Accountants are always looking for an appropriate time of the year for their clients to work on specific issues.  During the preparation of tax returns and financial statements, it is always an appropriate time to look back at the previous year and determine whether there is information in your financial statements and tax return data that can help you understand your business better, and determine whether changes need to be made going forward.  Understanding how changes in the costs of operating your office area is generally of high concern for physicians.  In general, physician expenditures on office-related expenses can be anywhere from 35% - 60% of their gross revenue.  These obviously include a couple of individual big items, like medical malpractice insurance.  Each area of expense in running your office can be analyzed.  The fact that an expense went up is not necessarily bad.  Likewise, the fact that an expense went down is not necessarily good.  You need to understand how each of the expense areas impacts the operation of your office and your overall efficiency to earn a living from your professional practice.

One additional area for analysis of the changes in operating expenses is from month-to- month, quarter-to-quarter, as well as from year-to-year.  The two main areas for analysis, separate from an individual review of payments out of each account, are benchmarking your practice against other similar practices, and looking at your practice over an extended period of time.

Benchmarking can often be done by utilizing your financial information and converting it into a format similar to formats utilized by other organizations.  Groups like the American Medical Association and the Medical Group Management Association often will publish information with regard to statistical analyses of practice expenses.  Understanding how your practice compares to similar practices on a doctor-for-doctor and/or dollar-for-dollar basis can often be enlightening and provide guidance on those areas that you might want to further investigate.  The further investigation will then uncover whether your practice needs a “tune up” with regard to operating efficiency.  In addition, these analyses will often show you where expenditures on your financial statements may effectively overstate or understate your real operating costs and operating profit.  An example of this might be auto expenses, where general statistics may show relatively small numbers, and your group has opted for relatively luxurious automobiles, and you may have multiple offices and hospital locations requiring a higher level of business use of automobile expense as a deduction.

In analyzing the changes in your expenses, one thing that always needs to be examined is the relative percentage of an expense to your total fee income from one year to the next, as well as on a quarter-by-quarter basis.  Certainly individual expenditures, such as meetings and seminars and malpractice insurance can be dramatically affected from one month to the next or from one quarter to the next by virtue of a particularly large payment.  For these items, annual analysis is usually best.  For most other expenditures, trends will develop early in the year with regard to increases or decreases based on either management decisions and/or outside influences.  Employee benefits will normally change based on the number of employees who are being employed, usually on a full-time basis, together with any changes that have occurred in the Employee Benefit programs. 

Over the past several years, employee benefits costs have generally gone up at rates that exceed inflation.  However, an analysis of the employee benefits may lead to more efficient buying; a decision to modify the employee benefits being provided; and/or requiring the employees to participate in the cost increases.  As an example, one client of ours had a 4.2% ratio of employee benefits to revenue for December 31, 2003 and the same client had approximately 3.4% cost for the same category for the year ended December 31, 2004.  The majority of the decrease was due to a change in the employee benefit program, and the selection of a new insurance carrier for the employees early in the year ended December 31, 2004.  Total revenue for this group increased by about six percent (6%), and the total payroll for the office (non-physician) employees increased by slightly less than one percent (1%).  During this period of time, the office administrator utilized a slightly greater mix of part-time employees, which allowed for a higher collection on the accounts receivable (the part-time employees were working in the evenings when collection calls could be made), as well as reducing by one (1), the number of employees for whom full benefits were being paid. 

In the same way, equipment rental expenses and related repair expenses may be analyzed to show whether or not optimal use of rental contracts, as well as maintenance contracts being compared to paying for maintenance on a “pay as you go” basis may give you information that is useful in future decisions.

