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Six KPI's That Will Turn Costs into Gold for Healthcare

Published on

February 1, 2018

Daniel Rhodes

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For years, medical practice groups have held a revenue-centric focus on practice management. When operating in a fee for service environment, the more services you can provide, bill for, and collect on, the more your practice makes. With the winds-of-change blowing in the industry including Value Based Cost compensation, cost awareness is critical to the long-term health of a practice from a business perspective. Managing costs is a basic requirement of any business. I was reminded of this when listening to my mother tell me about a recent visit to her Oncologist. The group’s practice was recently acquired by a prominent local hospital. Mom asked the doctor if the decision was financially motivated. “Actually, it was” her doctor replied. “Ten years ago, we built a new building to house our practice. It’s an amazing space. It enables us to deliver a very high level of service to our patients in a relaxed environment. However, due to changes in capital markets, the practice was not able to support the fixed costs resulting from the debt service.” They had to find a way to get relief and return to focusing on providing service their patients.

This should be a wake-up call to all practice leaders that gone are the days of billing our way out of poor financial decisions. Practices need to monitor cost-centric levers as much as they do review-centric levers in the new market we find ourselves in. The following is a list of the Key Performance Indicators (KPI’s) that industry best practices define as essential for monitoring the financial health of any primary-care or specialty service provider. Each KPI is identified, its importance is defined, and it is calculation is explained.

1. Average cost per Visit

Owen Dahl, FACHE, an independently contracted consultant and MGMA member, summed things up nicely at the 2014 MGMA Financial Management and Payer Contracting Conference in Orlando, Florida, when he stated, “All practice managers can quote you book and verse about revenue and collection management. However, very few can tell you what an average patient visit costs the practice.” In any for-profit business, cost awareness and management is a critical business lever.

This KPI is calculated by dividing total operating costs by the total number of patient visits during a given accounting period. Total costs should include all costs of the practice including direct and indirect costs. This KPI can be further analyzed by physician. Do this by compiling all direct costs attributable to each doctor and combine it with an allocation of a proportionate share of indirect costs of the organization.

2. Number of New Patient Visits

The life’s blood of any business is its ability to attain new customers and then retain those customers for as long as possible. Any business, regardless of its service or product, loses customers for a variety of reasons. It is important to battle this attrition through the addition of new customers to keep the organization healthy. Industry standards indicate that the average family medicine practice loses about four percent of their patients in any given year. The number of new patients seen is found by totaling the CPT codes charged for this activity during an accounting period. This is typically 99201-05.

3. Cost per Physician FTE

In any business, it is important to understand the profitability of each revenue-producing resource employed by the organization. Weather your investigating a department in a hospital, a stamping press in a metal shop, a staff accountant in a CPA firm, or a healthcare provider in a medical practice. When evaluating costs, we recommend accounting by location and/or business unit, by department or revenue/cost center, and by health provider. This can provide management a multi-faceted insight into the costs associated with providing care. Costs should be further broken down between fixed costs, variable direct costs, and variable indirect costs.

Fixed Costs are those that tend to remain constant regardless of changes in business volumes, such as rent and malpractice insurance. Variable Direct Costs are those which are specifically related to providing patient care and rise or fall based upon the volume of services provided. This could include medical supplies, lab costs, and patient care specific salaries. Variable Indirect Costs are those which are necessary but do not relate directly to the services provided by a health provider, such as utilities. These will also vary in total as business activity changes.

When determining the number of physician FTE’s during an accounting period, we find it best to calculate this number by dividing the number of hours worked providing patient care by the number of hours in the work period, adjusted for typical days off. For the typical practice, the number of available hours to work averages around 1,920 after adjusting for holidays, vacation days, and other time related benefits offered to your caregiver staff. When determining hours worked, rather than assuming that all hours scheduled were worked providing patient care, it is best to sum the hours actually worked and logged in the practices electronic medical records system or practice management system by each care giver. This should more accurately match hours worked with services billed. In turn this will allow you to better analyze revenue production and production cost on a per hour basis.

Once total expenses have been accounted for, they are divided by the number of physician FTE’s worked in the corresponding accounting period. This can then be further broken down by location, business unit, or care-giver.

