How Can You Use Financial Metrics to Improve Profitability?

There are many factors that can help your practice maintain financial profitability. It is especially important to review the structure of your financial statements to properly assess and optimize the health of your practice. Recently, we sat down with one of our healthcare experts, Miko Kulovitz, to discuss how important financial reporting can be to practice and what you can do to improve it.  We have outlined our conversation here:

Question: What are some of the common changes you recommend for a medical practice when you first look at its financial statements?

Answer: When we first look at the financial statements, we want to determine the health of the practice. Are they doing well? Are there areas we could improve? And those financial statements don’t always give us the information we need. A majority of practices use accounting software that is similar to QuickBooks, and that set-up isn’t always the best set-up that is going to show the medical practice how the financials need to be arranged. So when we come in, we’ll typically start with the construction of the financial statements and consider if the information is put together in a way that’s going to be useful to the physicians in making decisions and really driving the practice.

Question:  What does that generally look like?

Answer: We really want to be able to see what the operating net income is, aside from the physician expenses. We also want to be able to track by location how each division is doing. We want to see the profitability by provider. So there are a number of metrics that we need to make sure that we can track and have the financial statements divided in a way that presents that information to us.

Question: What are some of the financial metrics and practice profitability metrics that you like to monitor when you begin working with a practice?

Answer: There are a lot of key metrics that we review⁠—from the financials to the revenue cycle management. We want to look at the practice as a whole, see how it is doing and find out how it stacks up to peers on a state level and a national level. We really want to make sure that a practice’s metrics are in line with what other practices of a similar size and specialty are doing.

We also want to make sure that A/R aging is the youngest that it can be. We don’t want A/R to age into older categories because that makes it a lot harder to collect, and we want to see the days in A/R. We want to make sure that money is collected as fast as possible and that the cash flow cycle is healthy. We want to look at the financial statements and see what the overhead percentage is. We want to look at those individual expense categories and see if the larger items, such as the salary, benefits and medical supplies, are in line with what we are expecting to see. And because we work with financial statements of physician practices on a daily basis, we know what those parameters are; so, those anomalies will often stand out to us and help us pose the right questions so we can do the research and see if there are things that we need to explain further.

Question: When you work with medical practices, one of the key things that the physicians are focused on is the compensation formula. Could you make some comments about the common compensation formula structures that you see and what is effective in a practice?

Answer: There is no one-size-fits-all method to compensating the physician. Every practice is different, every specialty is different. So, we really want to take a look at what makes the most sense for that particular practice. The compensation model should be set up in a manner that incentivizes the behavior that’s best for the practice and also rewards the physicians for the work that they are doing. We want to make sure that the compensation model is compliant with Stark Law, that there are no issues that would be a detriment to the practice and that the compensation model is fair. A lot of times, there are issues in which the model is not achieving the goals that the practice wants to achieve, so we really want to take a look to see if this model is performing as we need it to perform and if it is accomplishing those goals.

Question: I would assume a single-physician practice compensation model is not really a big deal. When you get larger and larger, are there some creative ways you’ve seen practices compensate their physicians?

Answer: Again, there are many different ways to do that. The main thing is to focus on the revenues, allocate those appropriately and make sure that the practice is compliant. Also, with the overhead, it’s going to be a matter of the practice’s preferences and what makes the most sense. Some practices split overhead evenly, and some might allocate a percentage of variable or percentage of fixed. Again, there are many ways to slice that. It is really important that we talk to the physicians and get to know the practice to be able to help guide them in a direction for what plan is going to work best for them.

Article contributed by Miko Kulovitz, Healthcare Senior Manager, Warren Averett Healthcare Consulting Group. Warren Averett is an official Gold Partner with the Medical Association.