essentials of physician practice management
TRANSCRIPT
Blair A. Keagy Marci S. Thomas
Y
C1.jpg
ESSENTIALS OF PHYSICIAN PRACTICE MANAGEMENT
00a_971898ffirs.qxd 6/30/04 6:36 PM Page iii
00a_971898ffirs.qxd 6/30/04 6:36 PM Page iv
ESSENTIALS OF PHYSICIAN PRACTICE MANAGEMENT
Blair A. Keagy Marci S. Thomas
Y
Copyright © 2004 by John Wiley & Sons, Inc. All rights reserved.
Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741 www.josseybass.com
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permis- sion of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8400, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: [email protected].
Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-399386 or fax 317- 572-4002.
Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books.
Library of Congress Cataloging-in-Publication Data
Essentials of physician practice management / [edited by] Blair A. Keagy, Marci S. Thomas.— 1st ed.
p. ; cm. Includes bibliographical references and index. ISBN 0-7879-7189-8 (alk. paper)
1. Medicine—Practice. [DNLM: 1. Practice Management, Medical—organization & administration.
2. Financial Management. 3. Marketing of Health Services. 4. Personnel Management. 5. Risk Management. W 80 E78 2004] I. Keagy, Blair A., 1944- II. Thomas, Marci S., 1953-
R728.E87 2004 610'.68'1—dc22
Printed in the United States of America FIRST EDITION
HB Printing 10 9 8 7 6 5 4 3 2 1
00a_971898ffirs.qxd 6/30/04 6:36 PM Page vi
Acknowledgments xvii
Preface xix
1 Budgeting for Physician Practices 3
Marci S. Thomas
Suriya H. Grima, John A. Grima
4 Taxation and Physician Practices 85
Anne M. McGeorge
5 Capital Investment Decisions 100
Marci S. Thomas, Elisabeth Fowlie Mock
6 Monitoring Financial Performance 124
Teresa L. Edwards
7 Negotiating Managed Care Contracts and Contract Management 145
Beacham Wray
Bruce A. Johnson
Bruce A. Johnson
11 Governance and Leadership in a Medical Practice 241
Blair A. Keagy
Bruce J. Fried, Marci S. Thomas, Lisa L. Goodrich
13 Physician Compensation 291
14 The Role of Nonphysician Clinicians in Medical Practice 311
Blair A. Keagy
00b_971898ftoc.qxd 6/30/04 6:42 PM Page viii
15 Impact of Nursing Workforce Issues on the Physician and Practice Manager 330
Elizabeth A. Arsenault
16 Developing a Business Plan 349
Lou Porn
17 Adding a New Service or Program to a Medical Practice 369
Blair A. Keagy
Karen McCall, Dan Dunlop
19 Integrating a Clinical Research Program into a Medical Practice 410
William A. Marston
Blair A. Keagy
Mary Jane Kagarise, Anthony A. Meyer
PART FIVE: INFORMATION MANAGEMENT 477
22 Information Systems 479
Bette G. Brotherton, Larry Mandelkehr
Contents ix
x Contents
George F. Sheldon
The Editors 536
The Contributors 538
LIST OF FIGURES AND TABLES
FIGURES
1.1 The Budget in Relation to the Planning and Control Cycle 1.2 Relationship Between Level of Effort and Precision 1.3 Budgeting Process 2.1 Patient Service Revenue Cycle 2.2 Patient Access Functions 2.3 Billing and Collections 2.4 Calculating Payment with the RBRVS Methodology 3.1 Direct and Indirect Costs for Pittsburgh Family Practice 3.2 Calculating Percentages to Allocate Support Costs 3.3 Fully Allocated Cost for Newborn Visit 3.4 Proposed HMO Fixed Rate to Cover Direct Costs for Newborn Visit 3.5 Simplified Breakeven Formula 3.6 Mammography Screening Data 3.7 Breakeven Calculations 3.8 Breakeven Graph for Mammography Screenings 3.9 Breakeven Calculation Including Profitability and Overhead 3.10 Expected Average Rate of Reimbursement 3.11 Group Practice Acceptance of Capitated Contracts in 2000
xi
00b_971898ftoc.qxd 6/30/04 6:42 PM Page xi
3.12 Capitation Breakeven Formula 3.13 Dr. Foster’s Capitation Breakeven Calculation 3.14 Capitation Breakeven Calculation for New Patients 3.15 Average Variable Cost per Visit 4.1 Advantages and Disadvantages of Taxable and Tax-Exempt Status 5.1 Types of Capital Investments 5.2 Components of the Project Business Case 5.3 Capital Investment Analysis 6.1 Steps in the Benchmarking Process 7.1 Steps in Contracting with MCOs 7.2 Categories of Payers 7.3 Evaluating the Marketplace 7.4 Perform Financial Analysis and Model the Effects of the Contract 8.1 Analytical Framework for Laws That Apply to Medical Practices 10.1 Median Awards for Medical Negligence, 2002 11.1 Increase in Patient Choice Options During the Late 1990s 11.2 Increase in Practice Size and in the Number of Physicians in Large Groups 11.3 Increase in Administrator Compensation, 1996–2000 11.4 Percentage Change in per Capita Health Care Spending, 1995–2002 11.5 Increase in Operating Expenses and Medical Revenue, 1998–2000 12.1 Advantages and Disadvantages of Internal Versus External Candidates 12.2 Strategies to Improve Job Satisfaction Factors 12.3 Behavioral Rating Scale Item for a Practice Receptionist 13.1 Steps in the Compensation Process 13.2 Role of the Compensation Committee 13.3 Example of Compensation Formula Design 13.4 Steps in the Conceptual Design Process 13.5 Overall Compensation Formula Design 13.6 Quality as an Allocation Factor for Overall Practice Profit 15.1 National Supply and Demand Projections for FTE Registered Nurses,