4. Cost per Relative Value Unit

Before discussing the calculation for this KPI, a very brief history of the Relative Value Unit may be in order. Prior to 1992, Medicare reimbursement was based upon usual, customary, and reasonable (UCR) charges. This method was widely seen as distorted based upon geographic variability and Medicare fiscal restraints. In 1985, the Health Care Financing Administration contracted with the Harvard University School of Public Health to come up with a better, more objective method of compensating physicians for their services. The end result was the Resource-Based Relative Value Scale (RBRVS). The Relative Value Unit (RVU) is a component of the RBRVS. Today, all Medicare reimbursement for services provided to Medicare beneficiaries is based upon the RVU of the procedures performed, adjusted by a geographic modifier, and then multiplied by a conversion factor.

While this is seen as controversial by some, the RVU is an established standard, developed by an independent body, and governs or impacts the compensation received by all medical practices to one extent or another. As it is the basis for reimbursement for roughly half of a typical medical practice, it seems a reasonable basis for an analysis of cost versus revenue measure to profitability of services provided. Now that we know what it is, let’s look at what makes up an RVU. There three major components of an RVU or Total RVU; the physician work RVU, the practice expense RVU, and the malpractice RVU. Physician work RVUs account for the time, technical skill and effort, mental effort and judgment, and stress to provide a service. Practice expense RVUs account for the non-physician clinical and nonclinical labor of the practice, as well as expenses for building

space, equipment, and office supplies. Professional liability insurance RVUs account for the cost of malpractice insurance premiums. The first KPI we will discuss uses the Physician Work RVU. To calculate work Physician Work RVU KPI, total physician cost for a given period is divided by the work RVU’s recorded per the patient billing system for the same relevant period. The next KPI leverages the Practice expense RVU. To calculate the Practice Expense RVU KPI, total practice expenses, excluding malpractice cost and physician costs and including an allocation of proportionate costs for practice overhead, are divided by the practice expense RVU’s recorded per the practices billing system for the same period.

The last KPI leverages the Total RVU. To calculate Total RVU KPI, total practice expense for a given period of time, including an allocation of proportionate costs for practice overhead, are divided by the Total RVU’s recorded per the practices billing system for the same period.

5. Days Collections in Reserve

The government has established October 1, 2014 as last date for a practice to implement ICD-10. This implementation process will include a great many moving parts including training internal staff, adjusting internal IT resources, addressing health plan contracts, integrating processes with trading partners, enhancing clinical documentation, and testing new processes. Regardless of the diligence of your efforts and the quality of your outcomes, there are going to be bumps on the road to final implementation. These can come from issues within your practice, within the applications you use, or issues within payers systems.

It has been estimated by many industry experts that the transition from ICD-9 to ICD-10 will result in increases in claim denials of anywhere from a one hundred percent to as much as a three hundred percent for the average practice. This transition is expected to last anywhere from three to six months. Any increase in denial rates will impact a practices cash flow by delaying receipts and increasing claims processing costs.

To determine day’s collections in reserve, the amount of cash and cash equivalents on hand at the end of an accounting period is divided by the average collections per day. Cash and Cash Equivalents on hand at the end of the current account period(Cash Collections over the past 3 calendar months / number of days in past 3 calendar months) {Authors note: In early April, 2014, the deadline for the implementation of ICD-10 was extended to October 1, 2015. While this extension gives a practice a one year reprieve, it does not remove the inevitable transition or the probable impact to the practice’s cash flow.)

6. Revenue-Centric Key Performance Indicators

This paper is dedicated to KPI’s focused on cost management. This does not preclude a practice from taking their eyes off the ball regarding revenue-centric KPI’s. Revenue management has been the life’s blood and primary focus for practices for years. The need for managing the revenue stream continues to be the top priority for each practice. This includes the entire revenue cycle from charge capture, to proper coding and documentation, to contract negotiations with third-party payers, to receivable management, private payer management, bad debt write-offs and related collections, and to reimbursement auditing.

Examples of accounts receivable managed KPI’s include:

 Days in receivables outstanding, about 30 days

 AR percent over 120 days, 10 – 15%

 Net collectable, 95 to 98% (this should include capitation revenue as well)

(Note: the above averages are per findings by the Medical Group Management Association,MGMA)

About the author:

Shawn Slavin, CPA and active member of MGMA, is currently VP of Software Systems for CS3 Technology. Shawn’s extensive experience in the healthcare industry includes 6 years in regional and national Public Accounting working with customers throughout the central US. He is a founding partner with CS3 Technology and the designer of Stat-Connect™ a financial software tool designed to provide Practice Managers analytical business information. He works closely with his healthcare clients including general practitioners, optometrists, nursing homes and mental health agencies providing accounting software services and general business consulting.

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