Maximizing Profits in Private Practice

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Many of us enter private practice out of residency quite naive.  We tend to be untrained in business, management, investing, or accounting.  As a result, we may not maximize our private practice profits.  Although medicine is a high-paying career in the U.S., not every private practice is doing well financially.  Don’t let yours fail.

Your most important activities in life likely should be your family, health, spirituality, and learning.  But don’t neglect the financial world.  Those who do tend to regret it decades later when it may be too late to change.  One of the most important reasons we work is to generate a reliable income for ourselves and our families.  Make sure you maximize the profits coming your way from your private practice.  

I learned a lot from experience, mentors, administrators, and my MBA training.  Here I’m sharing some of my best tips.  How will you know if your office is well-run or whether your management team is earning its keep?  You need to have at least a basic understanding of a few key areas to be able to spot-check performance.  The most important areas to focus on are Costs, Efficiency, Productivity, and metrics for Financial Success.

Maximizing Profits Through Costs

It is critical that you monitor and manage your practice expenses. One way is to benchmark against practice data. You can use your own targets or those from the MGMA. The numbers vary by specialty, practice type, and location. My examples should give you a starting point.

Minimal Operating Cost Percentage

This ratio is Operating Cost divided by Revenue. Depending on the specialty and what is included in Operating Cost (e.g. retirement/pension plans etc.) this may vary from 40% to 60%. It is most useful as a cost marker when used over time. Large increases in Operating Cost Percentage need to be explained and addressed.

3-5 Staff per Physician

Staffing is one area where cutting costs may not improve your financial wellbeing. The most productive practices have physician-to-staff-FTE (full-time employee) in the higher range. More workers can often reduce the low-yield busywork from the physician’s schedule. They also keep the patients moving through and reduce downtime. More coders, billers, transcriptionist, scribes, and receptionists can improve patient satisfaction as well as collections.

Support Staff Costs of $16,000 or less per Month per Doctor

On the other hand, employees are part of the expense column of the income sheet. Excess staff boosts the overhead. Bored workers can harm morale and be ineffective in their work. A diverse, busy, and lean staff is the ideal.

1,000-2,000 Square Feet per Doctor

A doctor needs enough space to function well, but not too much excess room that is not generating revenue on a per square foot basis.

Scrutinize Your per Square Foot Costs

For example, building and occupancy of 1,500 square feet per physician with an annual cost of $50,000 would be $33.33 (cost per square foot per year).

The Payoff

Focusing on these few critical areas is a high-yield activity. Regularly check the ‘vital signs’ of your practice; make sure you are in line with your peers and progressing over time. You can then better enjoy your hard-earned free time away from the practice knowing that time spent at work is producing the maximal possible outcome.

Maximizing Profits Through Efficiency

Maximizing efficiency is critically important.  You must monitor and manage your practice’s efficiency. One way of doing that is to benchmark against practice data. You can use MGMA or similar data or come up with your own targets. The numbers vary by specialty, practice type, and location. 

At least 50% Collected by 30 Days

You may be seeing a lot of new patients.  As long as your coding is optimal, your charges will be high. But how fast are you getting your money? Sending out a bill is one thing. Collecting soon is a separate issue. Money collected later is worth less because of the time-value-of-money. Also, the payments are less likely to be received as time goes on. This is sometimes referred to as the “aging of Accounts Receivable.” They “decay” over time. Some payor contracts exclude payments charged 30 days past the encounter date.  You did the work, but you won’t get paid.  One important measure is how much is collected within the first collection time-period. This is listed as ‘0-30 days.’ Electronic filing has improved this outcome for most practices.

Only 20-25% Outstanding at 90 days

The other tail of the collection pile is the slow-to-pay one. Very few of those dollars will ever be paid.   Those claims can be moved into collections quickly to reduce this category.

Net Collection Percentage of 95-98%

This is one of the best measures of an office administrator’s ability. How well is your practice managed? This indicates how well they collect all the dollars you should collect. This number is arrived at by subtracting write-offs, discounts, and contracted amounts from gross charges and then comparing this to the collections received.

Average Days in A/R of 50 or less

A/R stands for Accounts Receivable.  A/R indicates the payments due to you.  It is a financial asset for you and your practice.  That amount that has been billed for performed services but the payments have not been received. Days in A/R indicates how “old” -on average- your accounts receivable are. The longer they sit in A/R, the less likely they are to ever be received. A “younger” A/R or fewer days in A/R is better. This is calculated by dividing your average daily charges into your accounts receivable.

