Sound financial decisions lead to practice stability

June 1, 2005

For many ophthalmologists practicing in the 1980s and earlier, revenue flowed in rather easily and yielded a very comfortable take-home pay. Those in practice today know a different reality—one in which health insurance providers rule the roost and doctors fight for every cent while their costs shoot through the roof.

Smart practitioners know they must maximize their productivity and efficiency, and trim any excesses, George A. Stern, MD, told an audience at the American Academy of Ophthalmology annual meeting last year.

"The trends in healthcare economics have been for third-party payers to use their power to reduce our payments continually while virtually all of our expenses have skyrocketed," Dr. Stern said. "Medicine has become a tough business."

1) Are you spending too much on your base institutional cost?

2) Are you planning purchases of new capital equipment wisely?

3) Are you able to handle a monetary crisis?

Preparing a budget Answering the first question requires an understanding of budgeting and benchmarking. Dr. Stern, who practices in Missoula, MT, recommends developing a prospective budget at the start of each fiscal year that will attempt to predict what the income statement will look like at the end of the year. This is one job that should not be delegated to the practice manager; physicians should be acutely aware of where the money comes from and how it is spent every month. Then, compare the monthly income statements with each month's budget to detect any monetary problems, he said.

Preparing a budget offers four distinct advantages by:

1) Protecting income to manage personal finances better;

2) Helping one anticipate large expenses, such as a tax payment;

3) Allowing one to determine whether one can afford equipment purchases or other large expenditures;

4) Letting one adjust the budget as the year goes on, based on whether one is ahead or behind each month.

To help determine whether one's budget is appropriate, divide an expense line item by the total predicted revenues for a percentage cost. Each percentage cost can then be compared with a range of percentages found with similar practices, in a procedure called benchmarking, Dr. Stern said.

"If your percentage costs in any area differ significantly from your benchmark, you have identified a potential problem area," he said.

However, a difference is not always bad. For example, he said, if staff salaries for the practice account for 30% of costs compared with a benchmark of 18%, one might be overstaffed. But if salary costs are high because the physician has rewarded a number of loyal, long-term employees with raises, one might be content with that figure. Likewise, if one has a market-driven refractive practice, the marketing line item may exceed the benchmark, and that is OK, he said.

"Your practice's alignment with various benchmarks should reflect your practice philosophy," he said.

Capital expenses Save 10% of revenues in a capital fund for buying new equipment, Dr. Stern advised. But, he added, make sure major purchases are warranted by forming separate budgets for those items.

To create a capital budget, start a spreadsheet that outlines the initial cost, a realistic and conservative estimate of the revenues that will be generated with that purchase, and an accurate estimate of the incremental costs that will be incurred. The budget should span the number of years it will take to pay off the purchase. Then, determine the break-even point.

"Given the rate of change in our specialty, I would suggest that, in general, a break-even point of greater than 3 years would not reflect a wise investment," Dr. Stern said.

Surviving a crisis The third consideration-and a critical point for small practices and solo practitioners-is whether there is enough money saved to survive a financial crisis, such as illness or injury.