Independent physician groups (whether a solo practitioner or a 100+ physician mega group) really should be viewed as mini corporations requiring the same application of standard business practices as traditional non-physician businesses. The physician groups that routinely apply these practices are typically better positioned for long-term success and survival. Conversely, those groups that don’t make the effort are often disorganized, disconnected from the evolving needs of their respective facilities and financially weak.

One of the key standard and highly-recommended business practices is to conduct an annual evaluation of your group’s general performance including, but not limited to:

  • A review of professional staffing requirements, including any pending departures (or physicians entering into a part-time or reduced call scenario) and recruiting needs based on volume, productivity and/or specialty need;
  • A review of group business expenses including their overhead cost structure;
  • An analysis of the group’s benefit and compensation structure and;
  • An evaluation of the group’s revenue stream and payer agreements.

While it is likely that more informal and episodic discussions of one or more of the above areas transpire from time to time, a more formal process is highly recommended as it will likely add to the efficiency and effectiveness of implementing any of the recommended changes.  While finding the time to undertake such an endeavor can be challenging, the annual investment of time will help ensure at least the following:

  • The level and composition of your group’s staffing is consistent with both group and facility expectations;
  • Your practice’s overhead expenses are consistent with industry standards;
  • Your group’s benefit and compensation packages are competitive and structured to accommodate individual group member needs;
  • The group has a comprehensive understanding of all revenue streams and;
  • The group has a well thought-out action plan for the upcoming year.

It is unrealistic and would be likely inefficient if the entire group participated in this annual evaluation.  Rather, a subset of the group – either a business committee or executive team – should be assigned to undertake this key initiative in conjunction with the group’s business advisors. The findings of these analyses and discussions should include recommendations (with any associated analyses and caveats) as well as any significant areas of concern, and should be presented both verbally and in writing to the group’s Board of Directors.

The Process

When evaluating the key business components of your group, there are a number of things to consider.  Below are a set of common discussion items that can be used to help navigate the direction of each of the practice evaluation components listed above. Of course, each physician practice will have their own set of circumstances and priorities to review and therefore, the below items should be modified to accommodate your specific practice. 

 How Well Do You Understand Your Practice

Analyze the business

Typically, there are one or more major issues confronting a physician practice which should serve as the foundation for conducting this evaluation. For example, if your group’s main facility has recently made you aware of numerous performance issues, these expressed concerns should likely provide the framework for evaluating each key aspect of your practice. Another example would be if the health system has recently indicated they will require your practice to begin covering a new facility within six months, this too will direct much of your discussion.

So, while you are a physician, you are also an owner of a business and therefore should be able to answer the following questions: 

  • How are the key relationships and contracts with facilities?
  • What is the practice’s financial position? (A/R, Debt, Cash in Bank, etc.)
  • Is the practice well-positioned for the future of healthcare and the facility’s needs?
  • Who is filling leadership roles within the practice and what is the plan to ensure leadership is in place for the future?

Physician Staffing, Productivity and Procedure Trend Review

The largest expense within any physician practice is their professional staffing. Therefore, it is essential to have a solid understanding of the optimal staffing for your practice. The term “optimal” in this context refers to staffing levels that:

  • Allows for exceptional patient care;
  • Satisfies any contractual or otherwise service expectations of the facility(ies) and;
  • Maintains a compensation & benefit structure that is competitive and rewarding for the group’s owners and potential recruits. 

Of course, each physician practice has its own model of what is deemed as “optimal” given its culture and how its owners value time off vs. compensation. Annually, the practice should identify the following:

  • The number and average work relative value units (wRVUs) for the practice and for each individual physician for the current and prior years.
  • Identify trends by facility and/or each key component of the practice. 
  • The same as #1 above but for each individual physician per day worked.
  • The number of procedures for the current and prior years, again by facility and/or each key component of the practice.
  • Do a thorough review of staffing and ask:
  • Is the practice adequately staffed for existing volumes?
  • Are there contract changes to anticipate (e.g., a physician on shareholder track will receive two additional weeks of vacation effective July 1st)?
  • Are there any planned or anticipated departures in the near future and/or will any physicians be working under a less demanding schedule?
  • Are there are recruiting requirements and if so, are there any specific training requirements perhaps based on either group and/or facility needs?

With the above data, your practice can make sound business decisions in the event it is presented with a new service contract, loses a service contract, expanded service hours are requested or a physician is seeking a part-time or reduced/no-call employment track near retirement.

Business Expenses & Overhead Cost structure

An annual review of the practice’s business expenses should be completed.   The goal of this assessment is to identify any business expenses that have been trending upward or expense outliers.  Common questions to ask may be:

  • What were overhead (non-clinical) expenses as a percent of total expenses in the last two to three fiscal years and how do these levels compare to industry standards?
  • Did any business expense increase by more than five% over prior year?
  • Is our group overpaying for accounting, payroll and legal services?
  • Since billing and management expenses are typically a large portion of total overhead expenses, does the group have the most-effective option (e.g., should we consider outsourcing these functions?

Benefits & Compensation structure

Annually, practices should evaluate their compensation and benefit package. This evaluation should not only include a comparison to similar groups in the same market, but also to itself in the prior year.  Compensation and benefit packages can vary greatly, again, due to the group’s culture and the value of time off versus money.

When comparing your practice to others, the questions below will help guide the analysis:

  • What was the average shareholder’s compensation in the current and prior years?  (W2, K1, etc.)
  • What was the average W2 per Work RVU for the past two years?
  • Are we offering a benefit package that is best suited for each individual member of the group including retirement, health, disability, vacation time, education expenses, etc?
  • How does the group’s compensation compare to other like practices as it relates to starting pay, paid time off, etc.? 

Analyze the practice’s revenue and contracts

One critical component of a group’s annual evaluation of key aspects of their practice is the source and composition of group revenues not unlike any other small business owner. This evaluation could encompass the following:

  • What is the percentage of group revenues from either each facility and/or each service line within each facility?
  • How has each of these revenue sources changed over the past two-three years both in absolute terms and as a percentage of group revenues?
  • What is the profitability of each revenue source considering both professional staffing requirements and a pro rata share of overhead expenses?
  • Are any of these revenue sources at risk including any facility financial support and does the group have a plan on how they would adjust to accommodate any significant decreases in one or more revenue sources?
  • Has the group conducted a detailed revenue forecast?

Conclusion

Establishing a business committee and formally addressing these issues will add great value to your practice. It will assist in getting to know the practice and truly understanding it from a business owner’s perspective.

Jeff Akers CPA

About the author

Jeff Akers specializes in financial, business advisory and practice management services for medical practices. He provides strategic and financial analysis, performs practice reviews, prepares compensation plans, implements financial management best-practices and internal controls, and prepares cash flow forecasting for medical groups.