More Bad News

Elyas Bakhtiari, for HealthLeaders Media, October 23, 2008

The financial crisis—both within healthcare and in the world economy—was predictably a hot topic of conversation at the MGMA annual conference in San Diego this week, and the latest MGMA cost survey that was released at the event suggests the financial environment isn't getting any better for physicians.

At this point, you don't need me to tell you that operating costs increased faster than revenues for many medical groups last year. That trend has been firmly in place for so long that the relatively small difference this year—multispecialty groups reported a 5.5% increase in revenue and a 6.5% increase in costs—seems predictable and almost mundane.

But when you consider that this pattern has held for more than a decade, the daunting circumstances group practices now face become clear.

Since 2001, operating costs for multispecialty groups have increased an astounding 43.1%, while the Medicare conversion factor for reimbursement is exactly the same. Seeing that data graphed during a presentation this week was alarming—and the slope is only getting steeper.

The natural reaction to this dynamic is to improve efficiency and cut operating costs as much as possible. But any business can only trim fat so far, and most groups have reached the limits of these improvement efforts.

Many of the cost-centers with the biggest increases are crucial to practice operations and difficult to cut:

Drug supplies. Costs of drugs jumped 17% for multispecialty groups, compounding a 33% increase the previous year. Pediatrics was the single specialty hit the worst with a 56% single-year increase, creating an unbelievable 132% increase over the past three years.

Support staff. Some specialties struggled more with support staff costs than others. Family practice, OB/GYN, and pediatric groups all saw double-digit increases in employee-related expenses in 2007, for example.

Professional liability. Cardiology saw the biggest increase in malpractice insurance premiums, 8%—bringing the total increase since 2000 to 132%. However, there was some good news. OB/GYN and orthopedic groups reported a decrease in malpractice costs.

The most troubling aspect of the situation is that there is little relief in sight. It has been a struggle to just keep reimbursement stagnant, rather than sharply dropping, and cost controls aren't doing the job.

Despite the seemingly endless barrage of bad news for medical groups these days, though, the overall attitude at the conference was positive. Hard times tend to spur innovation and change. It may not always be the ideal change—many physicians feel pressure to sell to a hospital or seek employment—but in each problem also lies opportunity, and physician practices are rapidly discovering new practice structures and leadership approaches for the current environment.

Most medical groups are getting by, and don't let the numbers fool you—the most adaptive continue to do very well.

For more information, see some of the reports I filed this week from MGMA:

Elyas Bakhtiari is a managing editor with HealthLeaders Media. He can be reached at
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