Check finances, costs before consolidation

Financially stressed private practices are seeking shelter through acquisition by a hospital chain. But owners need to scrutinize their costs and expenses before entering into negotiations.

As physicians find it increasingly difficult to make ends meet in independent practice, more and more practices are looking to hospitals for support or even acquisition. The growing trend of hospitals buying practices and/or employing physicians has created another reason for financial due diligence.

If your practice falls into this category, now or possibly in the future, you need to understand where it stands financially. Looking closely at the financial aspects of a practice can help management make the operational changes needed to increase efficiency, decrease costs and improve performance and quality.

Financial statements (from an accountant or accounting software) can be used to generate ratios and income information that indicate the financial health of a practice. Studying accounts receivable provides additional information about how long it takes to get paid by various payers and patients, as well as how well the practice collects what is due. Trending all of these data over time can also tell the practice a lot about what might be happening in a variety of areas.

But one analysis a practice should do before going into any negotiation is to find out how much it costs to take care of patients. If knowledge is power, then that information will arm you with a financial awareness that will surely help in your negotiations.

A relatively easy approach is to use relative value units (RVUs). Most practice management systems can report the frequency of services provided to patients by Current Procedural Terminology (CPT) code (sorted from highest to lowest). A simple spreadsheet can then convert those services into total RVUs and the cost to provide services per RVU, and thus the cost for each service provided. This exercise is useful for a variety of purposes, but primarily it allows the physician-owner to better understand and respond appropriately when the accountant reports that expenses are higher than revenues, or the hospital administrator makes an offer, or a large payer wants to renegotiate fees.

This exercise should not substitute for a competent professional who can conduct practice valuation, review employment or merger/acquisition contracts, and perform other similar negotiation functions. It should, however, form the foundation to a better financial understanding of a practice.

ACP's Financial Management Tools include, among other financial analysis spreadsheets, an RVU costing tool, available online. It is a free download for members.