Collection % (Collections over Gross Charges) of 42% or More

The more cash you take in compared to the amount you charge, the better.

Maximizing Profits Through Productivity

It is critically important to monitor and manage your productivity. One way is to benchmark against practice data. You can use MGMA or similar data or come up with your own targets. The numbers vary by specialty, practice type, and region. The following should give you a starting point.

Annual Gross Charges of $1.2 Million

Within a few legal constraints, you can charge whatever you want for your services.  Unfortunately, you will still get paid only so much. The charges do, however, have some influence over collections. It is also the one easily measured number that physicians can directly impact. It can be altered by adjusting your fees or work hours. Gross charges represent the total of how much you bill. This is not money that can be spent.

Annual Collections of $600,000

Collections are how much your practice actually received for work you performed. This is less than the amount you billed. In fact, it is typically half or less of the charges. 

Total RVUs of 1,000 per Month

RVUs are Relative Value Units that arose from the RBRVS (Resource Based Relative Value System). Each CPT (E&M or procedure) has an associated assigned RVU value. It should account for some of the expertise, risk, supplies etc. involved in performing the procedure. It makes some sense to track RVUs rather than (or better – in addition to) financial outcomes. A clinician that sees many Medicaid patients would have much lower collections, but productivity could still be high. 

Work RVUs of 500 per Month

Work RVUs are less than the total RVUs. They include only the part actually performed by the physician. This excludes costs, facility fees, and technical components. It is thought to be a direct measure of a physician’s productivity.

Patient Volume of 400 per Month

Nothing beats a high-volume practice for boosting and maintaining revenue. That number can be measured easily and tracked over time.

At Least 10% of Patients are New (40 per Month)

New patients are those who have not been seen by you or your partners (in the same specialty) within the last three years. New patients help drive future visits, services, and procedural income. It is important to ensure a steady stream of new patients.

25 Patient-visits per Day per Doctor

This is a reasonable and sustainable level of patient flow. Many doctors see more. Not many see significantly fewer than this and still maintain top-level incomes.

Spot Trends

The more milestones your practice surpasses the more confidence you should have that your practice is doing well.  If you come up short in several areas, dig deeper.  Payments and productivity vary by specialty and region.  It is important to do internal as well as external benchmarking. Know your numbers and watch for trends.  A downward trend in your billings or collections is more important than your MGMA percentile data. 

Practice Financial Success Metrics

How is your practice doing financially? Are you maximizing your private practice profits?  Most of us at least glance at our balance sheets (assets & liabilities) and income statements (profit & losses) annually or quarterly. We may or may not know how to interpret all of the numbers. You worry about declines: You celebrate increases.

Make More Money

How do you know that you are doing as well as you could? Are you living up to your financial potential? Working harder increases income, but are you making the most you can for your level of work?

Whatever you are making, I assure you that there are others in your field who work less than you and yet make more.  That should make you mad! That anger and competitive spirit can provide motivation.  That is a good thing since it takes motivation to read accounting statements.

Look at your takehome pay.  Who cares if your company is doing well if your family is not?  Some lose sight of that because they feel personally responsible for the financial success of the business. Make sure you are getting your fair share of the results. Start by reviewing your paychecks including W-2 and 1099 income. A review of those and your Social Security Administration report can be eye-opening. Are you pleased with the numbers? Do they seem in proportion to your efforts? Or do the paltry sums justify your level of stress and exhaustion?

Work Less

Compare how much you make with how busy/tired are you. Do you want to work more? To make more? These questions are subjective and vague and yet critically important in defining your level of motivation to improve your work and office efficiency. Only burning desire will propel you to future progress. Without significant ancillary income, you will likely have to work more to make more. You can improve office efficiency to keep more of what you generate. Effective negotiations with insurers can also make a big difference.

Given how tired you are, are you making enough?  The question is not how much you make or even how your income compares.  The question is are you making and keeping the maximal amount given your workload? 

Physicians tend not to be profit-maximizers.  That isn’t all bad. We want our own physicians to be ethical, humanistic, and balance. Nevertheless we physicians must learn to implement business principles to survive in the future; we must do even more if we plan to thrive.

Understanding these basic metrics and accounting concepts will carry you a long way.  You don’t need an MBA.  Just focus on costs, efficiency, productivity, and a few financial success metrics.  That will ensure you are maximizing profits from your private practice.  What do you think?  How important are these metrics in your private practice?  Have you found these or other concepts helpful?  Are there others that I missed?  Please share so other readers will benefit.

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