2000–2020 15.2 Ages of Registered Nurses, 1980–1996 16.1 Planning Process Leadership 16.2 Characteristics of Mission and Vision Statements 16.3 Examples of Strategy Initiatives 16.4 Sample Report on Ratings for an Initiative of Improving Affiliate Operations 16.5 Sample Timeline for Plan Implementation 17.1 Median Revenue per FTE MD After Operating Costs 17.2 Ancillary Services Producing the Most Profit per FTE MD 20.1 Decreasing Discharge Rates and Lengths of Hospital Stay
xii List of Figures and Tables
00b_971898ftoc.qxd 6/30/04 6:42 PM Page xii
20.2 Hospital Admissions per 1,000 Population in Selected Industrialized Nations, 2000
20.3 Acute Care Beds per 1,000 Population and Average Length of Stay in Selected Industrialized Nations, 2000
20.4 Comparison of Administrative Costs in Health Care in the United States and Canada, 1999
20.5 The Top Three Hospital Revenue Generators per FTE Physician 21.1 Breakdown of Medical School Affiliations with AAMC COTH (Council of
Teaching Hospitals) and Health System Hospitals 21.2 Relationship of Medical Schools to Their Parent Universities 21.3 Structure of the Faculty Practice Plan 21.4 Medical Schools by Geographic Region 22.1 Common Practice Applications and Functions 22.2 Common Applications with a Patient Focus 22.3 Traditional Approach to Strategic Planning 22.4 Emerging Approach to Strategic Planning 23.1 Sample Control Chart: Percentage of Children Not Receiving Immunizations
During a Seven-Month Period 23.2 Sample Completed Action Plan 23.3 Sample of Data Collected, Analyzed, and Graphed in Preparation for a One-
Hour AIDE Team Meeting 23.4 Sample Cause-and-Effect (Fishbone OR Ishikawa) Diagram 23.5 Sample Cause-and-Effect Diagram Identifying Root Causes of Problems 24.1 Health Care Spending as a Percentage of Gross Domestic Product 24.2 Actual and Projected Numbers of Active MDs and DOs per 100,000
Population in the United States 24.3 Numbers of Physicians per 1,000 Population in Selected Developed
Countries
TABLES
1.1 RBRVS Illustration 1.2 CPT Codes Categorized by Level of Effort 1.3 Actual and Projected Visits for 2003 and 2004 1.4 Projected Population in Highgrove Service Area for 2004 1.5 Projected Income Levels in Highgrove Service Area for 2004 1.6 Projected Patient Visits by Month for 2004 1.7 Indicators for Additional Analysis 1.8 Percentage of Patients in Each Work Level by Specialty for January
List of Figures and Tables xiii
00b_971898ftoc.qxd 6/30/04 6:42 PM Page xiii
1.9 Total Visits and RVUs by Specialty for January 1.10 CPT Codes Converted to Work Level RVUs and Charges per Payer Type 1.11 Projected Gross and Net Revenue per Payer per Specialty for January 1.12 Revenue Budget for All Specialties for January 1.13 Budgeted Physician Compensation for 2004 1.14 Budgeted Nonphysician Compensation for 2004 1.15 Maximum RVUs per Month for Clinical Employees 1.16 RVUs for January 1.17 Variable Labor Requirements for January 1.18 Budgeted General Operating Costs for 2003 and 2004 1.19 Operating Budget for 2004 1.20 Cash Budget for 2004 3.1 Assumptions Behind Allocation Bases 3.2 Allocated Costs and Total Costs 3.3 Allocation of Costs to Visits and to RVUs 3.4 Payer Types 3.5 Payer Mix and Average Reimbursement Rates for Mammography 3.6 Use Rate Sensitivity 3.7 Payer Mix for Discussion Question 6 4.1 Comparison of Tax Structures 4.2 Establishing Comparability of Physicians’ Compensation 5.1 Weighted Average Cost of Capital 5.2 Payback Period Analysis for Two Alternative Investments 5.3 Computation of Net Present Value for Densitometer 5.4 Computation of Net Present Value for Mammography Unit 5.5 Excerpts from Present Value of $1 Table 5.6 Calculation of Present Value of Ordinary Annuity for Five Years at 10 Percent 5.7 Excerpts from the Present Value of an Ordinary Annuity Table 5.8 Strengths and Weaknesses of Return on Investment Analytical Tools 5.9 Cornerstone ENT Expansion Evaluation 5.10 Lease or Buy Data 5.11 Cash Flow Evaluation for Purchase 5.12 Cash Flow Evaluation for Operating Lease 5.13 Types of Debt Financing 6.1 Report Card for the Richardson Obstetric Group 6.2 Payer Evaluation Sheet 6.3 Stonehill Family Practice Payer Mix Evaluation 6.4 Payer Mix for Discussion Question 2 8.1 Sources of Law by Practice Issue 9.1 Risk Areas Identified by the OIG for Physician Practices
xiv List of Figures and Tables
00b_971898ftoc.qxd 6/30/04 6:42 PM Page xiv
