Keep Your Practice OUT of the "PITS"
Even the busiest, most talented doctors are vulnerable to "Practices in Trouble Syndrome."
BY JOSEPH CARROLL

Shocking but true, even large, successful practices operated by top physicians are declaring bankruptcy in increasing numbers. Respected doctors are seeing their practices fail because their third-rate management approaches don't come close to matching their first-rate medical skills. The early warning signs of impending financial distress are usually evident in a collection of management mistakes that I call "Practices in Trouble Syndrome (PITS)."

More than just figurative irony, this acronym applies to practices that are literally in the "pits." The goal of this article will be to characterize the practices we encounter throughout the nation, and based upon those characterizations, identify why some practices excel and others fail financially.

We most often find Practices In Trouble Syndrome when physician-owners fail to recognize that today's ophthalmic practices must be run as businesses rather than just as clinics. I therefore encourage physicians to employ the inverse: treat the business operations of your practice like you would treat a patient.

If a patient presented with symptoms of a malignancy, a physician would diagnose, treat, monitor, and care for that patient. As with any malignancy, the physician is aware that failure to treat may lead to metastasis, adversely affecting the viability of other bodily systems. If the same proves true for a "malignancy" within a physician's business operation, why do so many physicians neglect to prevent, diagnose, or even treat these problems before they threaten their own personal and professional financial viability? The financial livelihood of any business is based on producing a reasonable profit for the owners, and creating value for a future sale at any given time for its stakeholders. Prior to cutbacks in insurance reimbursements, this goal was easily achieved. In fact, it's my opinion that in the past, ophthalmologists with above-average clinical and surgical skills were likely to be more successful than their counterparts in other medical disciplines.

Because reimbursement rates allowed for lofty profit margins, practice owners often lacked the motivation to pay close attention to the details of their business operations. Such complacency, however, set a precedent for many practices to deal with problems by adding personnel in a haphazard manner, making excuses for incompetent management, and constantly allowing for poor collections of accounts receivable.

Today, with the decline in insurance reimbursements and the cost of doing business escalating every year, physician-owners are being forced to take immediate action towards implementing systems of organizational structure and management controls. Our consultants continue to be perplexed at the staggering number of shareholders who don't mandate basic management awareness of maximizing productivity, efficiency and profitability. Tolerance of these fundamental business mistakes initially leads to lower operating margins and is eventually a prescription for financial disaster.

The alarming fact is that many physician-owners don't understand the magnitude of their management problems until it's too late. Despite shareholders' perseverance and dedication to their clinical and surgical responsibilities, they can lose everything very quickly and succumb to a syndrome that is analogous to the most virulent form of metastatic business cancer.

Profiling Practices

In general, we can classify the three most common types of practices we encounter as the innovators, the plodders and the rescue group, as described below:

The innovators. These are the practices that have the attitude that "we cannot fail." They have developed well-defined business plans that include short-term, intermediate and long-term goals. They take pride in their staff, and provide education, training and development as part of the daily practice routine. As a result, these practices are passionate about quality care and customer service. These practices often demonstrate a high degree of diversification because they are technologically advanced in everything they do, from patient care activities to management issues. The innovators have excellent management information systems and benchmarks for measurement. Practices classified as innovators typically set the standards for others to follow and hold themselves as shareholders accountable. The innovators don't waste time making excuses for reimbursement, economic mishaps or poor performance. Quite simply, they find the problem and then solve the problem.

The plodders. The plodder practices are usually financially successful in spite of their extremely cautious approach to business activities. The corporate culture of this group is a "maintain the status quo" attitude. It takes a lot of time for this group to make any major decisions because every major decision is studied on an endless basis. As a result, the plodders really never reach their full potential. The ownership of this type of practice will leave many profitable opportunities on the table. Consequently, the value of their practice is somewhat limited. Plodders will not be first in their market to introduce new ideas, concepts or technology. Since this group often employs a risk-averse attitude, it has been our experience that the outcome of this style of management results in stagnation.

The rescue group. These are practices that are approaching impending financial disaster, which may or may not ultimately lead to bankruptcy. Strangely enough, these practices might demonstrate some of the characteristics of the innovators or plodders. In fact, they might have been great innovators or plodders at any given time throughout their careers. However, these physician groups have simply lost the basic elements of success.

Identifying PITS

The following list represents the most common elements that surface when PITS exists:

Poor owner compliance. An old axiom is that "everything starts at the top." This holds especially true in practice management. The interesting reality is that sometimes the physician-owner is the root of the problem. This is often true because physicians set the tone of the organization each and every day. Unlike many other businesses, physicians work hand-in-hand with their staff on a daily basis. Therefore, it's absolutely imperative for the physicians to lead by example and emulate the core values of the organization without any hesitation. Successful organizations mimic this example as part of the routine; the physicians are in touch with daily tasks and demand excellence in every aspect of operations. On the other hand, practices that are in the "pits" do not comply with this simple rule. These practices often have physicians that can be demanding of others but not of themselves. Look at any successful company and you will see success when the ownership sets the right tone for the organization.

Lack of adequate management and leadership. Making an investment in competent, accountable and well-trained management will pay dividends for your business.

