Many medical practice organizations have adopted a dyadic approach to management(1) in which a physician leader is paired with a practice management professional to oversee and steer the financial management and strategy of the organization.(2)
The rudimentary manifestations of the dyadic models assume that the physician leader handles the clinical care models and methods as well as the provider management side of the house, and the senior manager, or practice administrator, handles how clinical services translate to the business performance of the practice, including financial performance.
However, as dyadic leadership models mature, the physician leader learns more about the business side of the practice, and the practice manager learns more about how variations in providers’ practice preferences and styles affect business performance. Over time, they build a “knowledge bridge” that enhances the potential and performance of the dyad, which translates into improved economic productivity and financial performance of the practice.
The focus here is on physician leaders’ understanding of forensic finance and skill sets, further defined as their abilities and capabilities to examine and understand how provider-generated practice performance dynamics (factors) behave independently and together to affect economic productivity and, thereby, the financial performance of the medical services organizations they lead.
The underlying assumption here is that the physician leader is uniquely positioned by education, training, and experience to lead ongoing investigative examinations of the economic and financial productivity of the organized medical practice, single or multispecialty, independent or integrated, and health-system based. Much of this proposed and ongoing investigative work is framed by a singular focus on how provider professional behavior patterns, preferences, and related productivity patterns affect the economic and financial performance of a functioning medical practice.
A PRACTICAL FRAMEWORK
What does the role of the physician in medical organization forensic finance look like? A baker’s dozen array of typical forensic finance opportunities for physician leaders is offered. While short of a “master class” in application, the roster of activities provides a practical foundation of work effort and the development of the required skill sets and competencies for physician leaders.
The two-part question the following framework answers is 1) what types of physician leader activities are characteristic of forensic finance as applied to the performance of the medical practice, and 2) what is the physician leader’s role in the investigative process?
1. Practice overhead and contribution margin performance. Physician owners of an independent, private medical practice may generally and wrongly define “overhead” as all collected revenue they don’t take home as earned compensation.(3) As such, some become pathologically obsessed with reducing practice overhead.
“Overhead” is appropriately defined as all business expenses not directly allocable to the production of a product or service, otherwise referred to as indirect operating expenses. Operating expenses within this indirect classification can be fixed or variable and generally fall into such categories as mortgages or facility rent expenses, equipment leases, utilities, insurance, marketing, and general management.
Overhead expense is allocable after all direct operating expenses, which include all expenses related to the production of the patient care process, drugs, related medical supplies, provider and staff compensation and benefits, and all other staff related to direct clinical care operations. The physician leader is advised to focus time on understanding the direct operating expense structure of the clinical processes, paying special attention to how variations in provider practice style affect the contribution margin performance per provider.
“Contribution margin” is defined as operating revenue productivity (gross charges minus all allocable third-party payer contractual adjustments) minus all accounted direct patient care operating expenses. The calculation of contribution margin occurs before the application of accounted overhead allocations as described. The variables that tend to have the largest effect on contribution margin performance are provider practice style, provider staffing, and payer mix.
2. Practice productivity versus efficiency. Productivity and operating efficiency are related, but they’re not the same and are not interchangeable financial performance constructs. Productivity pertains to production unit outputs; practice efficiency pertains to how well a clinical task is performed, i.e., doing things right in a timely manner and with the right amount of resource allocations.(4)
So, what’s the difference? The ambulatory surgery environment presents useful examples. A provider can be efficient in performing a screening colonoscopy, yet room turnover time produces sub-par room output per hour and per procedure day.
Ambulatory surgical environments are “asset-heavy,” i.e., they’re expensive to build, house high-cost clinical technologies, and are staffed with expensive support staff and overhead structures. So, if the higher-performing GI service environment can produce 18 procedures per room per day, production of 10 per room per day may make for an efficient day for providers but a sub-par day for procedure room productivity.
Physician leaders are encouraged to broaden the scope of their examinations of the economic and financial productivity of the organizations they serve, with the understanding that what is “efficient and productive” for a provider may not satisfy the financial performance requirements of their organization’s operating cost structure.
