American College of Physicians: Internal Medicine — Doctors for Adults ®

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As costs rise, doctors fighting back

From the February 1999 ACP-ASIM Observer, copyright © 1999 by the American College of Physicians-American Society of Internal Medicine.

By Bryan Walpert

Patricia Webley-Bethune, MD, says that the changes taking place in medicine are stretching her budget—and costing her money.

In the past, for example, patients used to wait until they had a serious problem before coming to see the Selden, N.Y., internist. Now, they are just as likely to come in with common colds or other simple ailments, often prompted by pharmaceutical advertisements that promise quick cures. Not only does Dr. Webley-Bethune need additional staff to take care of the increased patient load, but the capitated payments she receives for many of those patients barely cover her expenses.

Then there are the burgeoning mountains of paperwork created by the growth of managed care. That, too, requires additional staffing. For example, Dr. Webley-Bethune pays one person to do nothing but slog through managed care referrals.

"We notice that no matter how much more business in terms of more billing we do," Dr. Webley-Bethune said, "we still end up with cash flow problems because we have so much in expenses."

She's not alone. According to the latest cost data from the Medical Group Management Association (MGMA), median operating costs per full-time physician at internal medical practices in 1997 were $216,684, up 47% from a decade earlier. (For a copy of the study, call MGMA at 888-608-5601.)

Like Dr. Webley-Bethune, many physicians say managed care is a big reason for increased costs. Even as health plans force practices to hire more staff to handle referrals and track outcomes, they are paying physicians less. Collections as a percentage of charges is declining, in large part because managed care plans continue to deeply discount physician fees. MGMA data show that in 1997, for example, the median internal medicine practice collected 74% of its charges, down from nearly 88% a decade earlier.

"Revenue is not keeping up with increasing costs," said Lisa E. Pieper, MGMA's survey operations project manager. "The struggle continues to be to increase revenue and decrease costs."

So what can you do to cut your costs? Experts say the first step is to compare your practice with similar practices around the country. MGMA statistics, for example, offer a snapshot of how much practices of various sizes and specialties are spending either per physician or as a percentage of revenue on such expenses as midlevel providers and support staff.

"I find it extremely difficult to pinpoint overhead expenses and how to reduce those expenses if I don't know how I compare with somebody else," said Robert Connelly, a consultant with The Health Care Group in Plymouth Meeting, Pa. Good comparisons allow physicians to know exactly where their costs are out of whack and then focus on reducing costs in those areas, he said.

Once you've got those numbers in front of you, experts say you should focus on these areas:

  • Personnel. After physician pay, most practices spend the most money on employee compensation. MGMA data show that when it comes to support staff (a category that includes everyone from nurses to housekeeping personnel), median internal medicine practices spend $109,550 per full-time physician, or about 29% of their revenue. (The chart gives a detailed breakdown of personnel costs, but because of the way MGMA collected the data, the numbers do not add up to $109,550.)

    While compensation may seem like an obvious place to start cutting, it is one of the most difficult budgetary items to trim, in part because billing and other business functions are so complex.

    In fact, practice consultants say that the trend is to pay staff members more, not less. "There's pressure to increase spending for staff compensation because the skills required to survive are generally on a higher level than in the past," said C. David Carpenter, a consultant with PCSi HealthCare Consultants in Southern Pines, N.C. "Experienced people are hard to find, and they are demanding higher salaries and getting them."

    In addition, keeping salaries competitive will keep your employees happy, which will reduce turnover and ultimately save money. Each time an employee leaves, you have to spend money advertising, spend time interviewing and spend a huge amount of time training. When all is said and done, you lose weeks—or even months—getting new employees to their peak efficiency.

    "Physicians commonly say, 'Since I'm getting less money, I'm going to reduce salaries of my staff; they should all share what I'm experiencing,' " said Evelyn Eskin, president of HealthPower Associates Inc., a Philadelphia health care consulting firm. "That's not a realistic alternative. It's so expensive to have turnover that you want to retain the good employees you have."