At the same time, reducing expenses may not necessarily be a benefit to the practice.  One of our clients reduced their telephone bills significantly from 2003 to 2004, but simultaneously had a small decrease in the collection percentage on their billings.  It was determined that they had elected to cease making all long-distance phone calls from the office.  Because of this, a significant number of insurance companies were not called (they did not have toll-free, ‘800’ phone numbers available) and many of the patient accounts which were using these carriers were falling substantially behind.  This is what Benjamin Franklin referred to as: “Penny wise; pound foolish” and this phrase still resonates today in medical practices. 

At the same time, a different client made a change in the telephone service by shopping around, utilizing long-distance service buying groups within their medical association, and were able to reduce their total telephone costs from $36,000 in 2003 to $25,000 in 2004, with no decrease in actual telephone utilization and no decrease in efficiency in the accounts receivable department.  In each of these areas, only a combination of comparison to both industry (specialty) statistics, as well as your own specific statistics, can lead you to the correct questions to be asked. 

In many cases, all one needs to do is ask for certain discounts with regard to certain expenses in order to obtain them.  As was described in an article in Medical Economics (December 19, 2003), if you don’t look for discounts from any of your routine expenses, you simply won’t get them.  “A medical practice is a business”, says Paul Angotti, a consultant in Monument, Colorado.  “The physician or office manager should review contracts periodically to insure that they benefit the business, and rework them as necessary”.  (From Medical Economics, December 19, 2003, Page 49.)  This is still true with almost every type of expenditure.

While we may not be able to walk into Office Max® and make a specific deal for a relatively modest purchase, we might be able to deal with a medical supplies vendor, agree to buy 100% of our needs from them for the forthcoming year and, in exchange, receive a 10% discount from the prices that we would otherwise be paying.  This can only be done by knowing where you are spending dollars and what vendors you are currently using. 

Even in the areas of insurance, for the most part other than malpractice insurance, a full understanding of your expenses and your coverage is important in order to optimize your payments.  In some cases, buying the cheapest insurance policy could wind up being costly.  In other cases, you might find upon analysis, that you are actually overpaying on your insurance and receiving coverage that you either do not need or can not use.  Finding a good insurance agent and, in some cases, even having a comparison made by two different agents of your insurance needs will optimize your costs. 

One of the few things that can dramatically change the way your office expenses pile up is the layout of an office.  One opportunity, when a new office is being designed or redesigned, is to make certain that costs for on-going maintenance and related costs in patient flow, office staff utilization, etc., can be minimized consistent with your desired practice mode.  The number of waiting areas that are needed will impact on the furniture that is purchased, which will ultimately impact on replacing the furniture and on the maintenance cost for routine pick-up of trash, vacuuming, etc., as well as the number of staff that may be needed to move patients from one area to another within your office.  Working with an architect, together with your office administrator and accounting information, can assist you in these areas.

One area that frequently gets inadequate attention with regard to the cost issues is the information technology (IT) systems in the office.  Billing computers have traditionally been thought of as simply the cost of the computer, as well as the cost of the staff.  In fact, the relative billing efficiency of one computer system versus another can dramatically impact your staffing levels as well as your collection realization.  In addition, with the obvious change in information technology for electronic medical records (“EMR”), the use of EMR, together with billing and collection systems will dramatically change many of the cost structures going forward.  A complete analysis of your office, understanding the need for staff changes with the advent of EMR as well as how that impact on billing and collection, can dramatically alter the cost structure over the next few years.  Some practices will certainly make very efficient use of EMR and computerized systems, and will actually become more cost efficient.  Others will most likely make inefficient and inappropriate decisions, and will end up replacing systems prematurely, finding that their operation is not conducted efficiently, leading to increased costs, decreased collection; and ultimately the need to replace the system prematurely.

In summary, all of the pieces of the financial “pie” (information that comes to a practice) can be analyzed, and many of them are more within the control of the practice and the practice managers than you might think.

David H. Glusman, CPA, DABFA, Cr.FA, CFS is Co-chair of our Healthcare Services Group and has over thirty-three years of experience providing specialized services to group medical practices. Contact David at dglusman@marg.com.