Practice Management Series

2004 - 2005

ASCOClinical Practice

Series

1. Adapting to Changes in Medicare

2. Generating Practice Efficiencies

3. Organizing for Service Expansion

Practice Management Curriculum

Who should attend

Physician Leader of the Practice President of the PA, Founder

Practice Administrator CEO, Executive Director, COO

Contracting Officer Contract Administrator, Director of Billing

Clinical Manager Medical Director, Nursing Team Leader

After this session, you will be able to:

Express changes needed in the practiceUnderstand “investment mentality” and classify your practice in terms of investment potentialList the common characteristics of effective physician practice leadersUnderstand the relationship between the physician practice leader and the practice administratorApply simple self-assessment tools to position your group to take advantage of market changes today

The Old DaysMedian Per FTE Medical Oncologist

Compiled from MGMA Cost Survey through 2004 Report on 2003 Data. 2004 trending by third order polynomial by Oncology Metrics, LPW

hy Change?

R2 = 0.989

R2 = 0.9902

R2 = 0.9208

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Th

ou

sa

nd

s

Total Medical Revenue Total Operating Costs Rev. After Operating Costs

Eroding MarginsPer Oncologist with projections by Oncology Metrics

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

2000 2002 2003 2004 2005

Drug Cost Drug Revenue Drug Marginal Revenue

Why C

hange?

ThenNow

Why Change

Because we must change Population economics demand it

GDP growth can’t match Boomers’ march into SEER cohorts

Other sectors of medicine have done it DRGs, Cardiology, Radiology

Market dynamics support it“Everywhere the old order changes, and happy are those who can change with it.” Sir William Osler, 1895

Because it is wise to change

Developing Investment Mentality

Risin

g D

em

and

Increasing Market Share

?Problem Child Rising Star

Dog Mature Investment

Modified BCG Business Growth Matrix

$

Dog ? Problem Child

Practice sees a low % of new cancer cases in marketOverall market for cancer services is stagnant, shrinking, or being consumed by competitorsPresently failing, either rapidly or slowly and showing declining period-to-period revenueStagnation of capital investmentSusceptible to sudden closingsSmart dogs join up to form a dog pack

Typical of a new practice or outreach clinic in a new service areaOperations need investmentOffer the potential of rapid growthAlways have high costs initiallyMust be properly capitalized to keep from running out of money just before they take offShows real potentialHas a sustainable customer base

Mature Investment Rising Star

High market shareStable business with revenue growth driven by existing customers and productsWeak need or desire to innovate means low to no capital neededProfits are high and the contribution margin is also highMust maintain the strong market position as competition wants to enter and claim margin

Certain growth in demand for cancer servicesDeclining or stable number of providers able to meet increasing demandSignificant barriers to entry for new competitorsFinancing mechanism for many service buyersLegacy of inefficient operations offer significant process improvement opportunitiesPromising new technology offering significant opportunity for service line expansion

$

Evaluating Product and Service Lines for Additional Investment

1. In-house pharmacy is a Product Line2. Research is a Product Line3. Chemo. Admin. is a Service Line4. Patient E&M is a Service Line5. Laboratory is a Service Line6. RT is a Service Line7. CAT/PET is a Service Line

Investm

ent Mentality

??$

$

To execute growth, you must have Management

Physician Leader Seeing patients but on a reduced

schedule About .5 FTE physician One of the founders or otherwise senior

Active in hospital or community Can say “I don’t know, let me think

about that” Was (or is) the productivity leader Trusts the administrator

To execute growth, you must have Management

Administrator Trained – MBA, CPA, MHA Can read and write basic contracts Computer literate and analytically

proficient Can say “I don’t know, let me think

about that” Trusts the physician leader

To execute growth, you must have Patients

Counting the number of new patients that are seen in your practice is the starting point of most feasibility studiesNew patients are the denominator across which to leverage investment and costs1,500 new patients/yr. can generally support a CT and/or PET with reasonable margins

Investm

ent Mentality

New Patients / PhysicianAOHA/MGMA 2003 Report on 2002 Data

124

185

231

308345

442

0

50

100

150

200

250

300

350

400

450

10th %tile 25th %tile Median Mean 75th %tile 90th %tile

Building New Patient Flow:Physician Practice Leader’s Role

Promote and support the ability of the physician team to build and maintain a powerful referral system that will provide at least 400 new patients/year/physicianDesign clinical staffing pattern sufficient to support time for physicians to pay attention to referral patterns

Building New Patient Flow:Physician Practice Leader’s Role

Build partnership and pay policy that rewards individual and group efforts to build patient referralsRoutinely measure and discuss referral patterns.Support your administrator by not allowing staff to circumvent or undermine your joint initiatives

Building New Patient Flow:Administrator’s Role

Develop reliable ways to count new patients and their referral sourceMonitor and understand the insurance status of incoming patients looking for patterns by referral sourceReward front office staff for facilitating incoming calls from referrals sources to a physicianSupport your physician leader by not allowing staff to circumvent or undermine your joint initiatives

To plan for growth, you must have Managerial Measurement

Not for tax purposes You get to make estimates and judgments On an accrual basis Revenue is booked in the month it is generated Expenses are booked when they are incurred,

whether they are paid or not Example: malpractice insurance

Cash basis – paid in January, considered January expense

Accrual basis – paid in January, expensed 1/12 each month

To plan for growth, you must have Managerial Measurement

Balance sheet shows what you own and what you owe Profit & Loss Statement shows what you earned, (whether you have been paid or not) and what you bought (whether you have paid for it or not)