    Some physicians say that actually increasing your staffing costs can save money—provided the employee is worth it. R. Scott Ream, FACP, an internist with a four-physician group in Austin, Texas, has billing department employees who have been with his practice for between five and eight years, and a nurse who has been with him for 14 years. He said that his billing personnel are so experienced that they're quick to catch and resubmit unpaid bills, while his nurse knows patients so well that she can handle telephone calls and coordinate care without making him drop what he's doing to get on the phone with the patient. "Our employee cost per person might be a little higher than average," Dr. Ream said, "but the efficiency of it probably saves us lots of money."

    A practice's real problem may be overstaffing. Check the data to see how your practice compares. MGMA statistics show that the median internal medicine practice employed 3.78 full-time support staff for each full-time physician.

    If you find that you are overstaffed, Mr. Connelly said, consider attrition or even layoffs. If an employee leaves, consider asking the remaining employees in his area to split that position's duties—in exchange for a portion of the savings. If an employee earning $20,000 a year leaves, for example, have two remaining employees pick up that person's duties—and allow them to split $10,000.

  • Efficiency. But you don't necessarily have to pay more to increase staff efficiency. In Dr. Webley-Bethune's office, for example, employees are cross-trained. For example, if the office is slow, the receptionist works the front desk while the front desk coordinator, who is paid more, works on patient referrals, said Susan Genrich, the practice's office manager.

    In addition, the practice keeps its X-ray technologist on call instead of paying her to sit around the office with nothing to do. When she comes into the office to work, she's paid $15 an hour; when she's on call, she's paid only $6 an hour.

    Overtime is another good place to look for savings. In Frederick, Md., Internal Medicine Associates cut its overtime last year by staggering shifts for receptionists and nurses. The idea was to have fewer people working during the practice's slow times and to make staff available when physicians worked late without having to pay costly overtime wages.

    The practice also began requiring employees to clock in and out. "People would sometimes disappear for lunch for a little longer than they should have or leave a little early," said Ali J. Afrookteh, FACP, a subspecialist in sports medicine and managing partner of the six-physician group. "Our goal is zero overtime."

  • Insurance. You might not want to change your benefits package for fear of angering and losing your employees, but saving money on benefits doesn't have to mean cutting back.

    Infectious Disease Specialists of Atlanta, a group of three internal medicine subspecialists with 11 employees. The group was able to increase its coverage while reducing costs by working with a management company that also takes care of the practice's payroll, offers an employee-assistance plan that includes three free visits to a counselor, provides the practice with a life insurance plan, and offers an employee pension plan that the small group otherwise couldn't afford. The group gets all of those options for less than the cost of its old health insurance plan.

    Such stories illustrate the need to shop around for all your insurance policies—health, malpractice, worker's compensation and business—at least once a year. For comparison, MGMA data show that median internal medicine practices in 1997 paid $21,466 per full-time physician for support staff benefits, $4,324 in liability insurance and another $1,250 for other insurance premiums.

    Mr. Connelly said he was able to save a group of four surgeons in Pennsylvania $40,000 a year just by shopping around for malpractice insurance.

  • Budgeting and billing. Dr. Afrookteh's practice in Frederick, Md., worked with its software vendor to design a program to better manage its budget. He can now track everything from how much the practice spends on laboratory supplies to collection ratios. "Every month we can look at it and ask the intelligent questions we could never ask before," Dr. Afrookteh said.

    And if employees are spending a lot of time printing bills and stuffing envelopes, consider submitting your insurance claims electronically. It may cost 45 cents or so to send your claims through a clearinghouse, but you'll be saving money on paper, printer ink, envelopes, stamps and—most importantly—staff time.

    Ask the vendor who sold you your practice's computer system for help. Electronic claims programs are often available in existing computer systems, but just not used, said Ms. Eskin, the consultant from Philadelphia. So are electronic scheduling, collection letters and other software features. "They're either built in or people bought the modules but never turned them on," she said.

  • Supplies. If you're buying supplies from the corner office store, you can probably do better.

    According to MGMA data, median internal medicine practices paid $7,374 per physician for medical and surgical supplies and another $5,835 in office supplies and services in 1997. Instead of going down to the drug store to buy stationery, said David B. Roberts Jr., a CPA with Aiken, Carroll & Co., an accounting firm in Fairfax, Va., physicians should "scour the market," whether it's for pens and pencils or syringes and gauze pads.

