- Maximizing Profits Through Costs
- Maximizing Profits Through Efficiency
- Maximizing Profits Through Productivity
- Practice Financial Success Metrics
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).
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.
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?
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.
Wealthy Doc, this is a great post on a subject that none of us get taught throughout our medical education.
For the longest time I just went to work and assumed I was paid what I was supposed to and fairly. Only during my “financial awakening” did I actually go through numbers on my statements and realize that there were unfair charges to my practice and I had to petition and correct them. But it had been going on for so many years before that.
Great post as usual!
Thanks for the comment, Xrayvsn,
I’m sorry you had the experience, but at least you realized it. Better late than never.
I hope others will read your writings and mine and others and learn sooner than we did.
Thanks for this. Too many docs are falling into being an employee. Many times they are getting paid based on a formula that they do not understand. They should be sure they can see how they are getting paid and that it was calculated correctly. If the formula is too complicated, you won’t know if you are being cheated. Another good reason to be the owner of the practice. I wrote about some advantages of owning here: https://drcorysfawcett.com/advantages-of-owning-your-practice/
Dr. Cory S. Fawcett
Prescription for Financial Success
Thanks for your input, Dr. Fawcett.
I think younger doctors need to know about these things even if they don’t seem essential now. The employment trend may decline or stop in the future if hospital networks see declining margins. Private practices may rise again in the future.
I also have seen contracts where the bonus incentive is promised but the way it is written makes it impossible for anyone to achieve the bonus.
I wanted to let you know I put this feed on my daily curator I call The Hospital on my blog. All told I currently have 66 physician financial blogs that are in it with the latest post from each blog.
Check of out if you havent already
Hope you can spread it around your social network so it can gain popularity but for me it is an amazingly easy way to keep up with the latest post from pretty much every physician blogger I know.
A very cool idea, Xrayvsn.
Thanks for including me.
As someone considering opening they’re own practice, this is a solid, simple recipe for success. I’m not sure if your plan is specialty specific, as I can imagine daily patient volume depends on specialty, but it seems at least a PCP could follow this plan well. In my research, it does seem that some practices have out of control costs, and as much as we may plan, reimbursements (such as medicare’s proposed E&M fees) can have a huge, usually negative, effect. Add to that rising expenses, increased work/requirements by insurance (and needing more manpower to do it), private practice seems harder and harder. I could imagine that if a lot of requirements and headaches were eliminated, a doctor could have a solid practice while making good income at relatively low costs to patients.
Yes although the principles of finance and accounting and productivity are important across all practices the numbers can vary some. Productivity reports in the form of wRVU, billings, collections are available in databases like MGMA. They break it down by percentile and region. It is hard for a general blog like this to include specific data that applies to everyone. These numbers work for a few specialties that I can think of but wouldn’t for others.
Employed work and academia are alternatives to private practice. I have worked in all three worlds. I can tell you from my experience that they are ALL getting harder and more demanding. That is part of why I’m encouraging everyone to reach FI ASAP. We need choices to take back our lives, cut back, or bail out and do something else.
While i applaud the author addressing these issues (even if you are paid work RVU or salary you need to understand this as it will affect your pay), the author is plain wrong in the “maximizing profits through efficiency”. I would have a cow if my numbers were as poor as the ones he quotes are acceptable.
I am a practice owner and do my own billing in house. 80-85%, not 50% is collected by 30 days. The rest is usually secondaries which are processed after the primary insurance EOB comes back. 20-25% after 90 days? Mine is only 15% and I haven’t zeroed out any debts for the five years I’ve been in solo practice! Net collection of 95-98% acceptable? Mine is 99.5%. Anything under 99% would not be good. If you collect 600,000 per year, 3% is 18,000. Over ten years that’s $180 grand. 96% is piss poor in my book. Average AR is 30 days. The key: collect at the time of service.
You don’t even need to have annual collections of 600,000 to do well. If your annual collections are 500,000 but your overhead is 30% then you take home $350,000. And as an ophthalmologist this requires you to see under 300 patients a month not 400. You do this by hiring two really good staff at $8000 per month, half of what you cite.
I realize every field may be different, but anyone who believes these numbers is doing themselves a disservice.
Thank you for sharing your numbers and insight. There definitely is specialty variation and practice variation for these numbers. It sounds like you have an extremely well-run clinical practice. Congratulations. You should be proud of what you have created. After reviewing many practices in multiple specialties I assure you that you are near the very top in all of these numbers. I tried to make an effort to put out some numbers that could serve as a minimum ballpark number per category. People want to see specifics even though no one number works for everyone. If everyone understood and monitored their numbers the way you do there wouldn’t even be a need for a post like this one. They now at least have your set of numbers to see as another example.