3. Payer mix management. Payer mix in medical practices is often taken for granted: “We have what we have.” However, payer mix is not immutable. It is always available for creative marketing, depending on the type of practice and geographic reach potential.
Physician leaders should be examining payer mix per clinical service and program and clinical specialty, and in certain instances by provider. Highly productive providers with a poor payer mix can create operating economics whereby the busier the provider becomes, the more the practice loses financially. Physician leaders need to show their peers that not all practice revenue is “good revenue.”
4. Returns on fixed assets. Because assets are deemed to be “fixed,” physician leaders often assume “they are what they are” and are not a fruitful area for physician leaders’ attention. The potential peril here is that fixed assets left unattended can produce deteriorating financial returns, which eventually causes a practice to sink under the weight of diminishing returns. Problems here manifest as under-utilized facilities, under-utilized medical or support services technologies, and the like.
With regard to medical equipment, costs related to expensive service agreements lurk in the background, sometimes costing tens of thousands annually. These “hidden costs” add to the returns on fixed asset investigative analytics.
Returns on assets can be characterized and analyzed in a variety of ways. Analytics focuses on two metrics. The first is return on assets,(5) which is a metric that focuses on the efficiency of the application of assets to net profitability of an organization. The second is the fixed asset turnover ratio,(6) which compares net operating revenue productivity with fixed assets as carried on the balance sheet.
Effective applications of the related analytics to the financial performance of an independent medical practice, or one integrated with a health system, requires physician leaders and classically trained financial professionals to reach a meeting of the minds for definitions of asset classifications and useful life determinations. For example, a financial professional might determine that a medical device such as a CT scanner has five years of useful life remaining until the physician leader discovers that the next innovation in scanners makes all owned scanners clinically obsolete.
5. Diminishing returns on organizational strategy. As applied to medical practice, strategy is, by definition, an array of decisions made that guide actions initiated to advance organizational mission, brand, growth, and operating and financial performance.(7) Each decision requires the application of organizational resources, including financial investments. The strategic potential of the organization is just as important. With every decision to act strategically, an organization is making decisions to forego the pursuit of multiple other opportunities.
Returns on strategies can be measured in a variety of ways, including profitability growth and increased market share. Satellite sites extend geographic reach, new clinical service lines can retain profitable care in-house, and expanded primary care can acquire new patients and position medical groups favorably with third-party payers and employers.
Each strategic plan comes with a price tag. Managing the returns on strategy is a complex balancing act whereby gains in one area of strategy cause losses in others. For example, primary care satellite strategies are effective market acquisition tactics, but they are expensive, and the returns may be of high value, but the financial condition of the organization can’t sustain the strategy long enough to realize the returns.
Here, physician leaders need to prepare themselves to be center stage in the discussions regarding the financial requirements and financial performance expectations of a strategic plan,(8) including where and how provider availabilities, capacities, and behaviors will bear upon the success of the plan.
6. New patient acquisitions and allocations to providers. Medical practices can be busy and at the same time be dying because of the risks associated with new patient acquisition strategies. Interrelated dynamics are at work here. Physician leaders should be positioned with data to observe patterns, methods, and provider/patient assignments.
Examinations of these patterns answer important questions related to the “what, how, why, and to whom” of patients new to the practice. Such examinations become increasingly important as medical practices and health systems invest in expensive strategies to target specific diagnostic categories, patient types, geographic markets, volumes requirements, and first-visit access patterns. In the absence of physician leaders’ oversight of new patient acquisition patterns, expensive growth strategies can suffer.
7. Lost patient ratio. Few medical practices bother to calculate a lost patient ratio — a function of recorded net patient gains to losses. If a primary care department gains 1,000 new patients per month but loses 500 from the active patient rolls, the net loss ratio is 50%. Negative loss ratios are possible as well, i.e., more patients are lost than gained.