10.1 Malpractice Climate in Various States, 2003 13.1 Performance Areas and Metrics for Compensation Formulas 13.2 Cost Allocation Considerations 13.3 Allocation of Revenue and Costs by Specialty 13.4 Allocation of Revenue and Costs by Individual 16.1 Issues a Strategic Plan May Address, by Type of Practice 16.2 Three Markets with Different Characteristics 16.3 Sample Preliminary Task List and Timeline for One Initiative 19.1 Typical Compensation from a Phase III Trial of an Investigational Compound
for Healing Diabetic Foot Ulcers (DFUs) Versus Clinical Revenue Generated from DFU Treatment (Medicare Allowable)
19.2 Personnel and Time Requirements for a Typical Trial 19.3 Media Options for Recruitment and Relative Costs 19.4 Reasons for Patient Dropout 21.1 Affiliated Health Schools 22.1 Electronic Products for the Physician Practice 22.2 Information Technology Implementation Steps 23.1 Goals to Monitor for Success of Practice Changes 23.2 Steps in the AIDE Process 24.1 The Greatest Decline in Mortality in the History of the World Occurred
Between 1900 and 2000
ACKNOWLEDGMENTS
The editors want to acknowledge the help and support of their friends and col- leagues: William Zelman, who brought us together; Arnold Kaluzny, who helped
us find the right publisher; Erika Fulmer, who helped us keep things moving; Kristin Keagy, Kay Grinnell, Donna Cooper, Betsy Mann, and Raleigh Mann, who helped us edit the chapters; and all the chapter authors and contributors, who gave this book its breadth and depth. This book would not have been possible without them.
xvii
PREFACE
The purpose of this book is to provide a comprehensive and practical guide to the issues inherent in physician practice management, as well as tools and techniques
to deal with those issues. Although primarily designed as a textbook for students in- terested in the field, this book will also provide physicians and their practice managers with a fundamental understanding of the financial and regulatory issues that influ- ence today’s medical practice and with insight into the cultural, human resource, and governance issues that make physician practices unique among health care organi- zations. (Businesspeople who work in medical practices are known by a variety of ti- tles, such as administrator, practice manager, or office manager. For consistency we have chosen to use the title practice manager throughout this book.)
Physicians and medical groups face increasing challenges to compete as the cost to provide health care services continues to rise. Because reimbursement from governmental and other third-party payers is flat or decreasing, improvements in tech- nology, increases in costs of pharmaceuticals and for medical malpractice coverage, and the costs of complying with the Health Insurance Portability and Accountability Act (HIPAA) and other legislation have put a strain on practice financial margins. As a result many physicians and their practice managers now realize that they need additional knowledge and administrative skills to understand and deal with the chang- ing regulatory and fiscal environment.
Physicians seldom learn about medical practice management issues and techniques during their years of medical education, and many practice managers have
xix
00d_971898fpref.qxd 6/30/04 6:43 PM Page xix
no formal training as health care administrators. Lack of awareness of critically im- portant practice issues such as the organization’s cost structure, the negotiation of man- aged care contracts, and the importance of federal and state regulations can cause the practice to lose income or, even worse, face civil or criminal action.
In this environment physicians and their practice managers must have a general understanding of the many elements of practice management and a depth of under- standing in a few. To ignore these concepts could lead to loss of income as well as sanc- tions for violations of regulatory requirements. The practical tools and references in this book will help those who lead and manage physician practices to understand the principles behind effective practice management and increase their own proficiency.
As the external environment has changed over the last few years so has the in- ternal environment in which the physician has to practice. Physicians coming from their residency programs face issues resulting from changes in the way practices do business. The loss of control in medical decision making is very much on the minds of many physicians in today’s managed care environment. Newer physicians entering an existing practice also need to understand the culture of that practice and be aware of governance and equity issues. Physicians and their practice managers must work collaboratively to maximize the success of the practice.