Sample Balance SheetAssets O-1 Q-2 Q-3 Q-4

Cash on hand $ 65,368

$ 45,633

$ 86,921

$ 98,211

Drugs on Hand $ 17,677

$ 21,543

$ 34,655

$ 38,121

Collectable Acc. $ 1,434,344

$1,355,677

$1,423,455

$1,435,677

Total Assets $ 1,517,389

$1,422,853

$1,545,031

$1,572,009

Liabilities

Owed for Drugs $ 4,596

$ 5,601

$ 9,010

$ 9,911

Notes Payable $ 26,544

$ 26,121

$ 25,698

$ 25,275

Payroll Liability $ 13,899

$ 14,522

$ 13,655

$ 13,775

Total Liabilities $ 45,039

$ 46,244

$ 48,363

$ 48,961

Practice Net Worth

$ 1,472,350

$1,376,609

$1,496,668

$1,523,048

Managerial measurements produce Financial Indicators that are:

Important to the bottom line

Easy and reliable Benchmarked on a FTE physician basis Tied to new patient accrual

Sample P&L Per Physician Revenue O-1 Q-2 Q-3 Q-4

Cash Collections $ 962,335 $ 921,566 $1,002,652 $ 978,522

Change in Coll. AR $ (54,211) $ (78,667) $ 67,778 $ 12,222

Total Revenue $ 908,124 $ 842,899 $1,070,430 $ 990,744

Cost

Drugs Used $ 553,644 $ 405,656 $ 668,388 $ 585,056

Labor Used $ 195,214 $ 214,735 $ 189,358 $ 212,783

Occupancy Costs $ 21,569 $ 23,726 $ 20,491 $ 21,353

Administration Cost $ 86,000 $ 94,600 $ 81,700 $ 85,140

Physician Labor $ 50,000 $ 50,000 $ 50,000 $ 50,000

Total Cost $ 906,427 $ 788,717 $1,009,936 $ 954,333

Revenue + or (-) Cost $ 1,697 $ 54,182 $ 60,494 $ 36,411

COGS

Beginning Inventory $ 105,622 $ 117,677 $ 211,543 $ 134,655

Purchases $ 565,699 $ 499,522 $ 591,500 $ 588,522

Ending Inventory $ (117,677) $ (211,543) $ (134,655) $ (138,121)

Drugs Used $ 553,644 $ 405,656 $ 668,388 $ 585,056

New Patients 35 36 49 51

Managerial Measurement:Physician Practice Leader’s Role

Learn to read your basic financial statements: Balance Sheet, P&L, Statement of Cash FlowsAfter you learn to read them, don’t insist that other physicians do the sameUnderstand how the basic financial statements inform your managerial measurements

Managerial Measurement: Physician Practice Leader’s Role

Be the one who reports managerial measures to the physicians of your groupOnly report the three managerial metrics you think are most important: for example New patients/FTE MD ytd. vs. goal vs. prior

period Revenue/FTE MD– ytd. vs. goal vs. prior period Cost/FTE MD - ytd. vs. goal vs. prior period

Support your administrator by not allowing staff to circumvent or undermine your joint initiatives

Managerial Measurement: Administrator’s Role

Learn to read your basic financial statements: Balance Sheet, P&L, Statement of Cash FlowsAfter you learn to read and understand them, review these regularly with your physician practice leaderUnderstand how the basic financial statements inform your managerial measurements

Managerial Measurement: Administrator’s Role

Be prepared to provide supporting details when the physician leader reports managerial measures to the physicians of your groupDouble check the managerial measures to make sure they agree with the basic financial statements and are consistent with past reportsSupport your physician leader by not allowing staff to circumvent or undermine your joint initiatives

To execute growth, you must have Capital

All business expansion requires capital investmentAll business expansion that is properly executed supports both the cost of capital and repayment of capitalROI means “Return on Investment”

To execute growth, you must have Capital

IRR means “Internal Rate of Return”Retained Earnings are the source of most business capitalDebt is a tool of expansion

Investment M

entality

Understand the clinical drivers behind all capital investmentsAssure yourself that new patient referrals are not threatened by capital projectsTalk to other physicians who have made similar decisions and learn from them

Capital Resources:Physician Practice Leader’s Role

Be the financial spokesperson to your groups’ physiciansExplain the need to create capital reserves and retain earningsBe willing to equitably shoulder capital riskSupport your administrator by not allowing staff to circumvent or undermine your joint initiatives

Capital Resources:Physician Practice Leader’s Role

Capital Resources: Administrator’s Role

Perform all analysis for new product line development Capital requirements, affect on referral

relationships, cash flow, and staffing needs

Development convincing managerial measurements that inform capital decisionsEstablish banking relationships and instruments that cushion practice from capital shocks

Capital Resources: Administrator’s Role

Plan a margin of safety into every capital projectEstablish an internal “Hurdle ROI” and only recommend projects that are above that rateBe willing to equitably shoulder capital riskSupport your physician leader by not allowing staff to circumvent or undermine your joint initiatives

“Risk comes from not knowing what you’re doing.”

Warren Edward Buffett  (1930- ), Reasonably successful American financier, chairman of Berkshire Hathaway Inc.

Why do all of this?Why do all of this?