The key investigative challenge here relates to the type of practice — single specialty or multispecialty — and whether a specific clinical specialty is in the business of serving patients over time or is principally geared to episodic or acute consultations and treatments.
Individual providers tend to focus on the performance of “their practice.” So long as their daily schedule keeps them busy, they don’t consider whether their practice is growing or shrinking. The physician leader’s perspective is that of the practice overall, including how the financial performance of each provider’s practice contributes to the financial performance of the whole, especially during periods when the business strategy demands growth of the aggregate patient base.
8. “False positive” provider productivity indicators. In the absence of physician leader examination, analysis of provider productivity often misses the forest for the trees. A real-life practical example applies:
A small primary care group is being evaluated for acquisition by a larger medical practice to serve as a regional satellite. The goal is market growth and referrals to the larger, mostly specialty-based, main site. The aggregate wRVU productivity of the resident providers is high as compared with industry standards. However, close examination by a “trained eye” reveals the practice is virtually closed to new patients, providers too frequently spend much of their time seeing those with chronic conditions, in-house lab diagnostics are overutilized, and most referrals go to a competitor health system.
All is not what it appears to be. Acquisition of the group is not a good idea. Value creation would be an uphill battle. Here, the financial accounting won’t tell the truth. The physician leader begins the forensic examinations with some skepticism. The question is not one of “How are they doing financially?” It’s “How do they do it?”
9. Internal referral retention and opportunities costs. Often referred to as “referral leakage,” there are two interrelated dynamics for the physician leader to monitor and manage: type-1 outgoing referrals from the practice for specialty care already provided by the practice and type-2 outgoing referrals for specialty care not provided by the practice. Both are important for different reasons.
For type-1, all questions for investigation apply to “why we’re referring out care that we already serve,” and for type-2, questions for examination pertaining to “should we add the providers, and related operating expense structure, required to serve some proportion of the business we’re referring out?”
Related opportunities for investigation pertain to the addition of ancillary diagnostic and treatment services. The key focus of the investigations relates to the potential for practice “margin expansion,” which means expanding overall contribution margin performance by acquiring the right types of patients to serve — surgical patients, for example.(9) The physician leader monitors the internal and external referral patterns of the practice with an eye toward opportunities to profitably grow the practice at elevated levels of investment efficiency and productivity, largely aimed at type-1 and type-2 opportunities as described above.
10. wRVU comparisons within and across providers. The wRVU is an accepted and practical measure of provider work effort across clinic specialties for physicians and other licensed providers, and while commonly used in provider compensation plan designs,(10) there is much more value to be derived from structured examinations of wRVU production patterns within and across clinical specialties.
Examples include applications of wRVU productivity to routine, complex and surgical care, wRVU distributions across diagnostic categories, wRVU productivities attributable to new and existing patients, wRVU productivity distributions across payer types, and how various types of wRVU productivity predicts revenue and contribution margin performance (multi-variate analytics modeling applied).
Variations on the applications of wRVUs as practice productivity and financial performance model metrics extend beyond the examples provided here. The physician leader’s job is to discover and analyze wRVU patterns that portend medical risk, regulatory risk, financial performance risk, and compensation plan incentive misalignments for the practice.
11. The medical practice income statement (often referred to as the operating statement) performance and trending. The lion’s share of operating expenses for medical practices is comprised of people costs: provider compensation and benefits and staff compensation and benefits. Physician leaders’ focus here is on contributors to operating financial performance patterns that derive from provider practice patterns that produce financial performance deterioration and are fixable with appropriate leadership interventions.
The investigative process calls for the physician leader to examine the revenue production and operating expense structure for patterns, operating ratios, and trends that contribute to financial productivity increases and deteriorations. Wouldn’t this be a waste of time for physician leaders? Not when increases in financial performance derive from provider behaviors that potentially put the organization at risk.
Contributors to problems here are frequently found in the areas of over-coding clinical services, unnecessary diagnostic testing, unnecessary procedures, the over-prescribing of medications, billing for services that weren’t provided, inappropriate patterns of ongoing care, and others.
