If you believe that cost accounting isn't really necessary for your ophthalmic practice to succeed, you're not alone. Many physicians feel the concept belongs in manufacturing or industry, not in medical practices. But as your practice becomes more involved in budgeted and managed care, you'll find that keeping track of revenue streams and expenses is crucial.

Ophthalmic practices have typically used internally generated computer printouts and an income statement to keep track of finances. This may have sufficed in the past, but not any more.

To deal with managed care, you need a more detailed approach to financial management and cost containment. If you're aware of your practice's costs, it will be easier to determine profits generated by each product or service you offer. You should be able to tell how much profit you derive from office visits, ancillary services and other revenue sources.

Cost accounting can guide you

Using a good method of cost accounting can help with financial decision-making in your ophthalmology practice. The way you choose and deliver specific services becomes activity-based, and your practice benefits from the improved accuracy.

Two methods are practical for use in cost accounting: the Relative Value Unit (RVU) approach and the Activity Based Cost (ABC) method.

The RVU approach will give you rough estimates and approximations to work with. With this method, you divide total practice costs by total practice RVUs to arrive at an average cost per RVU. However, this approach will only be practical if all your payers use the same set of RVUs that you do.

With the ABC method, you'll be calculating the time and resources actually used to provide a service. The amount of clinician time, physician time, fixed overhead, variable overhead and supplies used to provide a service are all incorporated to determine the cost of that service to your practice. (For more information about the ABC approach, please review "Calculating Your Exam Costs" in the March 1999 issue of Ophthalmology Management.)

Know your costs

If possible, find out exactly how much it costs your practice to deliver each offered service. With this information, you can precisely measure the expected level of profit for a particular service, as well as the acceptable reimbursement levels you need to receive from any managed care contracts you now have or are considering.

You should always review your overhead costs to avoid unnecessary expenses and to reduce necessary expenses that have become pricey. But be careful that excessive cost-cutting isn't adversely affecting the practice.

Practices typically spend too much time trying to reduce or eliminate expenses and not nearly enough time working to increase profits. You can increase profits much more quickly and effectively by increasing revenue than by reducing expenses.

Knowledge is power

If your practice has a managed care contract that's cost-accountable, you can improve your performance by matching each physician's income-production with the cost of providing those services.

Businesses need to know what it costs to produce a good or service. Your ophthalmic practice is a business, too; you need to find out the same information. Using a cost accounting system will help you take firm control of your practice's finances.

Mark E. Kropiewnicki, J.D., LL.M., is a principal consultant with The Health Care Group, Inc., and a principal and president of Health Care Law Associates, P.C., in Plymouth Meeting, Pa. He regularly advises physicians and practices on their contracting matters and business law obligations. He can be reached at (800) 473-0032.