Good physician owners know how to diagnose their patients and provide a plan of care for improved vision, but that’s not enough to ensure success in today’s business climate. With an industry that is becoming constrained by reimbursement and rising costs in supply and staffing, the need for physician owners to effectively diagnose issues in their business and improve is becoming increasingly important.

FIRST, THE EXAMINATION

Before owners can properly identify a business issue in their practice, they need to examine how well their organization is running. A great way to gauge that is by calculating and reviewing key performance indicators (KPIs). I’ve listed some KPIs to know below, along with relevant questions owners can ask to identify potential areas of improvement.

• Revenue per full-time equivalent (FTE) provider. How much revenue is the practice generating per FTE provider? (This KPI can be calculated by FTE ophthalmologist and FTE optometrist.) Are there any opportunities to increase provider productivity and top-line revenue?
• Encounter per FTE provider. How many encounters does the clinic see per FTE provider? Are there opportunities to see more patients through more effective scheduling or use of staff?
• Revenue per encounter. How much revenue does the practice generate for each encounter? Are there opportunities to increase consult-to-procedure ratios, grow premium conversions or more effectively use staff and providers to create the capacity for more surgeries per week?
• Overhead ratio. How efficient is the practice in using resources to generate revenue? How efficient is the practice in converting revenue into profit? (This ratio is perhaps the most frequently used indicator to initially identify whether a practice has opportunities to improve its bottom line.)
• Support staff per provider. Is the practice utilizing the right number of staff per provider for efficient operations? Is the right number of staff employed? Should staff be reduced or increased?
• Staff-payroll ratio (total staff payroll/total collections). For the amount paid to staff, are they working effectively to generate revenue? Does the practice have too many staff members? Does the practice pay staff too much or not enough?

NEXT, THE DIAGNOSIS

By knowing their practice’s KPI measures, owners can take the next diagnostic step: comparing their key indicators to data-driven industry benchmarks. This business examination can help identify where the practice is healthy and where opportunities for improvement exist.

In ophthalmology, we are fortunate to have good industry benchmarks specific to our specialty. For instance, the AAO AcadeMetrics survey and ASOAnalytics benchmarking programs include data from hundreds of national practices in different specialties. This cumulative information enables a practice to compare its performance to that of its peers.

That comparison can reveal whether a practice’s KPIs are on par, below or over the industry median. Based on that knowledge, owners can identify promising lines of inquiry. It’s important to remember that key indicators and benchmarks won’t always tell you exactly what is wrong, but they are great at providing directional information, allowing you to ask the probing questions that can identify where action is needed. From there, a proper treatment plan can be developed.

FINALLY, CONFIRM — AND TINKER

Owners should continue to monitor their practice’s KPIs during and after implementing their treatment plan — that is, check to see if it’s working. Comparing the practice’s KPIs over a period of time is considered internal benchmarking, or indicator trends. This type of tracking can help reveal if the enacted solutions were effective based on the resulting trend. From there, owners can adjust their approach accordingly until healthy outcomes, including improved operations and stronger financials, are achieved.

Below are two scenarios in which KPIs and benchmarking helped practice owners make the right decision for their business. In both scenarios, indicators were compared to AAO AcadeMetrics benchmarks.

REAL-WORLD APPLICATIONS

Scenario 1: Should we sell to private equity (PE)?

I received a call this past year from a physician owner who said he and his partners were considering selling their practice to PE. He asked if I could examine their practice and perform a benchmark analysis. Here’s what I found:

• Practice overhead ratio: Above 75%.
• Industry overhead benchmark: 60%.

Compared to industry benchmarks, the practice’s overhead expenses were too high. But why? Did it have too many staff running up expenses? Was it not productive in the number of patients it saw? Was too much being spent on fixed costs? I dug deeper into several KPIs to find these answers.

• Occupancy expense ratio: 50^th percentile (median).
• Marketing expense ratio: 50^th percentile (median).
• Staff-payroll ratio: Above the 75^th percentile.
• Staff-per-FTE-provider ratio: Above the 90^th percentile.
• Encounter per FTE provider: Just below the median.
• Revenue per encounter: 75^th percentile.

