Practicing to Win

bcc consulting was founded in 2004 with the goal of integrating the art
and science of healthcare. Despite healthcare’s dependence on technology,
far too few organizations understand how to integrate new technologies
into clinical practice - beginning with challenges related to system
evaluation, selection, and contract negotiation, and finally culminating in
system implementation.
Over the last few years, client necessity has required us to expand
our offerings into business operations, primarily related to financial
management and strategic planning, but also encompassing key tactical
projects, such as sales and marketing campaigns.
The bottom line: results.

Copyright © 2008 bcc: Consulting. All Rights Reserved. 3
Practicing to Win
I have spent
the last three years
running my own “lab”
— actually, it’s a primary care medical office. I describe it as a “lab” because
I am first an owner in the business, and second the sole arbiter of our
operational methodologies – or at least for all things business-related.
Having spent several years working for a successful healthcare IT start-up,
before starting my own healthcare consulting company, I thought it was a
perfect opportunity to put my money with mouth and help my wife start
her own Family Medicine practice. She was hesitant, having only practiced
for a year following residency, but was eager to “do things her way,” at
least regarding all things medical. I say this, because unlike the majority
of physicians I have worked with, she has a healthy appreciation of her
strengths and weaknesses.
Other than the typical challenges – such as contractors who miss their time
and budget estimates by more than 20% - I don’t think there was anything
uniquely difficult about our situation. We were opening our practice
between two of the country’s largest academic medical centers, one about
5 minutes away in one direction, and the other about 10 minutes in the
opposite. My wife’s former practice was a good 30 minute drive away, so,
other than a few die-hard patients, we were starting from scratch.
Luckily the debt markets were much friendlier back then. Despite a few
sideways looks about starting a new practice between the two monolithic
academic medical centers, the banks were all-too-happy to lend us the
money to start the practice.

w w w . h i t b c c . c o m4
Our most important front-end decisions
EMR/PMS
My wife, having always used them, was more than comfortable employing
one. Furthermore, other than a few reasonable parameters, she left the
decision mostly up to me. I was very comfortable making this decision
because I had worked very closely with many of the companies we were
evaluating and knew their products quite well. In all honesty, the decision
was a fairly simple one. We selected eClinicalWorks (eCW), a very small
company in 2004, and today probably the dominant company in the
integrated EMR/PMS market.
Marketing
Relative to most medical offices, we have done a lot of it.
IPA Membership
As an existing member in an independent physician association (IPA), my
wife was able to bring her membership with her to the new practice.
Results
We started our practice with less than 30 patients, and 1 physician. Today,
we have 3 physicians working an approximate 2.5 FTE (full-time equivalent)
schedule, and a rapidly expanding patient-base currently around 4,500.
Supporting our physicians, we have 1 LPN, 1 clinical assistant, 1.5 FTE front-
office staff, and a part-time office manager (me).
Our practice was cash flow positive with the physicians averaging 12.5
patients/day on their work days; this occurred approximately 19 months
into operation. Our third year in business was profitable, and we expect
our profitability to continue to grow. Our physicians currently average
over 16 patients/day and we will continue to grow until we reach about 20
patients/day.
Early Assumptions
I earned an MBA with a concentration in Finance from the University of
Chicago, Graduate School of Business. I say this simply to give credibility
to my financial assumptions and to further add that becoming an “Office
Manager” was never my ultimate goal.
With the continuing pressure on medicine, particularly primary care, it
seems a fair question to ask why anyone would choose to start a primary
care medical practice. My instinctive beliefs are founded in Albert
Einstein’s famous saying, “In the midst of chaos lies opportunity.”
To explain that a little more clearly, I think it is impossible to graduate
from Chicago (a bastion of conservative financial theory) and not walk
“In the midst of chaos
lies opportunity.”
— Albert Einstein