12. Designs, applications, and examinations of the behaviors and productivities of physician/APP teams. The economic and financial performance of physicians and advanced practice professionals are not always economically and financially productive, nor do they always properly align with an organization’s financial performance requirements.
Studies of the applications of physician and APP care models have demonstrated successes and failures.(11) Models designed for the clinical specialties seem to have more economic and financial productivity success; primary care model designs can produce wide ranges of economic and financial productivity outcomes, including negative results.
While the finance department may be able to assess the “bottom line” performance of the various model applications, it isn’t prepared to diagnose the “why.” It takes a physician leader to identify, examine, and opine on the reasons for performance, whether positive or negative. The answer is always in how the model aligns and affects behavioral incentives, including compensation paid to physicians who lead each team.
13. The acquisition and applications of expensive ambulatory diagnostic and procedural/surgical services programming. Aside from trauma care, inpatient maternity, and hospitalizations for medically complex conditions, the lion’s share of care, moving forward, will be delivered in ambulatory care environments.
Medical groups, especially the larger single and multispecialty groups, will have ample opportunities to diversify into profitable ambulatory diagnostic and procedural/surgical services. It should be noted that while many of these services can be highly profitable, even in the face of downward pressures on health unit price and total costs of care, such services are not “automatically” profitable. Here again, decision making is more than a simple math problem.
Well-prepared physician leaders must be at the table with the knowledge to guide the strategy and sequencing of related ambulatory care programming strategies. Specific areas for physician leader analysis pertain to oversight of volumes projections, procedure utilization and unit production expectations, existing physician skill sets and competencies, payer mix effects on revenue assumptions, and needs related to provider recruiting requirements, to name a few.
SETTING THE RIGHT CULTURE
Seven practical lessons apply to establishing the right culture of cooperation:
The interested physician leader is already a part of the practice, or the right physician is acquired.
The physician leader need not be an active patient services practitioner, but it helps.
The physician leader is properly prepared with a related business degree, deep experience, or preferably both, and they want and embrace the role.
The required job description is tailored to the role, and peers and administrative staff are made aware of the purpose and scope of the job to minimize disputes about “boundaries.”
Related support staff in the finance department are directed to provide the required support.
The physician’s dyad partner is engaged early and is invited to help prepare the way.
To the extent that there is a position superior to the designated physician leader, a CEO, for example, that person is responsible for setting the table organizationally.
The physician who assumes the role needs to be wary of being seen as the “provider behavior cop.” Although there are times when the physician leader must also be the bearer of bad news, in the ideal, the physician leader in the role will be seen as the bridge between the providers and management, on-duty to ensure that the best decisions are made to keep the organization on track to pursue its mission and vision, while keeping the organization sufficiently productive and fiscally sound.
Finally, the physician must have protected time to execute on the job requirements described here, with the understanding that when the job is done well, the economic and financial gains produced for the practice can be orders of magnitude greater than time spent as a practicing physician.
References
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Zismer DK. Managing Strategic Risk Effectively Requires Shared Beliefs. BoardRoom Press. June 2019;30(3). GovernanceInstitute.com.
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Zismer DK. Connecting Operations, Operating Economics, and Finance for Integrated Health Systems. Journal of Healthcare Management. 2103;58(5):314–319. https://doi.org/10.1097/00115514-201309000-00004
Christianson, JB, Zismer, DK, White, KM, Zeglin, J. Exploring Alternative Approaches to Valuing Physician Services: A Report by Staff from the University of Minnesota, Division of Health Policy and Management for Medicare Payment Advisory Commission (Med PAC). Washington, DC, June 2011.
Zismer, DK, Christianson, JB, Marr, T, Cummings, DJ. An Examination of Professional Services Productivity for Physicians and Licensed, Advance Practice Professionals Across Six Specialties in Independent and Integrated Clinical Practice: A Report by the School of Public Health, University of Minnesota, for the Medicare Payment Advisory Commission (MedPAC). Washington, DC, July 2015.