The Framework of This Book
In July 2002, the American College of Medical Practice Executives (ACMPE) published The ACMPE Guide to the Body of Knowledge for Medical Practice Management. It summarizes the body of knowledge and skills that the ACMPE considers a prac- tice manager must possess to be effective in today’s health care environment. The “general competencies” that the ACMPE believes necessary are
• Professionalism • Leadership • Communication skills • Organizational and analytical skills • Technical knowledge and skills
Technical knowledge and skills should be developed in eight domains:
• Financial management • Human resource management • Planning and marketing
xx Preface
• Information management • Risk management • Governance and organizational dynamics • Business and clinical operations • Professional responsibility
This book provides the reader with practical, easy-to-implement infor- mation related to the majority of these topics. Each chapter contains illustrations of important concepts or management techniques as well as tools and templates that can be used in practice. The book is organized in logical divisions based on the eight domains of the ACMPE body of knowledge, as follows:
Part One, “Financial Management,” provides the reader with the information nec- essary to understand how to turn strategic plans into financial reality. Beginning with a description of developing budgeting templates to model financial performance in Chap- ter One, the chapters in this section also discuss increasing net reimbursement through management of the revenue cycle (Chapter Two); understanding the cost of providing medical services and management accounting (Chapter Three); the taxation of physi- cians and of the profits from their practice (Chapter Four); capital budgeting for the most efficient allocation of practice resources (Chapter Five); and monitoring financial performance through variance analysis, benchmarks, and ratios in order to maintain the practice’s competitive edge (Chapter Six).
Part Two, “Regulatory Environment and Risk Management,” provides the reader with the information necessary to understand the risks that physician practices face in today’s regulatory and litigious environment. The reader will learn how to combine the knowledge obtained in the section on understanding practice costs with knowledge of legal and contract terminology in order to negotiate contracts with third-party pay- ers and minimize risk to the practice (Chapter Seven). Chapters Eight and Nine ad- dress federal and state regulations and corporate compliance and will help the reader interpret those complex laws and regulations and know when to seek the advice of legal counsel. Finally, Chapter Ten, on risk management, will help the reader under- stand the risk of medical malpractice suits and how to reduce that risk.
Part Three, “Human Resource Management,” provides the reader with the in- formation necessary to understand and implement the various governance models ap- propriate to physician practices. The reader will also learn to interpret and integrate the various laws and regulations that affect the practice’s human resource policies and procedures and to design recruitment and retention strategies (Chapter Twelve); to understand, choose, and apply the best physician compensation model for the prac- tice (Chapter Thirteen); to understand the role of midlevel providers in a practice (Chapter Fourteen); and to understand the impact on the practice of nursing work- force issues and how to address those issues (Chapter Fifteen).
Preface xxi
00d_971898fpref.qxd 6/30/04 6:43 PM Page xxi
Part Four, “Strategic Considerations: Planning, Marketing, and Management,” provides the reader with the information necessary to create and implement a business plan for the practice, including creating or refining the mission and vision; performing, analyzing, and interpreting market research; building consensus for the plan among key stakeholders; and communicating the plan and obtaining buy-in for the plan from all parties (Chapter Sixteen). Chapters Seventeen, Eighteen, and Nineteen offer informa- tion on how to add a new service or program to the practice, develop an effective mar- keting plan, and integrate a program in clinical research into the practice. Chapters Twenty and Twenty-One present information that will help the reader develop skills in dealing with relationships between medical practices and community hospitals and in working with physicians in academic settings.
Part Five, “Information Management,” provides the reader with the information necessary to assess the short- and long-term needs of the practice and incorporate that information into the strategic plan. The reader will also learn to write requests for pro- posals (RFPs), understand the various laws and regulations affecting security and trans- mission of information, and gain awareness of technologies that can add to practice efficiency and quality (Chapter Twenty-Two). Chapter Twenty-Three includes in- formation on performance improvement, teamwork, and monitoring outcomes that is critical to practice management because medical practices are obligated to pro- vide data on clinical results and practice quality to regulatory agencies. The reader will come to understand the necessity of developing databases to gather information that will aid in quality control without providing detrimental information in the event of litigation. Finally, Chapter Twenty-Four discusses the realities that medical prac- tices are facing in the twenty-first century.
Many examples are included as illustrations. All the practices and physicians used in these examples are hypothetical examples developed out of the authors’ experience or based on contemporary medical news stories.
Essentials of Physician Practice Management Practice Aids
To assist our readers in gaining the most value they can from this book, we are also providing supplemental materials on the World Wide Web. Included are
• Answers to the discussion questions at the end of each chapter • Selected mini–case studies • Two comprehensive case studies, one on human resources and one on general prac-
tice management issues
00d_971898fpref.qxd 6/30/04 6:43 PM Page xxii
• Templates where appropriate, in the form of checklists and spreadsheets, that il- lustrate best practices that can be used by physicians or their practice managers to effect change in the practice
Essentials of Physician Practice Management is a collaborative effort between a physician and a businessperson. We have tried to address the needs of physicians and their prac- tice managers in practices of varying sizes (small to large) and types (for-profit and nonprofit group practices and faculty practice plans). Our goal is to give the readers of this book practical knowledge about and insight into the operation of medical prac- tices. It is our belief that the challenges faced by practices today cannot be solved by either the physician or the practice manager alone. A team effort is needed to acquire and apply the deep knowledge and skills necessary to thrive in today’s challenging environment.
