Ophthalmologists across the country recently had a little taste of what life might be like if the ever-threatened cuts in Medicare reimbursements were to be put into place. Because Congress was unable to agree on legislation prior to June 1 to delay the cuts due to the flawed sustainable growth rate (SGR) formula, Medicare ordered carriers to hold payments for three weeks, causing cash-flow problems in many practices.
Just after those payments were released — at rates reduced by 21.3 percent — Congress passed a law that reversed the cuts and provided for a 2.2 percent increase, retroactive to June 1 but ending on Nov. 30.
While the bullet was dodged once again, the pain was felt as overall payments to practices fell dramatically and in proportion to their reliance on Medicare. During the worst part of the uncertainty, one practice called me with the plaintive plea, “What in the world do we do?”
Many ophthalmology practices derive around 50 percent of their revenue from Medicare patients, and for some retina practices, this percentage is significantly higher. If Medicare slashes reimbursements by 21 percent, an office with half of their revenue coming from that source would see their inflow of cash reduced by more than 10 percent. For most doctors, that would mean a cut of between a third to half of their personal income.
Let’s hope that a permanent fix to the SGR problem can be enacted before Nov. 30!
But what if legislation doesn’t pass and the cuts become reality? What can a practice do to survive that magnitude of a hit to revenue?
The specific answer to that question depends, of course, on the individual characteristics of each practice, but there are certain tactics that can be implemented by each doctor and each practice to make sure that chances for survival are as high as possible. Here are six that will be crucial for survival if offices are hit with a major decline in revenue:
- Get out of debt, live within your means and save some money each month. The first result of a cut in Medicare reimbursements would be an immediate decline in owner-physician income. If a serious reimbursement cut becomes reality, there will be no way for owners of practices to escape a reduction in personal income.
Because it is nearly impossible to cut the fixed costs of a practice as much as revenues would drop, owner-doctors’ incomes would be dramatically affected. Most employed physician salaries would not be automatically adjusted, but some employment contracts might be renegotiated or terminated and bonuses would be harder to achieve.
Most ophthalmologists currently earn enough that living within your means should not be difficult. Adjusting your lifestyle to spend less than you earn, paying off your debts and saving some money each month is like an insurance policy against financial ruin.
Those of us who are old enough to remember previous economic cycles often shake our heads in dismay when we see young doctors, fresh out of training, who plunge deep into debt to buy a big house on the hill and two new Mercedes as soon as they see a few paychecks from the new practice.
The key to being ready for unexpected and catastrophic cuts in Medicare or other reimbursements is to make sure your monthly financial obligations are less than what you would make, even if fee reductions take place.
- Increase your productivity. I recently heard from an administrator of a two-doctor practice who mentioned that one of her doctors produces about twice as much revenue in the same number of office days as the other. When I inquired as to why the disparity in collections, she explained that the lower producer arrives at work late, so she has instructed the staff to delay scheduling patients.
He also wants to leave the office early, so she cuts off patient appointments in mid afternoon. Worse yet, he takes time during the work day to engage in day trading and other personal activities.
The luxury of taking your job for granted will disappear if Medicare imposes draconian fee cuts. Managing your work time carefully in order to increase your personal productivity is a hedge against being devastated by fee cuts.
- Maximize the use of fixed expenses. The majority of cash outflow in ophthalmology practices goes for fixed expenses — those costs that must be paid regardless of whether you see patients or not. Fixed expenses include rent, staff payroll, insurances, etc., and the more revenue the practice can generate from the same level of fixed expenses, the more profitable the enterprise will be.
For example, a practice that has only one doctor usually has one or two days per week when he or she is in surgery and the office is consuming cash, but not generating any revenue. Adding an MD or optometrist on the days when the office lies fallow — or offering optical or other profitable services to your patients — can help reduce the average fixed cost per patient seen, increase the cash flow generated by those fixed costs and increase the practice’s profit margin to soften the blow of reimbursement drops.
- Control your expenses. Most practices are careful about not wasting their resources on unnecessary expenses, but few are as disciplined as they could be about optimizing the funds they spend on operating costs. The key to controlling those costs is to implement a system for monitoring what you are spending, and that means using a budget.
It’s always interesting, when giving a presentation on financial management, to ask the attendees if they have a budget and to see how few ophthalmology practices use this very basic tool. It is virtually impossible to fully monitor and control practice expenses if expenditures are not regularly measured against a realistic budget.
Creating an annual operating budget, and then measuring your practice’s financial activities against that budget, can help you make sure your expenses are as controlled as they reasonably can be so that fee cuts are felt as little as possible.
- Right-size your staff. Notice that this tactic is not framed as “reduce your staff,” but, rather, to make sure your staff is the “right” size for your practice needs. Having too many employees is clearly a waste of resources and can lead to idle time and staff strife, but having too few techs or front-office personnel can lead to lost phone calls, irate patients, crippled patient flow and reduced revenue. A shortage of billing staff is the quickest way to financial calamity because claims not filed or monitored and then reworked can quickly reduce collections to zero.
Your employees should have to work diligently to keep up on their assignments, but should not be so overwhelmed that they fall behind on critical tasks, such as appointment reminders, recalls and claims processing.
When cash flow is tight, it is tempting to terminate the highest paid employees, but those are often the most productive and knowledgeable about what really needs to get done in your office. So, if you find that you are overstaffed, take a strategic approach to lay-offs. Keeping the most productive and motivated employees, while making sure that key positions are filled, should be the guiding principle in decisions regarding which staff members are retained.
Note: Prior to initiating lay-offs, you should check with your employment-law attorney to make sure that you follow all federal and state statutes.
- Consider a merger with another practice. In recent years, we have seen a trend of practices joining together in an attempt to take advantage of some economies of scale. Certainly, two solo practitioners, each working three office days per week, could at least theoretically reduce their rent costs by sharing an office, and, in many cases, some cost savings are achieved by combining with another practice.
However, prior to finalizing a merger, be sure to have a clear and accurate projection of what the costs will be in the blended entity, and how those costs will be shared between the physicians. It is not uncommon for a doctor to merge his/her practice with another with the hopes of saving money, only to find out that the merger has actually increased his/her costs.
In addition to the financial aspects of merging with another practice, give careful consideration to the less tangible factors — including management and practice styles, decision making, autonomy and interdependence. Oftentimes, solo practitioners who have been in practice for many years find it difficult to acclimate to a group setting unless they make a full commitment to the partnership.
If, after a careful examination of all of the financial, strategic and intangible factors, you and your advisors are reasonably confident that the facts point to a successful merger, this tactic may be able to protect you from the harshest effects of Medicare fee drops.
If the projected SGR Medicare cuts do become a reality, life will change for most ophthalmology practices. However, by being well prepared prior to the imposition of reimbursement cuts, you can give your practice the best possible chance of being one of the survivors.
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About the author: This article is adapted from an article previously published in the July 2010 issue of AAOE’s Executive Update. It was originally written by Derek Preece, MBA, of BSM Consulting, a member of the AAOE Consultant Directory. Derek frequently writes for AAOE News and presents courses at the Academy’s Annual Meeting.