Home Growing Your Practice Taking the temperature of a practice’s financial health

Taking the temperature of a practice’s financial health

August 2007

Published in the August 2007 issue of Today’s Hospitalist

You’re looking to switch hospitalist groups, and you want to get a picture of your prospective employer’s financial health. The only problem is that you’re not sure what questions you should ask “and what the answers should sound like.

A good place to start is by focusing on tools that practice consultants call “key financial indicators.” Put simply, these measures help shine a light on a practice’s financial health by looking at how well that group bills “and is paid “for its services.

That’s why John Boland, a consultant who is vice president of MedSynergies Inc., a company based in Irving, Texas, that provides financial services to medical groups, urges physicians of all stripes to ask some basic questions about a practice’s financial indicators.

As he is quick to point out, these tools aren’t just for hospitalists working in private practice groups. Even hospitalists contemplating a salaried position with a hospital-employed group, for example, would do well to ask detailed questions about the practice.

During the Spring 2007 Hospitalist CME Series meeting held in Cambridge earlier this year, Mr. Boland said that taking “the financial temperature” of a practice is a paramount concern for prospective candidates “even those on straight salary who aren’t being paid on productivity. Even if your salary is not directly affected by how well a group collects patient co-pays and how many of its claims are rejected by insurers, those measures will tell you a lot about whether the practice is viable or headed toward disaster.

“If organizations cannot produce core metrics, I would be very wary of their long-term financial viability,” he said. “If they’re not getting to the fundamentals of what makes their revenue cycle complete and accurate, then their chance of financial distress continues to increase.”

Key comparison metric

One important measure Mr. Boland said physicians should use to compare the financial health of different practices is a calculation known as payment-per-RVU, which stands for relative value unit.

Groups derive their payment-per-RVU by dividing what they collect from insurers by the number of RVUs reported in their charges. “A group where physicians on average are getting paid $40 per RVU is doing better than one where doctors are paid $30 per RVU,” Mr. Boland said. “The payment-per-RVU gives you an indication of a financial trend over time, in terms of how much physicians are earning, what services they’re providing and how well those services are being reimbursed.”

According to Mr. Boland, groups can track either work RVUs or total RVUs, as long as they’re consistent about the unit they use. The advantage of using the RVU is that it is a consistent, nationwide unit to gauge physician productivity around services and procedures. Regional variations in payment or other factors don’t cloud the RVU’s usefulness in providing a financial snapshot of a prospective group.

What if the practice you’re considering does not track payment-per-RVU? Mr. Boland says that payment-per-CPT would serve as a good proxy.

He also noted that while some groups use collection ratios “the ratio of claims paid to claims submitted “to gauge their financial health, that measure can paint a false picture. That’s because practices that maintain a low fee schedule could have a high collection ratio because payers are paying all of their bills.

“You could actually have a lower collection ratio and a higher payment-per-RVU with more cash flowing to your business” and a more advantageous fee schedule, Mr. Boland pointed out. “The fee schedule can be manipulated.”

Core practice indicators

In addition to assessing physician productivity in the group, Mr. Boland detailed five measures that will give you an idea of how well groups bill and collect for services. Every group, he said, including hospitals that employ a hospitalist service, should be able to report on the following:

  • Date of service vs. date of charge entry. This refers to how long it takes a group to enter a charge into its billing system. For office-based physicians, this lag time should be no more than two days, but for hospitals, which typically need more time to verify patients’ insurance information, charges should be entered within five days of discharge.

    Why is it important to know how long it takes for charges to be entered into the system? “The longer a charge does not get entered into a system and sent through the adjudication process,” Mr. Boland pointed out, “the longer it’s going to take to get paid.”

  • Unreconciled visits. An unreconciled visit refers to services that are never billed. Mr. Boland said that unreconciled visits are a particular threat to hospital medicine because hospitalists do so much rounding.

    He explained that because rounding is so dynamic and service-intensive, hospitalist groups need a scheduling and billing system that allows patients and services to be added on the fly. Without that type of system, he explains, “you’ll have no way to track your services.”

