John BolandFor anyone managing a physician organization in today’s complex healthcare industry, the reality is all too clear: The intricacies of juggling rising fixed costs and falling payments poses significant challenges that traditional business models do not address. 

According to the American Medical Association, costs associated with running a physician organization have escalated 41 percent since 1991; meanwhile, Medicare payment rates over the same timeframe have trended, at best, to a minimal improvement, with recent rates trending flat.

Financial managers have to rethink the relationship of cost to revenue by increasing the proportion of variable to fixed costs, especially in high-cost categories, such as staffing and real estate. A greater share of resources should shift to those fixed assets that affect front-end operations, such as care providers that can enhance patient experience.

Realigning costs to revenue should begin in back-office operations that have the least effect on direct patient care and patient relationship management. The billing/collections function provides a good place to start reworking the business model. As payments decline, but volumes remain steady, the cost per unit of work rises. For example, say a practice’s cost to collect is equal to 10 percent of its monthly collections, which are $2 million. If revenue declines to $1.5 million, the cost to collect—at a fixed $200,000—increases to 13 percent as a percentage of revenue.

Practices have a few options. One, of course, is to maintain current staffing. But that solution absorbs margins as staffing costs rise and payments decline. A second option is to downsize staff and require those remaining to be more productive—a challenge if these staffers lack the ability to take on additional work.

Another option aligns costs to revenue by turning the fixed costs of billing/collections into a variable cost. Realignment is achieved by moving the risk outside the practice, which means moving the billing/collections function to outside expertise. Costs can then be tied to collections. 

If the billing/collections function is outsourced, its cost, can vary, based on payment. Thus, if the billing/collections fee is 10 percent of reimbursement, and reimbursement declines from $2 million to $1.5 million, then the fee (cost of billing/collections) declines to $150,000.

The billings/collections function also faces a set of universal challenges that place further strains on the traditional business model. These challenges are apparent in the following areas.

Operational/strategic compliance. The increasing complexities of managing specifics such as coding, denials, and regulatory compliance often requires dedicated expertise in these areas. A practice’s internal staff may lack the overall experience to be able to implement strategies that directly address these issues or improve overall efficiency of the billing/collections department. Likewise, although hospital finance managers overseeing a practice may have more in-depth experience, that experience will be with inpatient operations, not a physician practice.

Volume. As volume increases, which is expected under health reform, a practice may not have the resources to add additional staff or be nimble in its hiring practices to meet demands. Many smaller or more competitive markets may also lack an appropriate number of skilled workers for these functions.

Performance improvement. Uncovering strategies for improving performance requires an intimate understanding of data that goes beyond metrics traditionally employed to gauge how well a practice is doing. Typical practice metrics may include a collections ratio or days in accounts receivable. But these metrics do not indicate whether revenue is eroding. Breaking down a metric into smaller slices can provide more meaningful information. Aged accounts receivable that grown from 90 to 120 days, for example, can be broken down into aged receivables by payer, by payer and location, and then by paper, location, and provider. 

Technology and analytics. Obtaining and updating appropriate tools for collecting and extracting data to analyze business performance can be an imposing task for a practice with limited resources and declining revenues. Dashboard reporting, in particular, requires sophisticated technology that is often beyond the means of practice. Linking denials data, for example, requires retrieving data from various information systems. Hospitals may have such tools, but integrating these with a practice’s existing information systems to obtain consolidated reporting is often impractical, and switching a practice’s systems to a hospital’s systems is often met with resistance.

Physician organizations have options in crafting a new business model and addressing these challenges. Adding to internal expertise, partnering with staffing, technology, or business intelligence providers, or using a combination of these—or outsourcing the function entirely—will better equip the practice to survive within the new reality of rising costs and declining revenue.


John is a managing director with Alleviant, LLC, Powered by Navigant Healthcare, Chicago.

Publication Date: Tuesday, February 26, 2013