Creating headroom for growth
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1) Cost cutting is not always the best approach to managing overhead costs and can hamper a practice's ability to provide quality care if taken too far. 2) A better approach is to view overhead as an investment rather than an expense and structure it to maximize physician productivity through well-staffed exam rooms and support personnel. 3) Overhead starts very high in the morning but decreases throughout the day as fixed costs are covered, allowing later patient revenues to generate higher profit margins. Practices should aim to increase late-day revenues.
Creating headroom for growth
- 1. TODAY’S PRACTICE Creating Headroom for Growth Cost cutting is not always the best answer. BY SHAREEF MAHDAVI Quick—what’s the eight-letter name of affected more by changes in revenue than by individual the monster haunting most physicians? If cost items. So, which is the more effective approach? you guessed o-v-e-r-h-e-a-d, you’re right. Typically, overhead is described similarly STRUCTURING OVERHE AD to a sci-fi monster: it shows up at the A Means, Not an End worst times, is difficult to control, and First, it helps to think of overhead differently. As pro- never goes away. Strategies for taming fessed by practice management authority Greg Korneluk, this beast were not included on your MCATs or found Chairman of the International Council for Quality Care anywhere during your residency. Instead, most doctors (ICQC; Boca Raton, FL), “overhead is the means to pro- get on-the-job training for controlling overhead and viding value, not an end.” This distinction is important quickly become frustrated about what approach is best. because it helps you think of overhead as an investment After long struggles, that frustration often becomes res- rather than an expense. This redefinition should help you ignation in the form of cost cutting. move away from resignation and toward proactive action Cost cutting becomes a perpetual game of trying to in how you approach and manage overhead. minimize overhead. Sometimes this method is appropri- ate, but not always. Although the pressure of keeping costs under control is ever present, cutting past the fat “In a medical practice, overhead and into muscle tissue is a recipe for disaster. If taken too should be used to far, cutting costs will hamper your ability to provide responsive and timely service to your patients. maximize your time.” WHERE D O YOU STAND? I assume that you are collecting financial data and In a medical practice, overhead should be used to maxi- monitoring your fixed expenses as a percentage of your mize your time. (That’s a far cry from viewing overhead as practice’s revenue. If not, you are at significant risk for a something that should always be reduced.) Staff, space, financial meltdown, and you need to institute a system and equipment all have a singular purpose: to maximize to track and monitor this ratio. For most medical prac- the doctor’s productivity. Korneluk says it so well in his tices, 50% to 60% of collections is a good benchmark book, Physician Success Secrets: How the Best Get Better,1 for overhead. In ophthalmic surgical practices, this per- that I deem it a golden rule: Every nickel that’s spent in your centage tends to be a little higher, depending on their practice should relate to improving your productivity and geography and amount of on-site surgical equipment. that of your staff. If you have a handle on your overhead percentage, At Nordstrom department stores, a perennial example please read on. If not, please put this down and call of business management, there are only two kinds of your accountant. employees: those who serve the customer and those Most physicians take the negative approach to over- who support those on the “front line.” You should apply head: they strive to reduce costs as a means of lowering a similar rule to your practice’s expenses: “Does this cost their ratio of expenses to revenue. Another means of help us directly improve quality at the point of service, decreasin overhead is to increase revenue. Those of you or does it help support the delivery of that quality?” If who closely watch overhead know that your ratio is the item does not satisfy either objective, you should JULY 2006 I CATARACT & REFRACTIVE SURGERY TODAY I 73
- 2. TODAY’S PRACTICE seriously question adding it to your overhead. of revenue. Sometime during the afternoon (let’s select In addition to equipment, this rule may be applied to 4:00 PM), overhead is covered and drops to 5% of rev- staff and space, which are often the two biggest line items enue. This structure represents the variable cost of treat- in the fixed-expense portion of a practice’s budget. Again, ing each additional patient once fixed expenses are met. physicians’ typical knee-jerk reaction is to reduce staff and Therefore, from 4:00 PM on, your profit margin increases space to save costs. The ICQC has collected sufficient data to 95% of revenue! to show that the long-taught mantra of starting out with This concept is closer to reality than is calculating your three examination rooms and one nurse causes the doctor average overhead during a month, quarter, or year. It to “hit the wall” at 18 patients. Adding a fourth room should be motivation enough to re-examine how you means increasing capacity for the doctor by 33%, and have structured your staff’s bonuses. Are their incentives adding one technician or nurse allows him more time to aligned to increase productivity using the modern view use that space. The operational leverage (an MBA term of overhead as described by Korneluk, or are they mar- that means creating incremental revenue and income) is ried to the traditional view? Steven Leavitt and Stephen significant, especially for the ophthalmic practice, which Dubner, authors of Freakonomics: A Rogue Economist has an increasing array of self-pay services available to Explores the Hidden Side of Everything,2 demonstrate in patients. However, it requires the careful monitoring of their book that just about everyone in society responds costs and an open mind as to how to control them. If this to incentives. Workers in an ophthalmic practice are no solution is so obvious, then why is it not routinely taught to exception. In the traditional view of overhead, staff mem- doctors during residency? bers often respond to scheduling gaps in ways that coun- teract productivity and magically create their own bonus The Korneluk Concept system. A missed appointment becomes time for a coffee Korneluk teaches a more advanced concept of cost break. A light schedule means closing the office early that structuring that has to do with the intraday variability in day. A late-afternoon telephone caller is told there’s no overhead. As Figure 1 shows, most businesspeople are available appointment that day. Such staff responses conditioned to think of overhead as a fixed percentage change dramatically in a system where everyone is re- for the quarter or year, shown at 55%. In reality, your warded for maximizing productivity each day and every- overhead rate starts out each day extremely high and one shares in the success when revenue reaches into the comes down every hour that patients are seen and rev- 95% margin arena. enue is booked. At 8:00 AM, overhead is more like 200% CRE ATING MORE HE ADRO OM Next month, I will continue this topic and discuss how to be smarter when hiring staff, planning space, and improving systems that give you and your practice the headroom to grow. In the meantime, to those of you who want advice in this area, I recommend the 2-day Physician Strategy College that the ICQC offers each month (a schedule is available at http://www.physicianstrategycollege.com). The ICQC’s novel approach to overhead is one of many new con- cepts you will learn to help increase the quality of your practice where it matters most—at the point of service between you and your patients. ■ Shareef Mahdavi draws on 20 years of medical device Figure 1. Most practices tend to view overhead as a fixed cost marketing experience to help companies and providers that remains constant throughout the day. In reality, over- become more effective and creative in their marketing and head starts out very high in the morning and comes down sales efforts. Mr. Mahdavi can be reached via his Web site, every hour as patient revenue is booked. A modern approach www.sm2consulting.com. to overhead would strive to increase revenue later in the day, when fixed costs have been covered and incremental rev- 1. Korneluk, G. Physician Success Secrets: How the Best Get Better. Boca Raton, FL: International Council for Quality Care; 2004. enue generates higher margins to the practice. (Concept 2. Levitt SD, Dubner SJ. Freakonomics: A Rogue Economist Explores the Hidden Side of adapted from the International Council for Quality Care.) Everything. New York, NY: HarperCollins Publishers Inc.; 2005. 74 I CATARACT & REFRACTIVE SURGERY TODAY I JULY 2006