AAOS Bulletin - August, 2005

7 tips on managing your overhead

By R. Todd Laytham, MBA, CPA

Reducing overhead expenses is always a high-priority topic among orthopaedic surgeons and practice administrators. Strategies for lowering overhead costs are regularly debated at educational courses and networking sessions presented at both the BONES Society and AAOS Annual Meetings.

The best strategy focuses on overhead management, long-term considerations and revenue issues. Overhead costs are also influenced by health and liability insurance premiums, office flow and physician preferences.

Here are seven ideas to help you manage your overhead expenses.

1. Take advantage of opportunities to cut liability insurance costs

Professional liability insurance continues to be a hot topic both at the national and at the provider levels. For orthopaedic practices, the liability insurance median was 4 percent of total expenses, according to the 2004 BONES Orthopaedic Practice Benchmarking Survey. In spite of the growing concern over medical liability costs, many physicians fail to consider options that could reduce their future medical liability premiums. For instance:

• Many insurance carriers offer courses that can save 3 percent to 7 percent off future premiums.

Insurance carriers often offer premium reductions for electronic medical records and other programs, such as patient safety or quality initiatives.

• Participating in the AAOS Medical Liability Reform campaign can lead to legislative changes that may reduce future premiums. This should be viewed as a long-term investment.

2. Increase investment in information technology

Information technology (IT) continues to be a greatly underfunded resource in most physician offices. Because the immediate impact and return on investment is not always apparent to physicians, they may not realize the productivity improvements they’re missing. When it comes to IT, it’s important to remember that short-term expenditures can create long-term efficiencies.

The banking industry spends as much as 25 percent of their total expenses on IT, with an industry average of more than 15 percent. Only one out of five physician practices, on the other hand, spend more than 5 percent of total expenses on IT, according to Modern Physician, November 2003.

The 2004 BONES Orthopaedic Practice Benchmarking Survey revealed that the IT spending median for orthopaedic practices was just 0.8 percent of total expenses, with a maximum spending of 8 percent.

When determining IT expenditures, physicians must be realistic. Unlike furniture, computers do not have a 10-year shelf life. Both hardware and software systems must be updated on a regular basis. However, by keeping up with technology, your staff will be more productive and your practice can comply more easily with Medicare regulations, the Health Insurance Portability and Accountability Act and other requirements. Planned yearly upgrades can actually decrease your total costs and increase staff productivity.

3. Reassess employee health insurance benefits

Staff benefits are second only to employee compensation as the most expensive aspect of a group practice. The medical office is not immune to double-digit increases in health insurance costs. In fact, medical offices often see some of the highest cost increases because of poor employee health and over-utilization of services. Total employee benefits typically run 25 percent to 35 percent of the total employee payroll.

In 2004, health insurance costs averaged $307.92 per month for employee coverage for all plans. Over the past five years, the increase in premiums has ranged between 8.2 percent and 13.9 percent nationwide, according to the 2004 Kaiser/HRET Survey of Employer-Sponsored Health Benefits. Among orthopaedic practices, premium increases greater than 20 percent were not uncommon.

Health care costs can be reduced through:

• Requiring higher co-pays and deductibles

• Cost-shifting of premiums to employees

• Offering “split plans” (multiple plans)

• Implementing health savings accounts or other high deductible plans

4. Focus on the ‘right’ staffing issues

According to the 2004 Medical Group Management Association Cost Survey, employee ratios per physician vary widely, from 0.5 to 6.4 full-time employees per physician, with most practices employing 2.5 to 4.4 full-time staff members per physician.

Benchmarking statistics indicate that the “best” practices—defined by physician revenue, income collections and accounts receivable ratios—have higher staffing ratios than the “average” practice. Although decreasing staff might reduce your overhead, it may have a greater negative impact on revenues.

Revenue generation is often overlooked when talking about overhead costs. For example, an orthopaedic group with a 60 percent overhead rate may, in fact, generate double the income of a group with a 40 percent overhead rate. That’s two times the profit, or physician income, for just a 50 percent increase in expenses.

