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Incorporate basic business principles into your practice
Savvy managers or administrators can use team building and strategic budgeting to ensure the fiscal health of their practices.
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When you look to the future, there is a confluence of significant issues taking place, just as in the early 1990s when the Medicare fee schedule was introduced. In the mid-1990s, the growth of managed care bred tremendous anxiety and concern about patient access. These concerns lead many ophthalmologists to pursue integration strategies including practice mergers, formation of contracting networks and, in some cases, a sale to a third party.
The good news is that, 10 years later, most ophthalmologists have seen growth in revenue and profitability. In my experience, ophthalmologists are resourceful. When faced with issues and challenges, most were able to make necessary adjustments to achieve or meet their objectives. As we look to the future, we are staring at several major trends.
In 2011 the first wave of baby boomers will reach age 65, which means that ophthalmologists will see an increase in the prevalence of eye disease. Over the next 5 years, ophthalmologists are facing the possibility of steep declines in reimbursement.
There is a third element, and that is the emergence of new, innovative technology. On the one hand, the availability of new drugs for the treatment of age-related macular degeneration offers great hope for many patients. On the other hand, the cost of these new drugs will create tremendous pressure on an already constrained health care budget.
Based on my observations and experience working with physicians over a long period, I am confident they will adapt and change in response to these market forces. The future is actually quite bright. This is one of the most exciting times I have seen in more than 20 years of consulting to ophthalmologists. Opportunities abound for those who can maintain clarity and focus and who recognize where there is change, there is always opportunity to achieve success.
Invest in your employees
I would like to share some pearls that have worked for me in running my business. This is a short list, and No. 1 on that list is to develop a strong No. 2 person. Ordinarily, this is someone who knows you, someone who you can trust implicitly and who knows how you think, how you function and what is important to you.
Another pearl: Surround yourself with a strong management team. Whether a small practice or a large practice, invest the time to develop your people. And central to that is a strong practice manager or administrator. Be sure this person is developing his key lieutenants. I know that many practice administrators are looking at a succession plan for themselves but have not effectively invested in developing their people.
Listen to our next generation of leaders. They have great ideas. Practices need to be able to identify and cultivate talent. At the same time, you need to manage out those employees who do not “get it” or do not understand the values and vision of the team.
It is also critical to engage the management team in the strategic planning process. More successful groups bring their management team into the planning process routinely, not just as a periodic exercise. And they also make it fun, by having retreats or other activities that build esprit de corps and create a good feeling among team members.
Setting the right tone is the responsibility of a leader, whether an administrator or a physician leader. Setting the right tone means creating expectations of how you want your organization to function and the values that you build your practice on. One thing that matters the most and should always be at the center of your activities is making sure that actions are focused on what is best for your patient.
The success of any organization is often a function of the quality and integrity of its leadership team. The most effective leaders are honest and have great integrity. They are humble and show respect for others. Mutual respect and trust inside your practice are probably the most important things in terms of driving increased efficiency.
Great leaders convert what appears to be ordinary into a really talented group. And that is what you are striving for in your position in the organization.
Most importantly, surround yourself with a strong accounting and financial management team. Whether you have folks inside, such as an accountant, controller or bookkeeper, or outside resources, you as the CEO or member of a board should be getting the right kind of information. Your expectations of these folks should be fairly high.
Plan fiscal strategy
Many practices do not budget effectively. The process begins with the development of a long-term strategic plan. The operating plan provides a road map of key objectives and financial requirements for the subsequent financial year. The budget provides the ability to measure performance against expected results. It is also an effective way to measure the performance of your management team. Many practices use financial metrics to incentivize both administration and group managers.
Do not be shy about building up retained earnings. Most practices distribute 100% of profits at the end of each fiscal year in the form of compensation, bonuses and retirement contributions. I understand the tax rationale for that, but this is not always a good business decision. In our company, we have been building up retained earnings over time because we think it is the appropriate way to guard and protect ourselves against unforeseen things that can happen in the future.
Make sure that your entity agreements protect the integrity of the practice. It is not smart to leave the next generation of physician owners having to pay large sums of money to folks who are not there anymore. So make sure that you review your agreements and make sure that they are designed or documented in a way that protects the integrity of the company.
Focus on numbers that matter, such as cash-flow management ratios or indices. Days sales outstanding are the number of days worth of collections tied up in your accounts receivable. That number should be in the 30- to 40-day range.
Make sure that approximately 75% of your receivables are less than 60 days old and that no more than 10% to 15% of receivables are older than 120 days.
Pay your bills on time. I have practices that are not aware that their payables are being stretched or aged and, as a result, may be on credit watches with vendors simply because they are not managing their cash flow effectively.
Look at efficiency measures. Your operating expense ratio will tell you how effective you are at converting a dollar of collections into a dollar of compensation or profit. This ratio should be in the range of 45% to 60%. Your payroll ratio will tell you how effective the practice is in using nonprofessional personnel. This ratio should be in the range of 20% to 25%.
For more information:
- Bruce S. Maller is president of BSM Consulting. He can be reached at 936 Southwood Blvd., Suite 102, Incline Village, NV 89451; 775-832-0600; fax: 775-832-0664; e-mail: bmaller@bsmconsulting.com.