June 2004 Blair A. Keagy and Marci S. Thomas Chapel Hill, North Carolina
Preface xxiii
ESSENTIALS OF PHYSICIAN PRACTICE MANAGEMENT
00d_971898fpref.qxd 6/30/04 6:43 PM Page xxv
00d_971898fpref.qxd 6/30/04 6:43 PM Page xxvi
PART ONE
FINANCIAL MANAGEMENT
Y
C1.jpg
ESSENTIALS OF PHYSICIAN PRACTICE MANAGEMENT
00a_971898ffirs.qxd 6/30/04 6:36 PM Page iii
00a_971898ffirs.qxd 6/30/04 6:36 PM Page iv
ESSENTIALS OF PHYSICIAN PRACTICE MANAGEMENT
Blair A. Keagy Marci S. Thomas
Y
Copyright © 2004 by John Wiley & Sons, Inc. All rights reserved.
Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741 www.josseybass.com
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permis- sion of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8400, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: [email protected].
Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-399386 or fax 317- 572-4002.
Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books.
Library of Congress Cataloging-in-Publication Data
Essentials of physician practice management / [edited by] Blair A. Keagy, Marci S. Thomas.— 1st ed.
p. ; cm. Includes bibliographical references and index. ISBN 0-7879-7189-8 (alk. paper)
1. Medicine—Practice. [DNLM: 1. Practice Management, Medical—organization & administration.
2. Financial Management. 3. Marketing of Health Services. 4. Personnel Management. 5. Risk Management. W 80 E78 2004] I. Keagy, Blair A., 1944- II. Thomas, Marci S., 1953-
R728.E87 2004 610'.68'1—dc22
Printed in the United States of America FIRST EDITION
HB Printing 10 9 8 7 6 5 4 3 2 1
00a_971898ffirs.qxd 6/30/04 6:36 PM Page vi
Acknowledgments xvii
Preface xix
1 Budgeting for Physician Practices 3
Marci S. Thomas
Suriya H. Grima, John A. Grima
4 Taxation and Physician Practices 85
Anne M. McGeorge
5 Capital Investment Decisions 100
Marci S. Thomas, Elisabeth Fowlie Mock
6 Monitoring Financial Performance 124
Teresa L. Edwards
7 Negotiating Managed Care Contracts and Contract Management 145
Beacham Wray
Bruce A. Johnson
Bruce A. Johnson
11 Governance and Leadership in a Medical Practice 241
Blair A. Keagy
Bruce J. Fried, Marci S. Thomas, Lisa L. Goodrich
13 Physician Compensation 291
14 The Role of Nonphysician Clinicians in Medical Practice 311
Blair A. Keagy
00b_971898ftoc.qxd 6/30/04 6:42 PM Page viii
15 Impact of Nursing Workforce Issues on the Physician and Practice Manager 330
Elizabeth A. Arsenault
16 Developing a Business Plan 349
Lou Porn
17 Adding a New Service or Program to a Medical Practice 369
Blair A. Keagy
Karen McCall, Dan Dunlop
19 Integrating a Clinical Research Program into a Medical Practice 410
William A. Marston
Blair A. Keagy
Mary Jane Kagarise, Anthony A. Meyer
PART FIVE: INFORMATION MANAGEMENT 477
22 Information Systems 479
Bette G. Brotherton, Larry Mandelkehr
Contents ix
x Contents
George F. Sheldon
The Editors 536
The Contributors 538
LIST OF FIGURES AND TABLES
FIGURES
1.1 The Budget in Relation to the Planning and Control Cycle 1.2 Relationship Between Level of Effort and Precision 1.3 Budgeting Process 2.1 Patient Service Revenue Cycle 2.2 Patient Access Functions 2.3 Billing and Collections 2.4 Calculating Payment with the RBRVS Methodology 3.1 Direct and Indirect Costs for Pittsburgh Family Practice 3.2 Calculating Percentages to Allocate Support Costs 3.3 Fully Allocated Cost for Newborn Visit 3.4 Proposed HMO Fixed Rate to Cover Direct Costs for Newborn Visit 3.5 Simplified Breakeven Formula 3.6 Mammography Screening Data 3.7 Breakeven Calculations 3.8 Breakeven Graph for Mammography Screenings 3.9 Breakeven Calculation Including Profitability and Overhead 3.10 Expected Average Rate of Reimbursement 3.11 Group Practice Acceptance of Capitated Contracts in 2000
xi
00b_971898ftoc.qxd 6/30/04 6:42 PM Page xi
3.12 Capitation Breakeven Formula 3.13 Dr. Foster’s Capitation Breakeven Calculation 3.14 Capitation Breakeven Calculation for New Patients 3.15 Average Variable Cost per Visit 4.1 Advantages and Disadvantages of Taxable and Tax-Exempt Status 5.1 Types of Capital Investments 5.2 Components of the Project Business Case 5.3 Capital Investment Analysis 6.1 Steps in the Benchmarking Process 7.1 Steps in Contracting with MCOs 7.2 Categories of Payers 7.3 Evaluating the Marketplace 7.4 Perform Financial Analysis and Model the Effects of the Contract 8.1 Analytical Framework for Laws That Apply to Medical Practices 10.1 Median Awards for Medical Negligence, 2002 11.1 Increase in Patient Choice Options During the Late 1990s 11.2 Increase in Practice Size and in the Number of Physicians in Large Groups 11.3 Increase in Administrator Compensation, 1996–2000 11.4 Percentage Change in per Capita Health Care Spending, 1995–2002 11.5 Increase in Operating Expenses and Medical Revenue, 1998–2000 12.1 Advantages and Disadvantages of Internal Versus External Candidates 12.2 Strategies to Improve Job Satisfaction Factors 12.3 Behavioral Rating Scale Item for a Practice Receptionist 13.1 Steps in the Compensation Process 13.2 Role of the Compensation Committee 13.3 Example of Compensation Formula Design 13.4 Steps in the Conceptual Design Process 13.5 Overall Compensation Formula Design 13.6 Quality as an Allocation Factor for Overall Practice Profit 15.1 National Supply and Demand Projections for FTE Registered Nurses,