When making staffing decisions, evaluate how productive staff members are. Take a hard look at each staff member and ensure that each person is making a significant contribution to the team. If particular employees are underperforming, they might need additional training, warnings or, as a last resort, dismissal.

Some staffing issues to focus on are:

• Employees that are seemingly impossible to replace, or “sacred cows”

• Over-specialization of job duties that can lead to decreased efficiency or a “that’s not my job” attitude

• The high maintenance/low productivity “Jerry Springer”-type employee whose ongoing trials and tribulations can hurt office productivity and lower staff morale

5. Analyze cost of remote offices, excess office space

Practices should conduct a careful cost analysis of their remote offices. For the average group, facility costs typically run about 5 percent of total expenses. As the number of offices increase, facility overhead drives up total costs substantially. When the cost of extra personnel, transportation, lost time through travel, supplies, equipment and communications are taken into account, the secondary office may create a loss to the practice. Also, without an electronic health record, there are increased costs and risks, with an associated decrease in productivity while the chart is at another location.

The cost of unused office space or space that is non-revenue producing should also be considered for conversion or use in a revenue-generating capacity. This includes storage, business office and other office areas.

6. Monitor supply costs

With the new Medicare payment rules, monitoring supply costs—specifically injectables—is crucial. For orthopaedic practices, the largest cost is for hyaluronan joint fluid therapy. In a small sample survey of BONES Society members, prices paid for Hyalgan/Supartz ranged from $95 to $119.54. Starting in July 2005, Medicare is scheduled to pay $110.07 for the injectable, which is an 11 percent decrease from 2004. Practices paying $119.54 have a significant problem.

Medicare payments for Synvisc face a 7 percent cut, and the sample survey for that product also revealed that many practices are paying more for Synvisc than they will be reimbursed.

Negotiating a reduced purchase price, requesting 120 days to pay, and paying with a “rewards” credit card can yield savings and help ensure collection of payment before your bill comes due. Consider purchasing from vendors, and demand they provide replacement products for supplies that were either used but not reimbursed, or will be reimbursed at a rate below your cost. Be willing to switch vendors if they do not provide the lowest price. Remember that the “profit” of the product has essentially been removed and the arthrocentesis fee is your true profit.

7. Create a strong physician-administrator partnership

Developing a strong physician-administrator partnership is a final way to manage overhead. Working together to create a plan and direction for the practice will help ensure that your orthopaedic group incurs the lowest possible costs. By networking through the BONES Society and other professional management associations, administrators can pick up new ideas and share data. Physicians can pass along useful information obtained via peer interaction through the AAOS. Creating stability and consistency within the organization and its goals will lead to the greatest efficiency and consequently the lowest cost.

Administrators who have the tools and responsibility necessary to carry out the plan without interference can execute the plan at a lower cost, without lost physician productivity. The administrator’s “cost” to provide management is significantly less than the revenue generated per hour by a surgeon seeing patients.

Gearing up for the future

Most likely, orthopaedic practices will continue to see falling reimbursement rates for some time, and the effort to stabilize or reduce medical liability insurance premiums will be an ongoing battle. At the same time, cost pressures and inflation will persist, pushing overhead costs higher. Ancillary service possibilities—including ambulatory surgery centers, specialty hospitals, diagnostic radiology, physical therapy, in-office MRIs and others—will continue to see revenue and cost pressures. There are many entities working to strip orthopaedic surgeons of their right to provide these services. Adversaries in this battle include government officials and bureaucrats, insurance companies, hospitals and other specialty providers, such as radiologists. With focus, direction and leadership, the individual orthopaedist, the group practice, and the specialty as a whole can be at the forefront of positive change, rather than reacting to change forced upon them.

R. Todd Laytham, MBA, CPA, is the administrator for Orthopaedic Professional Association, based in Kansas City, Kan., and immediate past president of the BONES Society, a national organization of orthopaedic administrators. He can be reached via e-mail at tlaytham@opadocs.com

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