffing. I recently performed a staffing analysis for a client who insisted he was overstaffed. When we compared his provider-to-staff ratio to similar practices, his analysis appeared to be correct. His annual charges and receipts, however, were almost double that of similar sized practices, thus creating more work and higher staffing requirements.

If you believe your practice is overstaffed, take the time to construct creative ways to reorganize. Rather than eliminate personnel, investigate to see if existing staff can be used to make the providers more productive. Look for efficiencies and delegate tasks to the lowest wage possible. Once you have examined the number and mix of the staff, look at salaries and turnover. Make sure that salaries are competitive within the practice’s geographic area. Paying a fair salary results in a satisfied, motivated staff, whose contributions are productive and profitable. Recruitment fees, training costs, and loss of productivity associated with turnover is more expensive than giving raises and bonuses to a highly qualified staff. Avoid the “salary creep” that results from giving automatic cost-of-living raises year after year. Each position within your practice should have an associated wage scale that is competitive but not above industry standards.

Many practices lose significant dollars each year by not adequately accounting for PTO (paid time off). Make sure all PTO policies are documented, communicated to staff, that planned leave is approved in advance, and that your payroll system accurately tracks employee PTO accruals. Be sure that overtime is approved in advance, monitored, and whenever possible, avoided.

In a tight job market, alternative staffing such as outsourcing and job sharing is often beneficial. Transcription, practice management, payroll processing, benefits administration, bookkeeping, and billing / collections all lend themselves well to outsourcing. Finally, cross-training for every position should be required to offer flexibility when the staff is on leave and to reduce training costs when turnover occurs.

In many practices, building and occupancy costs result in the second largest overhead item. The landlord’s operating costs and pass-through costs should be audited periodically. Even if a lease is not up for renewal, a professional specializing in tenant representation may be able to renegotiate the rates if the market situation is right. The practice should regularly evaluate its space needs. If there is excess capacity, you might want to consider sub-leasing, sharing space, or reconfiguring the space to make room for more providers.

Develop A Marketing Budget
Developing a marketing budget is an important part of creating a plan of action that is realistic and will help improve revenues. Without a solid budget, you can accidentally overspend on marketing costs. Follow three steps to help you organize current finances, determine where to spend marketing dollars, and strategically make adjustments.

Step 1: Organize Financial Information. Understand the current financial state of your practice. You need to know how much money your practice generates on a monthly basis and the variations that might exist throughout the year. “Reliable revenue” is the minimum amount of money your practice generates each month. Any amount over that monthly minimum is extra revenue that cannot be added to the budget because it is not reliable and can change.

After organizing the total reliable revenue that you can expect to generate each month, you need to subtract expenses. Any expense that the practice must pay each month should be subtracted from the revenue before trying to create a marketing budget. A realistic budget plan will always focus on revenue that exceeds the expenses, not the total revenue that comes in. When you have determined the amount of disposable income available for the practice, you should determine where the money will go. Marketing is only one area of focus that you need to incorporate in a budgeting plan. You should also consider putting aside money for unexpected costs and future growth.

Step 2: Determine Where You Want to Spend Your Marketing Dollars. After you know the total amount available to spend on marketing, the next part of creating a solid plan is organizing how you intend to spend that money. Three main factors contribute to how you spend marketing funds: the budget size, your past experiences, where you can reach the right audience. You will want to start organizing how to spend the funds based on the amount (digital marketing, relationship marketing, print ads, radio, TV, etc.).

Beyond the limitations of your budget, you also need to consider the strategies that have worked in the past. If you’ve noticed that email newsletters help bring in more patients, then you should do that again, even if you have the funds for more expensive alternatives. Also, consider which marketing channels will allow you to reach the right audience (direct-to-consumer / relationship marketing to referral physicians). Write down a detailed description of who your target audience is and think about what media they are consuming, this is where you should be advertising.

When you are considering a new marketing channel, you should set aside some funds for testing. Since you do not know if the new channel will work for your practice, you should only use a small portion of your marketing funds. Only after determining that it works for your practice should you commit more funds

Step 3: Marketing Analytics – What is your Patient Acquisition Cost? The final step of building a solid marketing budget is the analysis of the plan and adjustments that improve revenue production. Ultimately, marketing is designed to bring in extra revenue. If the strategy does not bring in new revenue in excess of the cost, then it is better to remove that strategy and try something else.

Assessing the data is a vital part of creating an effective marketing strategy. Look at the changes to appointments, procedures, charges and receipts – determine if it has increased, decreased, or stayed the same. Make sure that you can allocate increased revenues directly to a specific marketing campaign.

Search for Lost Revenue
Lost revenue can occur in many forms. I often see practices that do not consistently capture all charges, do not accurately code for services performed, fail to resubmit claims that have been denied due to correctable errors or missing information, and allow patient account balances to go uncollected. Other areas of lost revenue include failure to aggressively collect co-pays, past-due balances and provide financial counseling to patient PRIOR to procedures.

Once you have completed these steps, the practice should have developed efficient systems for internal controls; benchmarking production and expenses; reviewing staff levels, salaries and benefits and looking for other ways of reducing and controlling costs. Don’t allow this to be a one-time effort, insist on continuing diligence. Review the practice’s financial statements and management reports each month to look for discrepancies, unusually high expenses, or other opportunities to save money.

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