Ten years ago, a giant slice of pizza at my favorite pizza stand on Broadway was $2.50. It’s up to $5.00 now. The cost of doing business goes up, and naturally the cost of services goes up too. The healthcare business, somehow, has its own broken rules. Our reimbursements tend to trend downward over time but the cost of doing business continues to rise over time.
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For instance, the professional fees for a carpal tunnel release have gradually drifted downward over the last decade, and it’s insulting how little it was reimbursed to begin with. It doesn’t matter how quickly the surgery could be performed or how “easy” a skilled hand surgeon could perform it–just look at how many years of training it actually takes to get to the point to offer the surgery! The cost of delivery of healthcare goes up over time, so our net income gets eroded.
Recent years have shown that many smaller medical practices have been absorbed by large healthcare systems or sold to private equity. Some of you in private practice might even be thinking that selling out is the way to survive. But that notion is economically incorrect.
Small medical practicesought to be significantly more nimble than their larger counterparts.
One important factor in the plight of medical practices is that not all doctors have the time and energy to pay attention to optimizing their business practices, and that is where problems arise. What I’ve found to be most effective in increasing the bottom line in a medical practice while not having to see more patients is to lower your overhead.
Those of you in private practice have the opportunity to increase your bottom line without seeing more patients or doing more work. The name of the game is controlling your own costs.
Lower your overhead
The biggest confusion I see about business expenses is that they can be “written off”. It’s a common word that sometimes is used to imply that some sort of cost isn’t hurting the business. Some doctors even erroneously use “write off” to mean that they didn’t bill the patient.
Wrong. Wrong. Wrong.
There is only one good business definition of “write off”, and it means that an expense to a business can be an “above the line deduction” from the revenue for tax purposes. For example, if you collect $100 from a day of selling lemonade and the cost of the lemons, cups, sugar, and water cost you $20, your net profit to be taxed is $80. Your $20 is a business “write off” but it’s easier to comprehend if you called it a business expense. In medicine you can also refer to unpaid/unreimbursed services as write offs too, but that’s not going to increase your income.
A medical practice will have significant expenses to deduct from its revenue, and many doctors take pride in their crafty accountants (sorry, no offense to accountants!) that find interesting expenses to deduct.
Sorry folks, but finding extra deductions isn’t going to make your richer.
It’s like buying an $80 juice mixer (thrown away after using, of course) to make lemonade in the example above. You’ve effectively deducted your entire gross revenue of $100 so that you aren’t going to pay taxes. You’re also not going to make money.
Lowering overhead means buying lemons on discount or using bottled EZ-lemon juice.
The problem with most physician practices and overhead is that physicians are too busy to handle the details outside of the medicine. Some doctors think that they can overcome bad overhead by seeing more patients, but that is the wrong move. At some point, you’re going to break down from working harder or longer hours.
The larger the practice is, the harder it is to limit expenses and observe the problems that will increase the bottom line. We often delegate these tasks to the practice manager or whoever is in charge of operations. Sometimes you’re going to have a superstar who can micromanage these details better than anyone else, but you’re really rolling the dice.
If you have a competent manager that you want to delegate your expenses to, you could incentivize your manager to lower expenses. However, if you can spare the time and effort it is best to learn about the expenses yourself so that you can audit the books or handle some of these responsibilities if your manager is out.
The easiest targets of lowering overhead is to assess all of the recurrent costs. Cable and Internet companies are notorious about ratcheting up prices after the promotional period, and you shouldn’t have to be the sucker. All of these prices can be negotiated down or even cut, and will save significant dollars over the lifetime of a medical practice. Other recurrent expenses include:
- Utilities – find the culprits like air conditioning or leaky toilets to save money and the environment. Many larger offices will have multiple heating and cooling units, so these expenses are not trivial.
- Telephone lines – These are often costs that medical practices are hesitant to tweak because we don’t want our phone lines down, but these are also reliable cheaper solutions.
- Pest control – Don’t cut the pest control completely, but sometimes there are competing companies that want your business more than your existing guy.
- Office items – copier paper, printer toner, folders. Just because you might have a purchasing plan through your favorite office superstore doesn’t mean that you’re going to save money through them. Shop around. Not everyone needs to have a desk calendar at work either!
- Service contracts – medical device companies are notorious for gouging doctors just because they are doctors. Sometimes companies aren’t willing to budge, but befriending your rep or finding a reason for them to discount for you is key (maybe you’re the highest volume user of their device…)
- Marketing expenses – These expenses consume significant dollars especially in practices that offer elective services. Make sure that they are giving you appropriate ROI.
Every single one of your recurrent services will eventually raise its prices, and paying attention to some of these costs can amount to a five figure monthly expense (sometimes even six figures). Remember, your reimbursement schedule through Medicare isn’t going up, so something has to give so that you don’t make less money in future years. In a practice with $1 million revenue, a 5% reduction in overhead is going to save you $50,000! Many medical practices have significantly higher revenue than this. Over the course of a career, this can add up.
Remember. Just like your lemonade stand, paying attention to your overhead is the key to running a successful medical practice.
What aspects of your private practice have helped you financially?