June 2003 Bulletin

Practice efficiency in academic orthopaedics

By Ronald J. Faulbaum, CMPE

Would you prefer your academic practice to be effective or efficient? And what exactly do we mean by these terms?

My opinion is that effective practices are also efficient ones, that is, they achieve their mission (effectiveness), while also carefully managing their resources such as personnel, facilities and cash flow to achieve an acceptable level of profitability (efficiency).

In an era of declining revenues and increasing service demands, practices have no choice but to become more efficient.

This article will address practice efficiency–meaning the provision of labor, services and supplies necessary to support the clinical service mission–rather than physician efficiency. Efficiency problems in service organizations can often be traced to badly designed work processes, while contributing factors include poorly trained personnel and/or weak management practices. The complex and shifting nature of the health insurance marketplace places even greater demands on work processes within the academic practice environment.

The steps to achieve work process improvement include:

This article will address the assessment of an existing practice. Practice assessment helps identify where performance gaps exist and generates new ideas for improvement. The assessment should include benchmarking, direct observation and gathering of anecdotal data.

Benchmarking

There are several sources for obtaining external benchmark data such as the Medical Group Management Association (MGMA), American Academy of Orthopaedic Surgeons, American Association of Medical Colleges and personal inquiries with other academic practices.

Benchmark data, regardless of the source, should not be viewed as absolute, nor should it be used to set specific goals for your own practice. Instead, it should provide a reference point to begin an investigational process into reasons for significant variances. Some variances can be attributed to comparability problems, but others may stimulate new discoveries and creative problem-solving as the "best practices" of other organizations are examined. These metrics can also be internally benchmarked (tracked over several time periods) to see if practice results are improving, remaining constant or declining.

Here are some examples of key metrics and the benchmarks provided from published surveys:

Total operating cost per full-time equivalent (FTE) physician. Total operating cost is the annual clinical practice cost less physician compensation and fringe benefits, divided by the number of FTE physicians in the practice. This value may change dramatically with changes in faculty staffing. For example, a physician leaving the practice would increase it. The challenge is to eliminate practice expenses related to that physician to drive the cost per physician back down. MGMA private practice benchmark: $331,020.

Total operating cost as a percent of net revenue. Total operating cost as above, divided by clinical net revenue (patient fee collections). Subtract this figure from one to find the portion of net revenue paid out as physician compensation and benefits. MGMA private practice benchmark: 44 percent.

Staffing ratio. The number of FTE staff divided by the number of FTE physicians. Of note is that MGMA surveys comparing "better-performing practices" to all practices show that better performers have a higher number of staff per physician. MGMA private practice benchmark: a ratio of 5:13.

Days in accounts receivable. Total accounts receivable (AR) dollars divided by the daily average of gross charge dollars. This measures the balance between dollars awaiting collection and the underlying charge volume and should be calculated using a moving average of at least six months in order to smooth out variations. MGMA private practice benchmark: 74.74 days.

Percent of AR over 120 days. AR dollars for claims over 120 days old, divided by total AR dollars. It is well-documented that older claims have a much lower rate of collection success. Be careful, though; an easy way to reduce this percentage is to simply write-off older claims without making a significant collection effort. MGMA private practice benchmark: 25.77 percent.

Effective collection rate. The calculation is net cash collections divided by gross collectible charges. Gross collectible charges are gross charges less contractual allowances (reductions to payment as specified in the insurance plan contract). This percentage shows, of all the charge dollars the practice was entitled to per contract, how much was collected. This metric helps evaluate the efficiency of the entire revenue cycle including patient registration, charge capture, physician documentation, billing, collections and accounts receivable management. It should be calculated using a moving average of at least three months in order to smooth out variations. MGMA private practice benchmark: 95.68 percent.

Direct observation

To complement this "high altitude" assessment approach, practice management should spend time at the "tree top" level by gathering data through direct observation. Observers should be looking for process bottlenecks, duplicated work and process re-work situations. For example, in the billing area, key metrics to look at are:

Missing charges–How many patient visits (encounters) have yet to be billed? By reconciling the list of arrived patients against a list of billed patient visits, the practice can determine how many visits have incomplete fee tickets, incomplete notes or missing documentation.

Billing lag days–How many days elapse from the day of service to claim submission date? This should be examined for office as well as procedural billings from the OR. Besides impinging on cash flow, late claims run the risk of denial due to timely filing limits imposed by the insurance plan. Our experience is that 10 to 15 days should be the outer limit for lag days.

Claim rejection rates–What percentage of claims are rejected by payers on the initial submission? What are the major reasons for these rejections? Each rejection represents additional expenses incurred by the practice to re-work the claim. Our practice’s studies have shown that the collection rate on rejected claims can be 10 or more percentage points lower than the collection rate on claims submitted and processed successfully the first time. The practice therefore is incurring additional expense while potentially losing additional revenue on each rejection. Benchmark information is limited but a typical practice may experience a 12 to 14 percent rejection rate, while better practices operate at a rate that is one-half of this.

Anecdotal data

Finally, anecdotal data assembled through discussions with physicians, staff and patients can offer a wealth of information on areas for efficiency improvement. Clerical staffs handle efficiency problems everyday and frequently have good ideas on how to solve them, if someone would only ask them. Often, there is a significant discrepancy between how practice management understands a workflow process and how it actually occurs in the clinic setting. All phases of the assessment should be documented, compiled and distributed for review and comment.

Ronald J. Faulbaum, CMPE, is the executive director for Business Affairs in the Department of Orthopaedic Surgery, Washington University School of Medicine in St. Louis. He also serves as consultant to the AAOS Academic Business and Practice Management Committee within the Council on Academic Affairs. He can be reached at (314) 747-2520 or at faulbaumr@msnotes.wustl.edu.


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