October 1998 Bulletin

. . .and when it may be wrong

Reducing staff may strangle production of doctor

Reducing staff to decrease overhead seems a simple equation. "It's the initial response for somebody who wants to reduce operating costs," explains David N. Gans, survey operations department director, Medical Group Management Association (MGMA).

However, you don't want to blindly cut staff before you assess the total picture, says Gans, who suggests practices compare their overhead to their total income and determine what their percentage of overhead is versus their income.

At median, an orthopaedic practice's operating costs comprise 42.10 percent of revenue; approximately one-half or 17 percent of revenue is attributed to staffing costs; 4 percent, benefits; and approximately 20 percent for all other operating costs, according to MGMA's Cost Survey Data.

"If the [overhead] is high, the first thing you'd want to look at is if your income is somewhere in the normal ballpark range, compared to practices similar to yours, and if your percentage of overhead is in the normal range," says Gans. "If you find out you have low income or high overhead, it may be that you're overpaying your staff or just not getting enough business and you need to cut costs. But when you start looking at cutting your overhead, you need to look at specific tasks that people are doing."

To identify areas of low or high productivity in your staff practices, Gans says, "Have your office manager conduct periodic surveys of the number of staff, patient satisfaction surveys and stop-watch assessments of patient waiting time."

"It's helpful to take an objective view on the potential benefits or loss to the practice," notes Gans, who provides this scenario:

"Say you have a practice with five nursing aides and you're considering reducing the staff by eliminating one of the positions for nursing aides. The question is: 'Can the practice function well with one fewer nursing aide?'" (If the nursing aide's position is eliminated, the approximately $35,000 plus salary and benefits would now go to the bottom line.)

To do a proper assessment, Gans says you should carefully examine the workload of the five staff members and what the consequences would be if the workload were spread among four people. "If the reduction in capacity through lost productivity is one patient per day, assume the margin [revenue minus direct costs] on that one patient visit is $50," says Gans. "Since there are 200 office days per year in a practice, that's 200 x $50 or $10,000. The question is, 'Does the salary savings ($35,000) minus lost productivity costs ($10,000) represent a positive benefit to the practice?' The answer in this case is 'yes.'

"However, if the estimate of lost productivity is four patients per day, due to slow scheduling, then the change will have a negative impact. You'd actually lose more dollars than you're going to save. Then, the initial response of cutting costs or cutting staff may be contraindicated to the financial well-being of the practice."

As Gans points out, "The complexity of the problem is that you don't reduce staff-you reduce the right staff. Often times, you can realign responsibility with existing staff with no loss of efficiency or productivity which means the staff change is appropriate and in the best interest of the practice."

Gans says many times practices "strangle the production of the doctors" by having insufficient support staff which are essential to the patient flow in the practice. He believes there is a positive relationship between having more staff and higher physician compensation.

"Practices should also take a look at the relationship of physician compensation to square footage per physician in the practice," stresses Gans. "The most important function of the staff and physical plant of the practice is to maximize the production of the physicians. In some cases, instead of reducing staff, you may even want to increase staff or clinic square footage in order to increase patient services and therefore increase total revenue at a rate that exceeds the increase in overhead cost.

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