Affordable Care Act Will Squeeze Profits – So What Can You Do?

By Lisa Kianoff, CPA.CITP, CGMA

Lost in all the media hype about “affordable care” is the coming squeeze on profit margins for providers of health care under the playing field called Obama Care. Regardless of how final rules play out, informed medical practitioners must have in-depth information on the internal elements and costs of their practices to function effectively and profitably today.

 

                                                    Lots of Moving Parts

 

 

This new health care environment presents a particular challenge to a multi-faceted practice: multiple doctors and nurse practitioners, multi specialties, locations or multiple stakeholders. The challenge: track all revenues fromstandard and ancillary services, determine who generates those revenues and properly allocate them to the rightprofit centers. Lots of moving parts; particularly challenging if the growth of the medical practice is outpacing a QuickBooks-type accounting system.

 

That was the challenge for Northside Medical Associates, P.C., a growing practice in Pell City, a quick 30 minutes east of Birmingham. The timing seemed right for the clinic to offer an onsite pharmacy, extend in-house diagnostics, recruit additional sub-specialistsas part-time tenants and provide an opportunity for them to grow their practices in a secondary location. The problem: Northside’s physician shareholders had no comprehensive reports on the health of their practice to demonstrate to potential lenders or service providers.

 

What the practice did have was Mike Brennan, CPA, recruited as CFO by Dr. Rock Helms, the physician president of Northside, who recognized the necessity of better financial reporting to manage the business side of the Practice. Brennan was anexperienced business administrator, ableto orchestrate and administer the implementation of the multiple ancillary profit centers and the latest Electronic Billing systems. In a previous position Brennan had seen what decision-driving information about the practice he could get by upgrading to Microsoft Dynamics GP, an integrated business management and accounting system which could be used to design Practice-specific reports. He made the case that Northside needed a system like that capable of producing the information essential to the successful management of such a practice. We helped them implement that.

 

Brennan’s approach was to make each of the physicians, nurse practitioners and ancillary services a profit center. The result was12 profit centers, each generating appropriate reports. There was a P&L statement for each doctor and nurse practitioner throughout the year, reporting on all the lines of business, including X-ray, urgent care, Lab and Ultrasound; and a precise measurement of each physician shareholder’s contribution to the Bottom Line.

 

Parts All Moving Together

 

The system now produces 28 monthly management reports, compiling information available month-by-month and on a comparative annual basis. Some of their favorites:

 

1.    Individual Profit Center:Comprehensive Monthly Reports of Earnings in each area.

2.    Nurse Practitioner: Monthly performance of each professional by location where employed.

3.    Physician:Gross fees generated and net contribution to profit by each physician.

4.    Comparative: Month-to-month comparison of each profit center.

5.    Overhead Allocation: Total administrative overhead, by profit center.

6.    Revenue: Percentage of revenue and Net Profit generated by each Profit Center 

 

Dr. Helms says the Practice Partners/Shareholders find the reports easy to understand. “It allows us to decide whether to bring in another piece of diagnostics, expand the lab, or hire a more qualified and highly compensated employee for a profit center. It also allows us to know how to properly compensate people contributing to those profit centers,” he said.

Last year the reporting helped justify a further investment in Ultrasound equipment; not much for profit but great for patient care.

 

“Ultrasound is invaluable to have at your disposal when treating patients,” said Dr. Helms. “When a patient walks into your office with a swollen leg, for example, it sure is nice if you can tell them right away if it’s a blood clot, without having them walk to the hospital, at the risk of that clot breaking off and going into their lungs.”

 

Reporting also showed that X-ray could justify a 2nd machine in a more easily-accessed area, with a quicker return on investment, and helped make the case for adding 16,000 square feet to accommodate more specialists and that onsite pharmacy.

 

“There’s no way they could have opened the pharmacy without this system,” said the CFO. “The doctors wanted it, not so much as an additional revenue source, but as a way of effectively tracking feedback from patients about timely use of prescribed medications and making sure they were getting their refills.”

 

So it is again, that access to the right information is the barometer on how successfully the business side of any medical practice will be coming out of this next squeeze from the government. Northside’s new system will grow with the practice, so its owners will receive the best information on a timely basis, enabling them to make more effective business decisions.  These manager-physicians now see trends early and react if they see a business unit start to decline or identify areas where it becomes necessary to expand services.

 

Measure the Value of the Practice

 

“As profit margins tighten up, you’re required to be more efficient,” said Dr. Helms. “To be more efficient, you’ve got to have a very clear picture of where you are financially. This type of precise and accurate reporting allows us to do that and, to improve our financial position for the long run.

 One of the most essential elements of a strong accounting and reporting capability is the ability to measurethe value of a Practice. Ultimately,older shareholders will want to retire and sell their interest in the Practice to their youngerpartners. It is essential, when an older shareholder reaches that point, that they have not only built a successful business but have a strong business management system that can readily demonstrate that success. 

 

Lisa Kianoff, CPA.CITP, CGMA, is the founder and president of L. Kianoff & Associates, Inc. a 27-year old consulting services company that specializes in performance strengthening for businesses. A growing part of its business is helping health services companies with complex business structures strengthen their business performance using L. Kianoff developed Best Practices for multi-location, multi-specialty and/or multi owner medical companies. The company is a Microsoft Gold Certified Partner and authorized VAR for Microsoft Dynamics GP, Sage100, Sage 500, and Intacct. E-mail lisa@kianoff.com.

For the full case study on this health care provider, go to www.kianoff.com/casestudies