    With each hospitalist service being reimbursed an average of between $80 and $100, he told attendees at the session, it’s easy to project the implications of failing to bill one or two services a day for every hospitalist in a group. Optimally, only 0.5% or fewer physician services should go unreconciled.

  • Reject rates. A reject is a claim that is bounced back to the practice because something is wrong with the claim.

    “A reject means that your days in accounts receivable will be growing and that, unless you fix that claim, you are not going to get paid for that charge,” Mr. Boland pointed out. “It hurts the business because staff now need to do additional work to get that claim paid.”

    Practices can lower their reject rates by employing technology like claim-scrubbing software. Mr. Boland said that in general, reject rates should account for no more than 4% of all claims.

  • First-pass denials. A first-pass denial occurs when the payer returns $0 payment for a claim. According to Mr. Boland, this problem is the “single most costly event” for a practice because of all the work that has to take place to get the denial reversed. The problem is especially tough for hospitalist groups that have to get the information off of a hospital information system to “find out where the holes are.”

    While there are a number of factors that cause first-pass denials, the single biggest reason claims are denied has to do with patient eligibility. That’s particularly the case when patients are admitted from the ED, perhaps in pain or unconscious, and providers may have outdated or non-available insurance information.

    “The faster you can act on denials,” Mr. Boland said, “the faster you’ll increase your ability to actually collect for that service.”

    He estimated that out of 5,000 calls his company may make a month for collections due to eligibility problems, between 1,000 and 2,000 of those patients will be able to present proper insurance information. “It’s all about acting quickly,” he said.

  • Pass-through rates. According to Mr. Boland, pass-through refers to the co-pays that patients pay themselves. Because patients with private insurance can self-pay between 20% and 30% of physician services, this is an increasingly important area. And because patient-pay responsibility will continue to grow, hospitals and groups need to have a tracking mechanism to understand how this component affects a practice.

Other metrics

Mr. Boland said that once you understand the financial fundamentals of a prospective practice, there are certainly other metrics you can pursue, such as allowable-per-RVU and insurance payments-per-RVU. (See “The business of medicine: a glossary” on this page.) But when assessing a practice’s financial performance, Mr. Boland had one more piece of advice: Keep it simple.

“Try to keep scorecards simple,” he said, “so you can focus on those things that will lead to higher reimbursement.” Mr. Boland admitted that smaller groups may not have the same technical expertise as large groups and hospital systems to track and report on these issues. But groups should, he said, have some kind of handle on the state of their financial performance.

That’s why he said that physicians considering any new practice opportunity should get access to key financial data. If not, he warned, doctors would be accepting a position with that practice at their own peril.

Phyllis Maguire is Executive Editor of Today’s Hospitalist.

The business of medicine: a glossary

To help you assess the financial health of hospitalist practices, John Boland, vice president with MedSynergies Inc., a company that provides financial consulting to medical groups, spelled out different business terms that every hospitalist should know:

  • Allowable. The maximum amount of reimbursement that physicians can collect for any service. That maximum includes both payer reimbursement and the amount that patients self-pay.

  • Cash collections. Any revenue that a group receives for services provided by physicians.

  • Collection ratio. The amount of collections divided by the charge, giving you the amount you’re collecting on the charge.

  • Denial. A claim submitted to a payer that comes back with a $0 payment. “If you’re not doing a good job tracking denials or “even worse “no responses, the opportunity costs to the organization can start to be extremely high,” Mr. Boland pointed out at a Spring 2007 Hospitalist CME Series meeting held earlier this year. “You’re either re-working a lot of claims unnecessarily and not taking preventive actions to stop denials from happening, or you’re not following up on them, leaving money on the table.”

  • Reject. A submitted claim that has some kind of error, either technical or with the claim format, and is returned to the practice to be fixed before it’s paid.
  • RVU. The basic unit devised by the Centers for Medicare and Medicaid Services (and used by other payers) to quantify and reimburse the complexity of physician services, as reported in CPT codes.

Need help calculating practice costs?

Financial consulting company MedSynergies Inc., which is based in Irving, Texas, is offering a free CD-ROM of its cost calculator. The calculator includes a spreadsheet that you can use to input practice data from your own group to analyze practice costs. For a
free CD, e-mail John Boland, vice president of MedSynergies.