What’s the Cost?
As PMI travels the country to work exclusively with Pediatric practices identifying areas to improve their financial and operational performance, we find that many are unable to state the cost to provide care. Simply put: what does it cost to provide care for each child that comes into the office? We find that most practices are intimidated by the idea of bridging information from their practice management system with their accounts payable system such as Quickbooks. While it seems tough to figure it out, it is really simple…
The reality is that a practice has two options to increase profitability: increase revenue or cut costs. With managed care plans not likely to increase rates as we hope, practices need to focus on the two things they have 100% control of: number of patients seen and the cost to provide the care. While most Pediatricians are already operating at maximum capacity, the best thing to do is focus on the cost.
Being able to track your cost per encounter is extremely important for a variety of reasons:
- Better manage your practice overhead
- Readily identify expense concerns
- Identify opportunities to reduce expenses
PMI finds that between the staff labor and vaccine costs, it accounts for well over 80% of the expense to provide care to the children. Simply put, what is your practice doing to ACTIVELY MANAGE your two largest expenses? This leads to a few things to consider:
- Does your practice have set salary ranges for each position in the practice?
- Does your practice have set goals that must be attained for employees to receive bonuses?
- Does your practice have a set program to effectively monitor and rate each employee’s job performance?
- Are you reviewing your vaccine costs quarterly to make sure you are getting the best pricing?
Math Lesson for the Day….
The easiest way to determine your cost per encounter is to take the total operating expense (prior to provider compensation) and divide by the number of encounters. While not exact, it does provide some useful information. With it you can track the labor, vaccine, medical supplies and anything else on a per encounter basis.
Let’s assume a practice had 1,000 office visits last month and incurred $90,000 in operational expenses. The cost per encounter is $90.00. Of this amount, $30 was for staff labor, $8 for vaccines and the rest for general overhead. By comparing to the average revenue per encounter, one can quickly see what is left to pay for the provider’s salary and benefits. (This is really helpful when a practice begins thinking about adding another provider.) With this simple method, anyone with a reasonable skill set can use a calculator or Microsoft Excel to figure it out.
Well versus Sick Visits
Some PMI clients have gone so far as utilize the Medicare RBRVS system to determine the “cost per work-RVU”. Using such a system allows practices to examine the cost per encounter in granular fashion to differentiate the cost to provide sick versus well visits. This is straight-forward process that allows you to:
- Convey to managed care plans the actual cost to provide care- possibly providing justification for a rate increase
- Decide if managed care reimbursement is sufficient given your practice overhead structure
- Examine the impact of accepting certain contracts
PMI encourages every practice to find ways to track their cost each month. Hoping for revenue increases is not a safe way to increase your profitability. Calculating and tracking your costs each month is what is needed to effectively manage your practice.
Kindly reposted here with permission from Paul Vanchiere, Pediatric Management Institute
To learn more about this important financial metric or any of the others important for Pediatric practice management, click here.