Practicing to Win
away with a firmly ingrained belief in efficient markets. A principle that
does not say markets are always efficient, but that they tend towards
efficiency…in the long run. Short-term inefficiencies frequently exist.
To go a little further, while there are clearly pressures on medicine, and
primary care in particular, I was betting that the markets would eventually
correct themselves. Furthermore, as bad as things get, neither the
government nor the larger society will allow the 600,000 or so primary care
physicians working in small practices to go out of business. That’s not to
say that none will, but not all or even most.
In a deranged sort of way, it’s like the joke about the two campers in the
woods who hear a Grizzly outside their tent. One starts to put his running
shoes on and the other says, “You know, you can’t outrun a bear.” To which
his sneaker-donning “friend” replies, “I know, I just have to outrun you.”
The System allows for poor management. If it didn’t, there would be far
fewer doctors. In fact, I was willing to bet that if we performed in the top
5%, we could make a very good living. Nothing I have seen or learned has
changed this impression.
Medical Practice as Factory
First off, I am advocating for no such thing. I think comparing a medical
practice to a factory may help explain things in a way people can more
intuitively understand.
To start with, let’s go ahead and call medical treatment, or care, the
omnipresent “widget”. For arguments sake, let’s assume that every widget
is exactly the same, regardless of who the physician or where the practice.
In order to produce widgets, medical practices are assembled as factories.
Just as factories incur operating costs, so too do medical practices. We
generally refer to these operating costs as our overhead, which is broken
into two distinct categories: fixed costs, and variable costs.
As long as we are in the business of making and selling undifferentiated
widgets, we are completely subject to the price the market sets for
widgets—in economic terms, we are “price-takers.” Our goal in making
widgets is not to make “better” widgets, but rather to reduce our cost for
producing widgets, to sell more of them, or better, a combination of the
two – make them cheaper and sell more.
The System allows for
poor management. If it
didn’t, there would be
far fewer doctors.

Before I explain how to accomplish this, I have to address the cacophony of
upset readers who are protesting that, “We are most certainly not in the
business of making widgets!”
Let me assure you, you are. Who sets your prices? Do they differentiate
the same type and level of service based on quality? If you are inclined
to ask why payers reimburse different physicians and groups differently
for the same service, I assure you it has nothing to do with quality. It is
entirely driven by volume. Those with the most leverage, in terms of most
physicians treating the most number of patients, will nearly always be paid
more, regardless of quality.
Without getting into a completely separate discussion of pay for
performance, let me just say that it’s not happening any time soon, and it
will not be led by the government or by payers. I will get back to this point
later.
Certainly not all physicians are equal, and in turn not all service is equal.
No one would dispute that. Is quality a necessary component of the
product? Undeniably; however, this is a world of business, and in the world
of business no one is currently placing a premium on quality1
.
1
Or at least no one participating in the traditional system of healthcare.
New models such as concierge medicine, arguably come much closer to a
quality-based reward system.
S
D
P*
Industry Demand Curve
The traditional demand curves apply
to an entire industry in a competitive
market.
Firm Demand Curve
A competitive firm supplies only a
fraction of the total industry supply.
As a result, the demand curve of a
single firm in a competitive industry
is perfectly elastic (a horizontal line),
showing that the price remains fixed
regardless of the individual firm’s
supply—the firm is a price taker.

Practicing to Win
In fact, while it may sound cruel and heartless, any physician who offers
more than the “standard of care” and spends any extra time evaluating
or discussing anything outside of the current billable visit is a bad
businessman. By this measure, our physicians, like nearly all others are
bad business people. Again and again, physicians – and none more than
primary care – are asked to subsidize the larger system by freely making
sacrifices. Give us quality while we pay you in bulk.
So, in our widget producing factory, we are left with many, many
imperfections – areas that we cannot systematize or automate, chiefly the
machine otherwise known as physician. Luckily there are a number of
other areas that we can improve to 1: reduce the cost of the widget, and
2: sell more.
Fewer People
The greatest cost component of
any practice’s overhead is staff. I
have met so many practices that are
quick to lament the current state
of medicine while trying to run
their office as though they were in
the 1970’s. Even small offices have
staff dedicated to pulling charts.
Multiple front-office, back-office,
you name it.
I am a huge proponent of
technology and electronic medical
records (EMRs) in particular. Overall
EMR adoption is finally taking off,
but just as quickly we are hearing
distressing reports of the growing
number of failed implementations
and practices removing “useless”
systems. I would readily argue that any practice who has failed with an
EMR has failed with their deployment execution.
Any of the top 20 systems on the market are very good, and all have been
implemented in at least several hundred medical practices (the larger
vendors, in several thousand). Despite that every physician and every
office thinks they are singly unique, they are not. A deployment failure is
a commitment failure. And most frequently, the commitment failing is a
practice or a physician’s decision not to pay for good help.
A good integrated EMR and practice management system (PMS) exists in
the small office for one reason – to reduce office overhead. It is a tool that
helps you accomplish more with less.
I would readily argue
that any practice who
has failed with an EMR
has failed with their
deployment execution.