2000–2020 15.2 Ages of Registered Nurses, 1980–1996 16.1 Planning Process Leadership 16.2 Characteristics of Mission and Vision Statements 16.3 Examples of Strategy Initiatives 16.4 Sample Report on Ratings for an Initiative of Improving Affiliate Operations 16.5 Sample Timeline for Plan Implementation 17.1 Median Revenue per FTE MD After Operating Costs 17.2 Ancillary Services Producing the Most Profit per FTE MD 20.1 Decreasing Discharge Rates and Lengths of Hospital Stay
xii List of Figures and Tables
00b_971898ftoc.qxd 6/30/04 6:42 PM Page xii
20.2 Hospital Admissions per 1,000 Population in Selected Industrialized Nations, 2000
20.3 Acute Care Beds per 1,000 Population and Average Length of Stay in Selected Industrialized Nations, 2000
20.4 Comparison of Administrative Costs in Health Care in the United States and Canada, 1999
20.5 The Top Three Hospital Revenue Generators per FTE Physician 21.1 Breakdown of Medical School Affiliations with AAMC COTH (Council of
Teaching Hospitals) and Health System Hospitals 21.2 Relationship of Medical Schools to Their Parent Universities 21.3 Structure of the Faculty Practice Plan 21.4 Medical Schools by Geographic Region 22.1 Common Practice Applications and Functions 22.2 Common Applications with a Patient Focus 22.3 Traditional Approach to Strategic Planning 22.4 Emerging Approach to Strategic Planning 23.1 Sample Control Chart: Percentage of Children Not Receiving Immunizations
During a Seven-Month Period 23.2 Sample Completed Action Plan 23.3 Sample of Data Collected, Analyzed, and Graphed in Preparation for a One-
Hour AIDE Team Meeting 23.4 Sample Cause-and-Effect (Fishbone OR Ishikawa) Diagram 23.5 Sample Cause-and-Effect Diagram Identifying Root Causes of Problems 24.1 Health Care Spending as a Percentage of Gross Domestic Product 24.2 Actual and Projected Numbers of Active MDs and DOs per 100,000
Population in the United States 24.3 Numbers of Physicians per 1,000 Population in Selected Developed
Countries
TABLES
1.1 RBRVS Illustration 1.2 CPT Codes Categorized by Level of Effort 1.3 Actual and Projected Visits for 2003 and 2004 1.4 Projected Population in Highgrove Service Area for 2004 1.5 Projected Income Levels in Highgrove Service Area for 2004 1.6 Projected Patient Visits by Month for 2004 1.7 Indicators for Additional Analysis 1.8 Percentage of Patients in Each Work Level by Specialty for January
List of Figures and Tables xiii
00b_971898ftoc.qxd 6/30/04 6:42 PM Page xiii
1.9 Total Visits and RVUs by Specialty for January 1.10 CPT Codes Converted to Work Level RVUs and Charges per Payer Type 1.11 Projected Gross and Net Revenue per Payer per Specialty for January 1.12 Revenue Budget for All Specialties for January 1.13 Budgeted Physician Compensation for 2004 1.14 Budgeted Nonphysician Compensation for 2004 1.15 Maximum RVUs per Month for Clinical Employees 1.16 RVUs for January 1.17 Variable Labor Requirements for January 1.18 Budgeted General Operating Costs for 2003 and 2004 1.19 Operating Budget for 2004 1.20 Cash Budget for 2004 3.1 Assumptions Behind Allocation Bases 3.2 Allocated Costs and Total Costs 3.3 Allocation of Costs to Visits and to RVUs 3.4 Payer Types 3.5 Payer Mix and Average Reimbursement Rates for Mammography 3.6 Use Rate Sensitivity 3.7 Payer Mix for Discussion Question 6 4.1 Comparison of Tax Structures 4.2 Establishing Comparability of Physicians’ Compensation 5.1 Weighted Average Cost of Capital 5.2 Payback Period Analysis for Two Alternative Investments 5.3 Computation of Net Present Value for Densitometer 5.4 Computation of Net Present Value for Mammography Unit 5.5 Excerpts from Present Value of $1 Table 5.6 Calculation of Present Value of Ordinary Annuity for Five Years at 10 Percent 5.7 Excerpts from the Present Value of an Ordinary Annuity Table 5.8 Strengths and Weaknesses of Return on Investment Analytical Tools 5.9 Cornerstone ENT Expansion Evaluation 5.10 Lease or Buy Data 5.11 Cash Flow Evaluation for Purchase 5.12 Cash Flow Evaluation for Operating Lease 5.13 Types of Debt Financing 6.1 Report Card for the Richardson Obstetric Group 6.2 Payer Evaluation Sheet 6.3 Stonehill Family Practice Payer Mix Evaluation 6.4 Payer Mix for Discussion Question 2 8.1 Sources of Law by Practice Issue 9.1 Risk Areas Identified by the OIG for Physician Practices
xiv List of Figures and Tables