Throughout our travels, we have become exasperated by the number of physician-owners who accept inadequate or incompetent management. When physicians are fortunate to have first-rate management and leadership in place, they should recognize how valuable this resource is to them. A top administrator is worth a fortune to the physician group. As such, the administrator should be compensated commensurate with his or her level of responsibility and how his or her actions affect the net profitability of the corporation. Pay them what they are worth. Hold on to star performers and realize they have a significant amount of responsibility for the outcome of the practice. On the other hand, marginal performers should be counseled. They should be given very clear direction with very specific goals that need to be accomplished.

Management should be held accountable for strategic direction, implementing the business plan, moving the organization forward with growth and development, maintaining or exceeding budget requirements, daily problem-solving, implementing the company core values, promoting teamwork and customer satisfaction. The result is that management should do everything possible to ensure the highest return on investment for the amount of effort being produced by the physician-owners. The management team should know how to pay attention to the details, and recognize warning signs before they become catastrophic events.

Lax controls on staffing. Expenditures for human resources must be evaluated on an ongoing basis. It's very easy to replace inefficiency with more personnel. I recommend that before any new staff member functions without supervision, he or she must complete a formal new-employee orientation process. This orientation should include a review of the job description, in which management must clearly articulate the job duties, goals to be accomplished, and the overall expectations of the position.

None of these duties should be taken for granted. Practices that are experiencing financial difficulty usually have an overstaffing problem, leading to a lack of accountability for the staff. It's typical of these practices that they operate with little or no hands-on management, or direction for daily responsibilities. Typically, excessive overtime is claimed and no clear staff-performance systems exist.

We recommend implementing a well-defined pay-for-performance system for the entire staff. The pay-for-performance system should encompass a specific wage and salary program, with a bonus structure that rewards the staff for what they can contribute each day in terms of skills, and that places a value on their individual level of responsibility.

Indifferent collection of accounts receivable. The inadequate collection of receivables is usually the number- one problem consistent with all practices that are experiencing the "PITS." One of the most critical positions in any medical practice is the billing manager. These individuals need to feel that they have ownership in the practice. If you have a billing manager with this mindset, he or she will be passionate about the need to collect your money. (See "Ten Steps to Better Collection Results," above.)

Inadequate measurement. If it can't be measured, it can't be improved. Physicians demand accurate and timely testing for patient care as part of the routine. Why don't these same owners require timely reporting for their practice? If you want to prevent problems financially, you need to take the time to review the data from your operations. We recommend several quick reports that should be prepared for you by your management staff:

• daily summary of charges and collections by physician
• monthly summary of collections and expenses compared to budget
• monthly clinical and surgical volumes compared to budget and last year's volume
• monthly balance sheet and profit & loss statements
• monthly debt-to-equity ratios
• monthly summary of credit balances
• monthly benchmarking of expenses to national standards for ophthalmology
• monthly overhead
• monthly summary of aging accounts payable
• monthly aging of accounts receivable
• monthly days in accounts receivable
• monthly new patient ratio
• monthly revenue generated by each full time staff member and physician.

These reports should be reduced to graphs and an Excel spreadsheet that will allow management and the shareholders to review this data in a summary format in 15 minutes or less. These numbers represent the "lab tests" for the financial health of your practice.

Lack of adequate controls for employee theft. Unless you are performing all of the functions of billing, collections, bookkeeping and accounting yourself, you better have systems of control for employee theft in place for your practice.

For starters, you need to have in your policy and procedure manual a policy requiring that all new employees must undergo and successfully pass a background check prior to being hired. We recommend this routinely to our clients, and you would be amazed at what we find out about prospective employees. Would you want someone in your billing department who was convicted of theft? The answer to this question is obvious. However, we still run into practices that don't want to spend the money for this process. Prior to conducting a background check, you need to get the prospective employee's permission in writing to conduct the check. If anything comes back that prevents you from hiring the employee, federal law mandates that you must provide the applicant with a full-disclosure statement. A full background check will normally take between 1 to 3 days to complete.

The second area of concern is employees who perform multiple business functions. For example, if your administrator is posting payments, opening the mail, and taking the deposits to the bank, there could be concerns from a quality assurance point of view. A dishonest employee in this scenario could be collecting payments and altering patients' accounts to cover up for stolen funds.

The ideal situation is to have each key office function performed independently of each other. This creates a system of checks and balances for the practice. The practice should "close out" and the books should balance on a daily basis. Also, we recommend sequentially numbered fee slips to ensure accountability for all possible charges. Lost or discarded fee slips should be investigated. Routine audits should be conducted by multiple in-house managers. Make sure you have the proper controls in place in order to limit your exposure.

Vigilance Pays Dividends

I encourage you as a physician-owner to require financial check-ups for your practice by utilizing the above methods of prevention, diagnosis, treatment, control and maintenance. Ask the right questions and demand accountability for deficiencies. Watch for the warning signs of "Practices In Trouble Syndrome." By doing so, you will have the ability to evaluate whether you are growing, maintaining, or losing your competitive edge in the marketplace. Implementing well-defined processes and controls will give you the ability to be proactive instead of reactive, setting the standards for others to follow in your marketplace. As a result, you'll create value by ensuring that your practice can run without you. Accept change as an opportunity. It's an investment in your future.

Joseph Carroll is founder, president and CEO of Advantage Administration, Inc., a full-service medical consulting company for physician practices and corporate clients across the United States. Assignments range from individual projects to complete outsourcing of practice administration. He can be reached by phone at (800) 320-7409, or via e-mail at jcarroll@advadm.com.