Offices that have been in practice for a number of years will spend the
money on an EMR, and because of loyalty to their staff, will not eliminate
positions. Again, I understand the loyalty, but please do not turn around
and complain that you are not getting the return on your investment.
Almost as annoying is to hear physicians talking about how electronic
medical records should improve patient care, or the patient experience –
with complete obliviousness to the business implications. Do not buy an
EMR to yet further improve the quality of the widgets you are selling—this
makes no sense, economically. Worse, it leads to the idiotic conclusion that
payers or hospitals or employers should pay for your EMR. Good luck with
that.
The fact is that EMRs do much to improve healthcare quality, but that
is an added benefit, and in today’s environment, not a reason to buy
one. First and foremost, they allow you to do more with less…Less people,
which is the best thing you can do to decrease the cost of a widget.
To give you an example, I submit
most claims on the same day
patients are seen, though from
time to time, I have to ask the
providers to finish an outstanding
note. As part of the note, each
physician is responsible for their
own coding. Again, no extra
personnel dedicated to roles
handled by our system. In addition
to the administrative edits,
eClinicalWorks now offers access to
CodeCorrect’s knowledge base (a
company focused on automating
the overwhelming ICD-9, CPT,
and HCPCS changes along with
government and private payer
rules related to them). I had
petitioned eClinicalWorks for 2
years to incorporate CodeCorrect’s edits and am glad they finally did as I
find it invaluable.
It takes me about 15 minutes a day to submit all of our charges
(approximately 40-60 claims). Each claim goes through the following
process before it reaches the payer: coded by physician, checked for
administrative errors by eCW, checked for potential coding violations
by CodeCorrect, reviewed and edited by me if necessary and sent to our
clearinghouse, Emdeon (formerly WebMD Envoy); the clearinghouse
performs an additional edit before submitting to the payer. If the
clearinghouse detects any errors, it will send a message to the office within
a few hours so the claim can be corrected and resubmitted before it is sent
to the payer, thus reducing a lengthy denial cycle.
Do not buy an EMR
to yet further improve
the quality of the
widgets you are selling
— this makes no sense,
economically.