00b_971898ftoc.qxd 6/30/04 6:42 PM Page xiv
10.1 Malpractice Climate in Various States, 2003 13.1 Performance Areas and Metrics for Compensation Formulas 13.2 Cost Allocation Considerations 13.3 Allocation of Revenue and Costs by Specialty 13.4 Allocation of Revenue and Costs by Individual 16.1 Issues a Strategic Plan May Address, by Type of Practice 16.2 Three Markets with Different Characteristics 16.3 Sample Preliminary Task List and Timeline for One Initiative 19.1 Typical Compensation from a Phase III Trial of an Investigational Compound
for Healing Diabetic Foot Ulcers (DFUs) Versus Clinical Revenue Generated from DFU Treatment (Medicare Allowable)
19.2 Personnel and Time Requirements for a Typical Trial 19.3 Media Options for Recruitment and Relative Costs 19.4 Reasons for Patient Dropout 21.1 Affiliated Health Schools 22.1 Electronic Products for the Physician Practice 22.2 Information Technology Implementation Steps 23.1 Goals to Monitor for Success of Practice Changes 23.2 Steps in the AIDE Process 24.1 The Greatest Decline in Mortality in the History of the World Occurred
Between 1900 and 2000
ACKNOWLEDGMENTS
The editors want to acknowledge the help and support of their friends and col- leagues: William Zelman, who brought us together; Arnold Kaluzny, who helped
us find the right publisher; Erika Fulmer, who helped us keep things moving; Kristin Keagy, Kay Grinnell, Donna Cooper, Betsy Mann, and Raleigh Mann, who helped us edit the chapters; and all the chapter authors and contributors, who gave this book its breadth and depth. This book would not have been possible without them.
xvii
PREFACE
The purpose of this book is to provide a comprehensive and practical guide to the issues inherent in physician practice management, as well as tools and techniques
to deal with those issues. Although primarily designed as a textbook for students in- terested in the field, this book will also provide physicians and their practice managers with a fundamental understanding of the financial and regulatory issues that influ- ence today’s medical practice and with insight into the cultural, human resource, and governance issues that make physician practices unique among health care organi- zations. (Businesspeople who work in medical practices are known by a variety of ti- tles, such as administrator, practice manager, or office manager. For consistency we have chosen to use the title practice manager throughout this book.)
Physicians and medical groups face increasing challenges to compete as the cost to provide health care services continues to rise. Because reimbursement from governmental and other third-party payers is flat or decreasing, improvements in tech- nology, increases in costs of pharmaceuticals and for medical malpractice coverage, and the costs of complying with the Health Insurance Portability and Accountability Act (HIPAA) and other legislation have put a strain on practice financial margins. As a result many physicians and their practice managers now realize that they need additional knowledge and administrative skills to understand and deal with the chang- ing regulatory and fiscal environment.
Physicians seldom learn about medical practice management issues and techniques during their years of medical education, and many practice managers have
xix
00d_971898fpref.qxd 6/30/04 6:43 PM Page xix
no formal training as health care administrators. Lack of awareness of critically im- portant practice issues such as the organization’s cost structure, the negotiation of man- aged care contracts, and the importance of federal and state regulations can cause the practice to lose income or, even worse, face civil or criminal action.
In this environment physicians and their practice managers must have a general understanding of the many elements of practice management and a depth of under- standing in a few. To ignore these concepts could lead to loss of income as well as sanc- tions for violations of regulatory requirements. The practical tools and references in this book will help those who lead and manage physician practices to understand the principles behind effective practice management and increase their own proficiency.
As the external environment has changed over the last few years so has the in- ternal environment in which the physician has to practice. Physicians coming from their residency programs face issues resulting from changes in the way practices do business. The loss of control in medical decision making is very much on the minds of many physicians in today’s managed care environment. Newer physicians entering an existing practice also need to understand the culture of that practice and be aware of governance and equity issues. Physicians and their practice managers must work collaboratively to maximize the success of the practice.