    And don't be afraid to ask for bids. "You add up what you buy and you put out a proposal: This is how many rubber gloves we use in a year and this is how many syringes," said Randy Bauman, principle with Delta Health Care, a consulting firm in Brentwood, Tenn. "Try to entice them to give you a lower price for the volume you give them."

    If you're worried that you don't have sufficient volume, team up with others. Dr. Ream's four-physician office in Austin, for example, joined with other practices to get some leverage when seeking bids. Jan Ream, the practice's office manager and Dr. Ream's wife, estimated that the group saved about 30% on products such as syringes, needles, ECG supplies and even toilet paper and paper towels.

    In addition to lowering prices, you may also be able to negotiate terms. Some companies, for example, offer discounts for early payment, such as a 2% discount for full payment in 15 instead of 30 days. And Dr. Webley-Bethune's office negotiates for free delivery.

    Finally, make sure that you have a system in place to avoid unnecessary purchases. Dr. Afrookteh's practice in Frederick, Md., used to let several employees order supplies, as long as a physician signed the order. The problem was that busy doctors rarely questioned orders totaling only a couple hundred dollars. Now, to make sure that spending is in line, all requests go through the office manager, and Dr. Afrookteh tracks the spending monthly.

  • Equipment. Experts say that what holds true for low-cost supplies like pencils and syringes—shop around—also holds true for large, more expensive pieces of equipment. In 1997, median internal medicine practices paid $5,106 per physician for furniture and equipment. And similar strategies apply. "If you go out and get bids on fax machines and copy machines you can drive those prices down a lot," said Mr. Bauman from Delta Health Care.

    When Linda S. Long, office manager for a solo internist in Bright, Ind., was looking for a new computer system in 1997, she interviewed a number of vendors. She was not satisfied with the prices, so she called some colleagues to find out what systems they were using and how satisfied they were with their products. The networking paid off when she saved an estimated $50,000 on her office's system.

    Another tip is to consider buying instead of leasing your medical and office equipment. Leases often require interest payments of 20% to 40%; with interest rates at all-time lows, you can often finance outright purchases for around 8%, said Mr. Roberts, the accountant from Fairfax.

  • Rent. If your rent seems out of line, find out what the going rate is in your area per square foot. Occupancy is a hefty budgetary item; median internal medicine practices paid $26,000 per physician, or about 6% of revenue.

    Mr. Connelly from The Health Care Group said that one strategy is to approach your landlord and ask for a reduction in rent. An alternative is to use the space you have more efficiently to boost revenue. Dr. Afrookteh's group, for example, was able to turn one of its administrative offices into an examination room so a new partner could see more patients.

  • Advertising. According to MGMA data, median internal medicine practices spent $752 per physician on promotion and marketing. Dr. Ream's office cut its Yellow Pages advertising bill in half—producing $200 a month savings—by simply listing all of the practice's physicians under the practice's ad instead of listing individual physician names. "We're a well-established practice," said Ms. Ream. " We don't get many calls from people thumbing through the yellow pages."
  • Miscellaneous costs. The "miscellaneous" line in your budget may seem too small to go after, but MGMA data show that median internal medicine practices spent more than $9,000 per full-time physician—more than 2% of revenue—in this category in 1997.
  • Results. So how much can all of your efforts save? Dr. Afrookteh estimated that his practice is saving about $25,000 a year or more because of all the changes he made in 1998, including adding an exam room, consolidating billing under one efficient manger, cutting overtime and tracking the budget.

Finally, a word of advice: Make sure you're cutting with a good reason. Mr. Connelly from The Health Care Group described one practice that, concerned about overhead, got rid of its water coolers to save $4,000. The problem was that everyone, including patients and employees, complained.

In the long run, Mr. Connelly says, the savings were not worth the ill will. "There are a ton of ways for practices to pinpoint areas where they can make some positive changes," Connelly said. "That's different than the physician saying, 'Let's start cutting here.' "

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