Practicing to Win
The amazing efficiency of this process ensures claims are submitted
promptly and accurately, minimizing later follow up. It’s a great concept:
if you do it correctly the first time, you don’t have to have a dedicated staff
to follow up on denials.
The corollary to this is that when we do have denials, I can make the
decision to follow up or not. It’s a crazy notion, but not all denials are
worth following up on. I have no doubt that many other practices are
better chasing down every cent, but our goal is to optimize our resources
and return on investment.
Less Space
Rent or mortgage payments are likely any given practice’s second largest
regularly recurring cost item. In theory, as is true with leasing vs. buying
cars, there really shouldn’t be a financial difference between renting vs.
owning. Of course, as with all things, short-term inefficiencies abound.
Additionally, there are subtle trade-offs between owning and renting that
generally come with implicit price tags. For instance, renting offers the
added flexibility of moving later if you need additional space to grow into.
Therefore, you may be willing to pay more for the “option” that renting
offers.
For simplicity’s sake, let’s just assume that it’s a zero sum gain, monthly rent
vs. monthly mortgage. Let’s assume that you have a fixed amount of space
for which you pay a fixed monthly amount. Are you fully utilizing that
space? Are you maximizing your office’s ability to generate revenue?
I was recently informed that the average physician should have about 1,500
sq. ft. So, in other words, a 3 physician practice should be about 4,500 sq.
ft. Don’t get me wrong, I love data, lots of it. I love doing analysis on data.
But this underscores a problem that is so typical of practice management.
It reminds me of the story I once heard from a McKinsey or BCG consultant
who, in complete admiration of his boss, told the story of how she
informed a client that “on average, every person has one testicle and one
breast,” clearly admonishing the use of meaningless statistics.
Our office that originally supported a solo physician can now support 3 FTE
physicians. We occupy a whopping 2,000 sq. ft. – that’s less than 700 sq. ft.
per provider. Furthermore, we have ample space. I give my wife full credit
for the office design. She is inherently a utilitarian and designed 6 exam
rooms around a central work area. The back office that used to belong to
just me, is now shared by the 3 physicians and me.
The truth is that the physicians do not need an office, or at least an office
in the traditional sense. If anything, an office gives one an opportunity
to accumulate junk and personal odds and ends that are not even good
enough to be kept at home. If the providers are seeing patients – in the
exam rooms – they really do not need an office to hang out in. A chair, a
It’s a crazy notion,
but not all denials are
worth following up on.

desk, a computer to document ongoing encounters… not much else.
In fact, while the 4 of us share a single office, you will rarely find more than
2 people in the office at any given time. I suspect the average occupancy is
about 1.3.
Of course, we do not have hundreds of square feet dedicated to paper
charts. We also do not transcribe notes. I know that most EMRs support
transcription – no doubt an early concession to those physicians who
refused to change their ways – but it flies in the face of EMRs and adds a
completely unnecessary cost.
Perhaps one of the reasons that the office accommodates the four of us so
easily is that I actually spend very little time in the office at all. I perform
most of my management responsibilities from home or on the road via
VPN (virtual private network) access. Additionally, each of our physicians
has remote access to the server from home. If anyone is at the office after
5:15pm, it is because they choose to finish their notes in the quiet of the
office.
Greater Productivity
Thus far, we have reduced the cost of our widget by minimizing support
staff and maximizing the production capacity of our factory. There are
a number of other things that we can do to minimize additional cost
elements, but rather than address them individually, I would prefer to
address them as one group under the heading — When to Spend vs.
When to Skimp.
In general, both my wife and I are big believers in sweat equity – a roll-
up the sleeves, can-do attitude that can save money at just about every
turn. For example, we purchased the majority of our office equipment,
including exam tables, exam lights, a baby scale, and an autoclave, among
other items, from a defunct medical practice in town. We bought most
of our office furniture from an unfinished wood furniture store, that we
subsequently finished ourselves. Trust me, there was real sweat involved in
this.
But knowing when to roll up the sleeves, and when to take out the check
book is imperative. In fact, I lump so many different cost items into this
header because it is probably the one area where most practices make their
biggest mistake.
When we built-out our office, I paid the builders to pull Cat 5 cable
through our space, but I did all the technical work to punch down the
cable and ultimately build out our entire network – the heart and soul of
our operation. As soon as I was finished putting the whole thing together,
I immediately contracted with an excellent network support group,
UnlimitedPlus, to manage my network, specifically to provide continuous
monitoring and disaster recovery services. Why? Because I am not an
Knowing when
to roll up the sleeves,
and when to take
out the check book is
imperative.

