December 1998 Bulletin

Crunch the numbers before you negotiate

Activity-based accounting tells cost of each procedure

By Bonnie Booth

Do construction company owners bid on a new hospital project without figuring out how much they are going to have to pay for workers and supplies to complete the job?

Probably not. Yet, plenty of physicians are negotiating contracts with managed care organizations without having any idea how much it costs them to provide services to patients in that MCO.

"Most physicians don't know what it costs to run their practice," said Bob Connelly, a consultant with the Health Care Group in Plymouth Meeting, Pa. "They have no sense or idea what it costs to provide the service. If you don't know what it costs, you won't know what you should be entitled to receive when negotiating managed care contracts."

Experts recommend a procedure called activity-based accounting to get the most accurate picture of expenses associated with each procedure performed in your office.

Activity-based accounting uses detailed information on all of the costs, activities and other resources associated with a given service. It is more accurate than traditional cost accounting methods because it seeks to trace all costs directly to products and services.

Before you can start crunching the numbers you'll need to know how much the practice spends on salaries and benefits for employees, overhead expenses such as rent, utilities, janitorial service, etc. and clinical and office supplies.

Next, pick your unit of measure. Consultants say there is no one way to do an activity-based accounting analysis. You can figure your cost per each CPT code or you can group CPT codes under certain processes.

Once you've decided on a unit of measure, you're ready to begin. The cost of each unit will be measured by figuring the staff time involved, the occupancy expense and the supply expense.

Let's look at measuring staff time first.

The Gary Siegel Organization, a Lincolnwood, Ill.-based opinion research and behavioral accounting firm, uses a survey method to figure out the percentage of employee time allocated to each task.

"We don't measure time down to the microsecond," said Gary Siegel, president of the organization. "We ask people to estimate the percentage of time they've been spending on the major office processes. If somebody is doing billing all day, it's a no-brainer. If they are taking care of patients, scheduling services, opening mail, they are going to know how their time breaks down."

Once you know how much time is spent on each task, you can figure out the man-hour cost.

For example, if the receptionist is paid $24,000 annually and his or her benefits cost another $8,000, the total annual cost to the practice for that receptionist is $32,000. Divide that by the number of annual office hours (52 weeks multiplied by the number of hours your office is open each week; for the purpose of these examples let's say 40 hours). The cost per hour for the receptionist is $15.38. If the receptionist spends five minutes checking in a patient, multiply .083 (5 divided by 60) by $15.38 and the check-in costs $1.28.

Next, figure occupancy expense. It's determined by adding rent, utilities and any other annual expense associated with the physical space (for example, janitorial services) and dividing it by the number of hours the office is open per year (annual office hours).

Supply expenses are figured in much the same manner. Take the total amount you spend on supplies each year and divided that by the annual office hours.

Now that you know how to figure the basic costs, it's time to categorize them into direct and indirect expense.

Direct costs are those involved in patient care. Indirect costs include reception, billing, etc. For example, clinical salaries, supplies and the cost of the percentage of practice space devoted to examination rooms would be a direct expense. The salary of receptionists, billing clerks, office supplies and the percentage of space devoted to the waiting room would be considered indirect expense.

To break occupancy expense down into direct and indirect expense, take the total square footage of the office space and divide into clinical space and administrative space. If 30 percent of the space is used for administrative tasks, multiply the total occupancy cost per hour by 30 percent to get the indirect occupancy expense.

To break supply costs down, you need to figure out what percentage of your supply cost is used for clinical supplies and what percentage of your supply costs cover administrative supplies.

Administrative staff-practice manager, billing clerks, receptionists-are usually considered indirect costs while nurses and other clinical staff are considered a direct expense.

While all this sounds complicated and time consuming, Connelly recommended that physicians undertake the tasks themselves rather than hire an outside consultant.

It's more cost effective to do it internally," he said. "You are going to see what's going on in the practice and spot any potential bottle necks or snags in the daily process."

Orthopaedists who don't want to undertake this process for themselves can hire a consultant to perform the study.

The Gary Siegel Organization has developed a method for measuring expense that includes 17 work area processes ranging from servicing patients in the office to resolving collection disputes and re-billing charges.

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