The practice’s high staff payroll ratio and high staff per FTE provider ratio, compared to industry benchmarks, indicated that it was likely overstaffed. When comparing those two ratios with the encounters per FTE provider, which was near the median, it was decided a closer look into the use of staff was needed.

As a result, three issues were identified:

1. The practice had more administrative staff than was needed.
2. The practice was inefficient in the use of surgery coordinators.
3. Revenue per encounter was high partially due to high premium conversion ratios, but the practice did not see as many patients as it could because of a problem in its scheduling templates.

After a thorough analysis — and looking at these benchmarks — practice leadership decided the practice was not efficient enough (despite previous beliefs) and, therefore, it was not a good time to sell. Instead, leadership worked hard over the next year to improve practice performance. They did so by implementing more effective scheduling, reducing some administrative staff and using other staff more efficiently. By making these changes, the practice got its overhead ratio closer to 60%, with profit more than doubling in a little over one year, while keeping staff engaged and not compromising exceptional patient care.

Scenario 2: Should we make staffing cuts?

An administrator called me, stating her physician owner regularly looks at industry benchmarks and determined that his practice was overstaffed. He based his finding on the following:

• Staff-payroll ratio: Just below the 75^th percentile.
• FTE staff per FTE provider: Above the 75^th percentile.
• Owner compensation: Close to the 50^th percentile.

As a result, the owner directed his administrator to work on “rightsizing.” Meanwhile, she felt the practice not only needed all the staff but also needed to give them bonuses. But, to do either, she needed support from additional benchmarks. Therefore, I looked into the following indicators to get the whole story:

• Encounters per FTE provider: Above the 95th percentile.
• Collections per FTE provider: Just below the 75th percentile.
• Collections per encounter: 25th percentile.

Based on these additional indicators, we saw that the owner was extremely productive in the number of patients he was seeing, which correlated with the need for a higher number of FTE staff per FTE provider. Although collections per FTE provider were above the median, the owner was making below median income.

With these additional indicators in hand, we were ready to start asking probing questions to properly diagnose the business situation:

• Were staff overpaid resulting in a high payroll ratio and lower provider income? No, staff were paid at the median for their region according to the AAO/OOSS Salary Survey.
• Did the practice have a good consult-to-procedure ratio? Yes, the conversion to procedures was close to the median benchmark.
• Was there anything different about the payer mix for this practice? Yes, the practice was a Medicaid provider, and the only ophthalmology practice in the area that took Medicaid. The physician owner felt it was his ethical duty to care for these patients because nobody else would. Upon closer examination, it was found that the Medicaid payer mix was almost 30% of all patients.

These findings proved that the practice owner was productive in the number of patients he saw; however, because of the low reimbursement rate from a major payer, the total collections per encounter was low. This was the main reason why the payroll ratio was high. It wasn’t because staff were overpaid or they weren’t productive; it was because the collections, which is the denominator for the payroll ratio, was lower.

These additional KPIs and industry benchmarks made the physician owner realize his staff were working hard and efficiently to help him care for so many patients in the community. As a result, he not only retained them all, but gave them all a bonus to express his gratitude as well. It was a total reversal from what he originally planned based on industry staffing benchmarks.

By inquiring about other indicators to diagnose the larger system, the administrator ultimately saved the owner from a horrible practice decision.

INSIGHTFUL BUSINESS DECISIONS

The two scenarios mentioned above show how KPIs and benchmarks can be used by physician owners to make insightful business decisions. They either validate that a practice is performing well or guide its improvement efforts where needed. This allows the practice to better utilize its resources and drive more revenue towards profits.

In today’s challenging health-care environment, that can go a long way towards success. OM

About the Author

Dixon Davis, a senior consultant with BSM Consulting, is based near Salt Lake City, Utah. Before joining BSM, he worked for 17 years with physician groups, independent practice associations and a privately held company focused on health-care education and product development.