Practicing to Win
expert network administrator. Furthermore, it took me 2 weeks, with help,
to get the network up and running. If it fails, I want it up and running
within 6 hours. This means having contingency servers, client PCs, network
switches, and routers on hand, and the ability to recreate my network
environment. I am proud of myself for putting the network together in
the first place. I am much smarter and more effective in troubleshooting
and solving problems on my own as a result; however, I recognize when to
call in the experts.
For not a whole lot more than we spend on our cleaning service, we have
remote data back-up and a solid contingency plan in place. What’s more,
I sleep comfortably each night knowing that if anything goes wrong with
either our system or our network, we will have it all up and running within
a day. Many practices are reluctant to pay for this type or level of service.
Another common problem I’ve already alluded to, and one that I speak
about often, is EMR/PMS vendor selection. When it comes to selecting an
EMR and practice management system (PMS), offices seem to think that as
long as they choose “the right” vendor, all of their problems will be solved.
In truth, any of the top vendors’ systems are adequate, some better than
others, and some much more expensive. The success or failure of an EMR/
PMS implementation has much more to do with the office’s network (IT
infrastructure) and its staff’s willingness and ability to adapt to change
(change management). Do not expect that simply choosing a vendor will
ensure success. It won’t.
Every decision involving resource utilization – chiefly physician and staff
time – must be weighed against its opportunity cost. In other words, how
else might that resource be deployed, or what else might that person be
doing?
Physicians are often referred to as bad business people. While somewhat
deserved, the reputation really comes from the fact that very few
physicians are formally schooled in business, and many physicians have
type-A personalities. They are generally intelligent, self-reliant, and
confident. These are great characteristics, but do not lend well to taking
advice. Even worse, they seem to imbue many physicians with the
intellectual curiosity and problem-solving to want to personally undertake
unnecessary challenges. Interestingly enough, this self-sufficiency does
not generally spill over into menial tasks like cleaning the office, or trade-
specific specialties like accounting or law.
Business acumen, strategic planning, management and to a large extent
computers and computer networking, on the other hand, are all egalitarian
undertakings that require no formal license or degree to practice. As a
result, those with proven academic success and intelligence are wont to
engage in them with surety and confidence. The cost of such erroneous
misjudgment is twofold: first, subpar business performance, and second,
either lost or interrupted time with patients, which hampers revenue-
generation.
Every decision involving
resource utilization —
chiefly physician and
staff time — must be
weighed against its
opportunity cost.

Know when to roll-up the sleeves and when to pay for good help, and
apply frequently in all business undertakings.
Greater Throughput
In maximizing the capacity of our office (which effectively lowers our per-
unit cost by increasing output without increasing fixed costs), we create an
environment that allows us to sell additional widgets. In other words, our
factory can now support greater throughput, but we still need to develop
the customer base or demand to offset this new supply.
Many practices, particularly well-established practices, have a surplus of
demand and can accommodate the new supply quite readily. Others need
to be a bit more aggressive and proactive in soliciting new patients. There
are a number of effective, low-cost ways to do this. Again, one of the main
objections to tasteful marketing is cost. Why spend money soliciting new
patients when you will eventually stop accepting them? There is a very
good reason for doing so.
Again, think of your office as a factory. You are spending X dollars a
month to run the factory, of which the vast majority of your costs are fixed
Why spend money
soliciting new patients
when you will eventually
stop accepting them?
TC TRTC TRTC
TT
A A firm’s total cost (TC) curve typi-
cally resembles a classic s-curve. Total
costs quickly rise with each incremen-
tal unit of output, reflecting an initial
outlay of fixed costs. As the costs
amortize over a higher quantity of
output, the marginal cost (or cost for
each additional unit) – or the slope
of the TC curve – decreases until it
nearly plateaus. Eventually the firm’s
ability to generate additional units
increasingly depends on higher vari-
able costs, causing the curve to slope
steeply upwards.
B As a price taker, the competitive
firm’s total revenue (TR) increases
along a diagonal line, the marginal
revenue is a constant slope.
C Total Profit is simply total rev-
enue minus total cost. This can be
expressed as TR – TC = TT (profit). The
maximum profit occurs at q* where
the distance between the two curves
is greatest.

