Would your practice pass a stress test?

It is helpful to consider adverse scenarios that could arise from inside or outside your practice.

Issue: December 10, 2010

ByJohn B. Pinto

From The Wall Street Journal, Feb. 26, 2009:

John B. Pinto

“The Obama administration, in unveiling details of its financial-rescue plan, laid out a dark economic scenario it expects banks to be able to withstand. To ensure banks can survive even if the unemployment rate rises above 10% and home prices fall by another 25%, the administration will require some banks to either raise private money or accept a bigger investment from the U.S. government. U.S. officials don’t expect the economy to deteriorate that sharply, but they want to be sure banks are prepared nonetheless.”

Whatever you may think of the Obama administration, now that the national mid-term elections are over, the concept of “stress tests” is intelligent, whether you are a too-big-to-fail bank, a cardiology patient or an ophthalmology practice of any size.

Although the past 20 years has been a period of relative environmental stability for the profession — if you can look beyond the inexorable fee reductions, expense spirals and regulatory squeezes — past may not be prelude. Adverse scenarios could readily arise in the years ahead, from inside or outside your practice.

Crippling Medicare fee reductions have been bandied about for years. Such cuts are highly unlikely, but they could occur, especially if the most pessimistic half of macroeconomists turn out to be right. Much more likely than a calamitous federal fee cut is the advent of local or internal difficulties. A key member of your management or provider staff could suffer a health crisis. Your office building could be destroyed. Or you could lose a key managed care contract.

Testing your practice

Every practice situation is different, of course, so it is hard to spell out the most reasonable way to stress test your practice. It is likely that you, your staff and advisers are in the best position to know the threats with the highest possibility of becoming real. You should discuss these threats internally and come up with your own customized scenarios to test out. However, just as the U.S. government imposed a generic set of hypothetical stressors on the banking community, here are five generalized challenges that you might face and should test for; add others to the list based on your own situation.

1. Key doctor loss. You lose the services of your top-producing surgeon for 9 months (enough time for him to spring back to action or be replaced).

2. Key staff loss. Your expert administrator leaves to join another practice. It takes 4 months to find a replacement, and operations melt down in his or her absence.

3. Abrupt fee reductions. Double-digit Medicare fee reductions are now obliged, absent the ongoing affirmative action of Congress. It is highly unlikely that such stern reductions will ever occur; instead, Uncle Sam will simply inflate the currency as his own mitigation strategy for the national debt and ballooning entitlements. But a national fiscal emergency is conceivable. These are distinctly weird times. So it is highly appropriate for you to stress test your practice for an across-the-board reduction in all third-party fees (remember that private insurance payment rates are generally indexed to Medicare rates). What percentage drop should you test? Ten percent is a reasonable and more politically realistic figure than the statutory 20+% now on the books. But try 20% if you are feeling brave. Or morose.

4. Loss of a key managed care contract. Very few practices outside of select competitive markets (Las Vegas, Los Angeles, southern Florida, etc.) are overly dependent on any one third-party contract besides Medicare. However, if you practice in one of these adverse markets, you should hypothetically stress test your organization for the loss of any one such contract.

5. Facility loss. Fire guts your main office location. Records are now ashes. Collections halt except for the fast-tapering flow of old claims coming in. Property insurance covers the building, but it will take 12 to 18 months to rebuild. At the very least, equipping a new leasehold will take 5 months. Business interruption insurance covers some core overhead costs, but while you are getting up and running again, patients and staff drift off to other practices.

An inventory of mitigation tools

The most important mitigation tool is cash. If you own a modest million-dollar practice but have $10 million in the bank, you can survive any adversity. How much is enough? One business-like way to calculate the sufficiency of your cash reserves is to add up the average monthly expenses in your practice, before you and any other owners are paid. Multiply this number by three. The resulting number is the minimum capital you should have ready access to in the form of business or personal credit lines, family savings or friendly uncles. If your situation is more tenuous (you have been evading one or more practice-killers in the form of competitive pressures, tapering patient volumes or facility difficulties), your readily available capital reserves should be much higher than the minimum three times multiple of monthly costs.
Insurance is the most common resort in the event of catastrophic low-probability events. In addition to old standbys such as life and disability insurance, property insurance and general liability coverage, you can even buy a policy to defend you in the event of a Medicare fraud and abuse claim.
After cash and insurance, the most critical mitigation resource is brains. It is important, especially in the largest practices, to maintain an emergency responder list for everything from your plumber, electrician and insurance agents to the best compliance consultants, regulatory affairs attorneys and locum tenens agencies.
If you have a solo practice, it is important that you prepare an advance directive for your staff and family, so that in the event of your abrupt absence from the practice, they know what you would like done next. Wind down operations and give the charts to a local colleague? Attempt to sell the practice to a list of prospective buyers, prioritized from your most to least favorite? This directive is a difficult document to prepare and is a chore easily put off. But it costs nothing. Do it today.
Cross-functional staffing in all practice areas is a key mitigation strategy. Not only should all critical lay staff functions, especially patient accounts work, be cross-trained, but it is important to have, to the extent possible, more than one doctor on tap for all fiscally important clinical and surgical services. If you have a two-doctor mixed cataract and refractive surgery practice, with one doctor doing all the cataract surgery and the other doctor performing all the LASIK cases, your practice is profoundly exposed.
Facility redundancy, if feasible, is very helpful. I remember a client who lost three out of four offices to Hurricane Katrina — it was that fourth office that allowed him to stay in business. If you have just one office location and do not have any reason to own a satellite, ask yourself, “Do I have professional friendships in the community sufficient to allow me to take my patients somewhere else for awhile during a rebuilding effort?”
Preserving off-site duplicates of your important documents and databases is a standard business practice. It is likely that your attorney and accountant have retained copies of your most important documents, but check to make sure that is the case. Of course, all practice management and electronic charting systems should be backed up nightly and stored off-site (one more reason to adopt EMRs instead of combustible paper records).
Writing down protocols and procedures in an operations manual is a key strategy to reduce the impact of losing any one member of your management team.

Conclusion

Do you want less stress in your life? Take these practice stress tests. Discover and fill the chinks in your armor. Then relax. Things being what they are, the next 20 years are likely to be as relatively prosperous as the last 20. And repeat after me: “There are 620 million eyeballs in America and a nearly unlimited market demand for not going blind.” We are all going to be just fine. (I think.)

John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. He is the author of John Pinto’s Little Green Book of Ophthalmology; Turnaround: 21 Weeks to Ophthalmic Practice Survival and Permanent Improvement; Cash Flow: The Practical Art of Earning More From Your Ophthalmology Practice; The Efficient Ophthalmologist: How to See More Patients, Provide Better Care and Prosper in an Era of Falling Fees; The Women of Ophthalmology; and his new book, Legal Issues in Ophthalmology: A Review for Surgeons and Administrators. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; website: www.pintoinc.com.