Analyze top two expenses to boost your bottom line

The Doctor's Office , June 19, 2008

There are two ways to improve your net income: increase your revenue and decrease your expenses. In theory, the potential to do the former is infinite, whereas the latter is limited by the minimum cash necessary to run your practice. But the reality many physicians face is that they can only see so many more patients, launch so many ancillary services, and so on. Therefore, overhead management is crucial.

To get the biggest return on your efforts, begin by analyzing what you currently spend in your two biggest expense categories, which are typically staff wages and rent.

Paying for people. Healthcare is not unique in that its No. 1 expense is generally payroll. As a result, staff layoffs are pervasive in most industries in tough financial times—leading to a misconception that eliminating positions is the only way to make a significant dent in practice overhead. But this is not always the case, says Jerry Hermanson, MBA, CHE, senior consultant at Healthcare Integration Consultants, Inc., in Highlands, NC. In fact, some situations cry out for more hands on deck.

For example, "if you want to invest in a practice administrator, many times that will improve your cost structure and profitability because you'll be able to keep track of the changes in practices, not only saving money but also on the revenue side," Hermanson says.

For the most part, you want to see your staffing ratio— the number of full-time equivalent (FTE) staff members per physician—in line with specialty-specific benchmarks, such as those provided by the MGMA.

You should also determine how much you spend on staff wages relative to collections, broken down by category—administrative, billing, back office, front office, and so on. Divide each of these line items into your collections to arrive at their percent of collections. Phairas explains that this number, along with the number of FTEs in each category, can be analyzed according to the following rules of thumb: If both indicators are higher than the norm, you are probably overstaffed; if both indicators are lower than the norm, you are probably understaffed.

Save on your space. Most practices' second-highest expense is the lease on their office space, which accounts for 5%–10% of overhead relative to collections, Phairas says. Again, obtain benchmark data to determine what your peers are spending. Physicians are wise to have these data and a corresponding budget in hand when they first negotiate a lease, but it's not impossible to make changes at other times.

"You don't have to wait until the end of a lease to renegotiate," Hermanson says. "If economic situations have changed in your market—property values have gone down, interest and inflation rates have gone down—you may be able to renegotiate. We've seen a lot of that in the past year or so."

This story was adapted from one that first appeared in the June edition of The Doctor's Office, a publication by HealthLeaders Media.

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