Report: Costs Outpace Revenues for Medical Practices

Physician Compensation & Recruitment, January 15, 2009

A recent report from MGMA confirms that operating costs are rising faster than revenue in many medical group practices. Although the findings are not surprising, the effect of the costs-revenue disparity is continuing to unfold, and how practices and health systems are responding could have serious implications for the practice of medicine.

MGMA Cost Survey: 2008 Reports Based on 2007 Data reports that although multispecialty group practices reported a 5.5% increase in median total revenue in 2007, median operating costs rose by 6.5%. Many single-specialty practices reported a similar trend. For example, cardiology practices' median total medical revenue decreased 0.61%, and operating costs rose 6.3%.

Physicians and groups offset practice overhead and add revenue streams when they expand into ancillary areas, such as imaging, lab services, and surgery centers. Although this works for diversified groups, it may have the opposite effect in subspecialty practices, says Allen Dye, vice president of marketing at Merritt Hawkins & Associates in Irving, TX.

Subspecialization may contribute to some of the financial woes practices are facing, especially with surgical subspecialties, as there isn't the same opportunity to spread out the risk as in a more diversified practice. "They are not as insulated from market change," Dye says. Moreover, as the practices add surgery centers and make other attempts to "look and feel more like hospitals, they are going to see what [hospital] margins have been doing for a long time," he says.

Practices are—or should be—questioning the role of services and procedures, such as:

  • Are ancillary services covering variable expenses and contributing to fixed overhead?
  • Are the ancillary services offered in the practice the highest and best use of office space?
  • Are there ancillary services that the practice should be offering in-house?
  • Is it financially worthwhile to continue to perform in-office procedures?

This article was adapted from one that originally ran in the January 2009 issue of Physician Compensation & Recruitment, a HealthLeaders Media publication.
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