Today, the stethoscope isn't the only tool physicians need to master. Increasingly, the financial spreadsheet determines a practice's health. Healthcare practices face unprecedented challenges, from Medicare reimbursement cuts to soaring inflation, and financial advisors must evolve their toolkit to keep pace.
These challenges took center stage in a recent episode of the Best Metrics podcast. Host Glenn Dunlap interviewed Michael DeLuca, CPA, Principal-in-Charge, and Regional Director of HBK Healthcare Solutions. HBK, ranked 45th among the top 100 accounting firms, provides various financial services to healthcare practices. With over 15 years of experience advising healthcare entities, Michael offered a sobering yet insightful look into the economic realities facing modern healthcare practices.
The takeaway? As the healthcare industry evolves, traditional metrics are no longer enough. Advisors must master healthcare-specific key performance indicators (KPIs) to effectively guide practices through this increasingly complex landscape.
The Financial Pressure Cooker: Challenges Facing Healthcare Practices
The healthcare industry has always been complex, but recent years have seen an unprecedented convergence of financial pressures. Michael vividly depicts this new reality: "2023 was a unique year in private practice. The Centers for Medicare & Medicaid Service (CMS) cut the reimbursement schedule. So it was really the first full year of cuts in Medicare reimbursement, cuts in revenue, and the full cycle of mass inflation to really hit the P&L. It was a double-edged sword for practices."
This double-edged sword is slicing into practice revenues from both directions. On one side, Medicare reimbursement cuts force practices to do more to stay even. Conversely, inflation drives up operational costs, squeezing profit margins even further.
While inflation has slowed somewhat, regulatory burdens continue to mount, adding layers of complexity to practice management. From HIPAA compliance to quality reporting requirements, practices spend more time and resources on administrative tasks than ever.
This puts a tremendous toll on physicians. Many entered the field with a passion for patient care—not business management. As Michael observes, "My clients are not money-hungry physicians. They truly just want to help." Yet, these dedicated professionals now grapple with financial pressures that threaten the viability of their practices.
“You’re seeing those early retirements or forced sales because medicine has changed. It’s not the same business they got into,” Michael says.
Beyond the P&L: Key Financial Metrics for Healthcare Practices
Traditional profit and loss statements in healthcare finance only tell part of the story. Michael emphasizes, "The real question to ask and start digging into is the quality of the processes and operations behind how that revenue is collected. Those are where the true KPIs rest."
This focus on the quality of processes and operations is at the heart of effective healthcare financial management. Revenue cycle management, which encompasses everything from patient registration and insurance verification to claim submission and payment collection, is a critical component of financial health.
Two key metrics stand out: clean claim submission rates and collection rates on allowed amounts. Michael advises that practices should aim for a clean claim submission rate of over 95%. Similarly, practices should target a collection rate greater than 95% on allowed amounts after insurance adjustments, which means less than 5% bad debt.
Michael also recommends practices code and bill within 3-5 days post-service. “We don’t want that to linger,” Michael says, “because the longer it lingers, the more we’re hampering cash flow.”
Another crucial metric is the aging of accounts receivable (AR). Michael recommends that less than 10% of AR should be over 90 days old, with an even tighter standard for Medicare claims due to their faster payment cycles.
Understanding the payer mix is also critical. As Michael points out, what might be considered an ideal payer mix in one location could be unrealistic in another, depending on local demographics.
Managing these metrics effectively requires specialized knowledge and skills, which leads to another industry challenge. Michael notes a growing shortage of qualified billing and coding professionals, especially post-COVID.
Charting a Course for Growth: Strategies and Non-Financial Metrics
With these financial pressures, strategic growth planning is more crucial than ever. Michael highlights two key strategies: the "leverage model" and adding ancillary services.
The "leverage model" involves effectively utilizing nurse practitioners and physician assistants to increase patient flow and free up physicians' time for higher reimbursement procedures. This approach can help practices grow revenue without proportionally increasing costs.
Adding ancillary services, such as bringing physical therapy or MRI services in-house for an orthopedic practice, can create new revenue streams and improve patient care.
However, financial metrics alone don't tell the whole story of a practice's health and growth potential. Non-financial metrics like patient wait times, no-show rates, and provider-to-staff ratios are crucial in understanding practice performance and patient satisfaction.
Michael also notes a trend towards LLCs and partnerships in healthcare practices, particularly as they prepare for potential growth or outside investment.
Conclusion: Navigating the Future of Healthcare Finance
The financial aspects of running a healthcare practice in today’s economy are evolving rapidly, creating a perfect storm of financial pressures for many practices.
The practices that will thrive in this new landscape adapt quickly, leveraging data-driven strategies to drive growth while maintaining a keen eye on financial and non-financial metrics. But they can't do it alone—they need the guidance of well-informed, strategically-minded financial advisors.
Listen to the full episode of the Best Metrics podcast for a deeper dive into these topics and more valuable insights from Michael. The knowledge shared in the complete discussion goes beyond what we've covered here, offering practical strategies and real-world examples to help you navigate the complex world of healthcare finance.