The Framework of This Book
In July 2002, the American College of Medical Practice Executives (ACMPE) published The ACMPE Guide to the Body of Knowledge for Medical Practice Management. It summarizes the body of knowledge and skills that the ACMPE considers a prac- tice manager must possess to be effective in today’s health care environment. The “general competencies” that the ACMPE believes necessary are
• Professionalism • Leadership • Communication skills • Organizational and analytical skills • Technical knowledge and skills
Technical knowledge and skills should be developed in eight domains:
• Financial management • Human resource management • Planning and marketing
xx Preface
• Information management • Risk management • Governance and organizational dynamics • Business and clinical operations • Professional responsibility
This book provides the reader with practical, easy-to-implement infor- mation related to the majority of these topics. Each chapter contains illustrations of important concepts or management techniques as well as tools and templates that can be used in practice. The book is organized in logical divisions based on the eight domains of the ACMPE body of knowledge, as follows:
Part One, “Financial Management,” provides the reader with the information nec- essary to understand how to turn strategic plans into financial reality. Beginning with a description of developing budgeting templates to model financial performance in Chap- ter One, the chapters in this section also discuss increasing net reimbursement through management of the revenue cycle (Chapter Two); understanding the cost of providing medical services and management accounting (Chapter Three); the taxation of physi- cians and of the profits from their practice (Chapter Four); capital budgeting for the most efficient allocation of practice resources (Chapter Five); and monitoring financial performance through variance analysis, benchmarks, and ratios in order to maintain the practice’s competitive edge (Chapter Six).
Part Two, “Regulatory Environment and Risk Management,” provides the reader with the information necessary to understand the risks that physician practices face in today’s regulatory and litigious environment. The reader will learn how to combine the knowledge obtained in the section on understanding practice costs with knowledge of legal and contract terminology in order to negotiate contracts with third-party pay- ers and minimize risk to the practice (Chapter Seven). Chapters Eight and Nine ad- dress federal and state regulations and corporate compliance and will help the reader interpret those complex laws and regulations and know when to seek the advice of legal counsel. Finally, Chapter Ten, on risk management, will help the reader under- stand the risk of medical malpractice suits and how to reduce that risk.
Part Three, “Human Resource Management,” provides the reader with the in- formation necessary to understand and implement the various governance models ap- propriate to physician practices. The reader will also learn to interpret and integrate the various laws and regulations that affect the practice’s human resource policies and procedures and to design recruitment and retention strategies (Chapter Twelve); to understand, choose, and apply the best physician compensation model for the prac- tice (Chapter Thirteen); to understand the role of midlevel providers in a practice (Chapter Fourteen); and to understand the impact on the practice of nursing work- force issues and how to address those issues (Chapter Fifteen).
Preface xxi
00d_971898fpref.qxd 6/30/04 6:43 PM Page xxi
Part Four, “Strategic Considerations: Planning, Marketing, and Management,” provides the reader with the information necessary to create and implement a business plan for the practice, including creating or refining the mission and vision; performing, analyzing, and interpreting market research; building consensus for the plan among key stakeholders; and communicating the plan and obtaining buy-in for the plan from all parties (Chapter Sixteen). Chapters Seventeen, Eighteen, and Nineteen offer informa- tion on how to add a new service or program to the practice, develop an effective mar- keting plan, and integrate a program in clinical research into the practice. Chapters Twenty and Twenty-One present information that will help the reader develop skills in dealing with relationships between medical practices and community hospitals and in working with physicians in academic settings.
Part Five, “Information Management,” provides the reader with the information necessary to assess the short- and long-term needs of the practice and incorporate that information into the strategic plan. The reader will also learn to write requests for pro- posals (RFPs), understand the various laws and regulations affecting security and trans- mission of information, and gain awareness of technologies that can add to practice efficiency and quality (Chapter Twenty-Two). Chapter Twenty-Three includes in- formation on performance improvement, teamwork, and monitoring outcomes that is critical to practice management because medical practices are obligated to pro- vide data on clinical results and practice quality to regulatory agencies. The reader will come to understand the necessity of developing databases to gather information that will aid in quality control without providing detrimental information in the event of litigation. Finally, Chapter Twenty-Four discusses the realities that medical prac- tices are facing in the twenty-first century.
Many examples are included as illustrations. All the practices and physicians used in these examples are hypothetical examples developed out of the authors’ experience or based on contemporary medical news stories.
Essentials of Physician Practice Management Practice Aids
To assist our readers in gaining the most value they can from this book, we are also providing supplemental materials on the World Wide Web. Included are
• Answers to the discussion questions at the end of each chapter • Selected mini–case studies • Two comprehensive case studies, one on human resources and one on general prac-
tice management issues
00d_971898fpref.qxd 6/30/04 6:43 PM Page xxii
• Templates where appropriate, in the form of checklists and spreadsheets, that il- lustrate best practices that can be used by physicians or their practice managers to effect change in the practice
Essentials of Physician Practice Management is a collaborative effort between a physician and a businessperson. We have tried to address the needs of physicians and their prac- tice managers in practices of varying sizes (small to large) and types (for-profit and nonprofit group practices and faculty practice plans). Our goal is to give the readers of this book practical knowledge about and insight into the operation of medical prac- tices. It is our belief that the challenges faced by practices today cannot be solved by either the physician or the practice manager alone. A team effort is needed to acquire and apply the deep knowledge and skills necessary to thrive in today’s challenging environment.
June 2004 Blair A. Keagy and Marci S. Thomas Chapel Hill, North Carolina
Preface xxiii
ESSENTIALS OF PHYSICIAN PRACTICE MANAGEMENT
00d_971898fpref.qxd 6/30/04 6:43 PM Page xxv
00d_971898fpref.qxd 6/30/04 6:43 PM Page xxvi
PART ONE
FINANCIAL MANAGEMENT