Outpatient Finances: The Small Things Matter

When analyzing the delivery of care and its dollar value (vs. quality value), health systems and clinicians tend to focus on component pieces of the care delivery model; that is, “…our revenue cycle is broken…” or “…our doctors make too much money and don’t produce.” I’ve been approached by health systems whose leading edge is that their physicians are overpaid or not seeing enough patients. My preamble is a query about the impediments to their production (e.g., understaffed, poor IT backbone, sub-optimal office layout). Likewise, some systems or physicians see their rev cycles (RC) myopically vs. the holistic systems that they are. So, while the aforementioned issues might be true of any given medical practice, I’d argue that each piece can complement, or damage, the profitability of a medical clinic. That is, these issues can be addressed individually but are also related to one another. They are not mutually exclusive.

In this article, I’ll paint a facile picture of the care delivery “ecosystem” to offer some insight into my thesis. I’ll use simple models to delineate a graphical picture of why I suggest what I do. Lastly, these models apply, generally, to private practices and private equity (PE)-owned clinics. Physicians who are employed (which we noodle a little) tend to have less embedded worry about expense management, etc.  

First thing’s first; let’s drop in an image of my “ecosystem.”

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Figure 1: Clinic/Care “Ecosystem”

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Figure 1 is the care delivery model in the ambulatory space. Granted, for those of you paying attention, much of the titling in the image speaks to RC activities. However, I’d argue, as I have in the past, that the RC is not simply coding and collecting but includes all aspects of care delivery.

With that, let’s look at a simple example and how the little things impact the finances of a clinic. Dr. Schmoe sees 10 level 3 (99203) new patients a week. Office visits aren’t huge cash cows but we’ll paint a simple picture of what improved access (a.k.a. a “small thing”) can mean to a practice.

Dr. Schmoe has fairly static fixed costs. But his crack administrator envisions tucking in an extra 5 new patient visits per week. This is, candidly, not overly aggressive nor onerous (provided systems in the clinic are robust/managed).

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Figure 2

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Plugging in the numbers we note that Dr. Schmoe generates $1,100 in revenue based on 10 level 3 new patients in Atlanta (using Medicare allowables). In Figure 3, note that the 5 additional visits will, all things equal, generate nearly $1,700 or an improvement of almost $600 (per week – Medicare allowables).

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Figure 3

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In Figure 3 we also crafted some nuance; Dr. Schmoe has had a coding audit and many of his level 3s are really level 4s! With an improved “new patient” schedule and proper coding, Dr. Schmoe is now generating an additional $1,400 more per week ($1,132 to $2,529).

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Figure 4

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Now, in Figure 4 we note that Dr. Schmoe was generating 16 Work Relative Value Units (wRVUs) per week with his 10 99203s. Based on an increase of 5 new patients he moves to 24 wRVUs in production. Note that when he changes his coding pattern, as I contemplated above, he has generated 39 wRVUs per week. If Dr. Schmoe is on a wRVU comp production model this impacts him greatly (more than 100% increase in “work”).

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Figure 5

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In Figure 5 we consider the compensation value of Dr. Schmoe’s production (wRVU) increase. As you can see, in a $20/wRVU comp plan, his increase in production increased his compensation (again, given improved coding) from $320 to $780 per week for new patients. Ostensibly the practice or health system is happy about this production because if they are managing the clinic appropriately, this should translate into bottom line net revenue.

Now, let’s visit this simple idea as it trickles through the profit and loss (P&L) statement. Owing that all of these items can stand alone but are inter-related, let’s look at Dr. Schmoe’s example in a practice with 9 other associates (e.g., 10 total physician-owners).

In Figure 6 below we note that all 10 physicians have the same production (10 new patients per week). In this example, Dr. Schmoe and his associates (The Group) did not have a coding audit and instead increased production by 5 new patients each reimbursing them at Medicare’s level 3 office visit in Atlanta.

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Figure 6

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Note revenue (all at Medicare rates) jumped nearly $300K for the year. We noticed a slight uptick in Staff costs (↑$10K) and Supplies (↑$2.5K) due to increased utilization and patient volumes. However, our fixed costs had no change (duh); they are “baked” into the P&L regardless of patient volume.

The net result of each clinician adding 5 new patients a week for a year translates to a net gain of $281K. Our costs increased a meager $13K but our overhead percentage (e.g., cost as a function of revenue) decreased 13 points. The physicians are “equal share” owners, so the profit is evenly divided for compensation. So, the group saw an 84% increase in profit, a “real” dollar gain of $28,177 per physician, and their comp jumped from $33.6K to $61.8K each. Not a bad look for simply adding 5 extra new patients per week per physician.

While this exercise is decidedly one-dimensional, it is directionally accurate and displays the financial value of addressing the “small things.” A few extra patients, without extraneous added cost, leads to enhanced revenue (and we didn’t even consider patient mix [Medicare vs commercial, etc.], contemplate “downstream” revenue that arises out of additional testing, surgeries, nor view through the prism of care-based “value” payments). This is a “flat” example delineating why the simple things (addition of a few patients) really matters to a clinic’s profitability and bottom line, whether a private practice, PE backed entity, or health system.

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This article was previously published on Jan 3, 2023 at https://www.forbes.com/sites/jeffgorke/2023/01/03/out-patient-finances--the-small-things-matter/?sh=7398b8f867eb

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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

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