Practicing to Win
and not variable. This creates what is known as “stickiness.” In other
words, you may be able to scale back blocks of cost to cut back the output
capacity of your factory. But you probably can do this at only certain points
along your supply curve. For instance, you may only be able to spend .8X
to run the factory at 80%, or .5X to run it at 50%. However, your overhead
is not perfectly variable like the fine tuning volume knob on your stereo.
This means that you are most likely paying X dollars to support 100%
capacity, even if your throughput is only 85%. Analysis of the situation
might reveal that you should actually lower your capacity to 80% so that
you can align your cost structure with your utilization – it may be better to
spend .8X for 80% than X for 85%.
The opposite is also true. If you are spending X, but running at 85%, you
should work to increase your capacity to 100%; but how hard? It depends.
How much are you losing by not running at 100%? You may currently be
profitable, but the inefficiency is undoubtedly costing you. The value of
the ongoing loss will give you a much better understanding of the need
to accelerate supply optimization. For example, how much should you be
willing to spend on a 6 month marketing campaign that will reduce your
under utilization from 12 months to 6?
A By comparison, if we assume
that all of our costs are fixed, we can
clearly see that our total cost (TC)
curve looks like a staircase – a fixed
level of cost supports a specific level
of output, beyond which point, the
marginal cost is the entire cost of the
next level of fixed costs.
B Again, as a price-taker, our total
revenue (TR) curve resembles the
typical competitive firm.
C Unlike the typical competitive
firm, which has a single point of
maximum profitability, we have
multiple points. This clearly shows
the importance of “right-sizing” your
clinical operation to match patient
load.
TC TRTC TRTC
TT1
TT2
TT3
q1
q2
q3

Realizing that the concept of stickiness can be confusing, let me explain
this further using a hypothetical medical practice example. Let’s assume
that we have a 5,000 sq. ft. office with the following parameters:
Rent 5,000 square feet
($10,000 a month)
+ 4 FTE Providers
($10,000 a month per provider)
+ 4 MAs
($2,500 per month per MA)
+ 3 Front-Office
($2,000 per month each)
+ 1 Back-Office
($3,000 per month)
+ 1 Office Manager
($6,000 per month)
=
Total Fixed Cost
$75,000 per month
=
Total Capacity
100 patients per day
=
Average collection per patient encounter
$90
What should we do, if anything, to run more optimally if we are only
seeing 85 patients a day?
First off, let’s calculate the value of our underutilization:
100 patient capacity
- 85 patients per day (current level)
= 15 patients per day
15 patients per day
x $90/encounter
= $1,350 per day
x 21 work days per month
= $28,350 month
That’s a lot of money, but keep in mind we are a full 15% underutilized.

Practicing to Win
People, as with most fixed costs, are fixed in the short-term but variable in
the long. In other words, if we know that we are going to be running at
85% of capacity for the foreseeable future, we can restructure our staffing
to reduce costs and capacity. However, if the shortfall is only temporary, it
is much more difficult to lay people off and rehire them only when they are
needed (also called furloughing). Factoring in the costs of finding, hiring
and training personnel, you can see why they are regarded as a fixed cost
in the short-term.
In our example, if we assume each physician has the exact same level of
productivity, reducing our provider staff from 4 to 3 would immediately
reduce our capacity by 25%. We would then be able to reduce some of
the support staff and our overall fixed monthly costs. The net effect may
actually be better than our starting point, but let’s assume we are growing,
and our goal is not to downsize.
A better alternative is to build-in some variability within our staffing. So,
rather than having 4 providers who must maintain full-time positions, it is
preferable to have at least one or two providers who have the flexibility to
work a part-to-full time schedule. This gives us the ability to ratchet down
our supply to better reflect demand.
The same is true of our medical assistants (MAs). So, instead of having
4 full-time MAs, we may prefer to have 3 full time and 2 part-time. The
part-time employees, in addition to giving us greater work-hour flexibility,
simultaneously reduce our overall benefits burden.
Basic Economic Theory
According to Wikipedia,
“microeconomics is a branch
of economics that studies how
individuals, households, and firms
make decisions to allocate limited
resources, typically in markets
where goods or services are being
bought and sold. Microeconomics
examines how these decisions and
behaviors affect the supply and
demand for goods and services,
which determines prices; and how
prices, in turn, determine the
supply and demand of goods and
services.”
In general “micro,” is extremely
intuitive and explains so much
about how and why people do
what they do. I believe that if
every physician were trained on
just two simple microeconomic
concepts they would be much
better business people –the first,
which I have already touched upon,
is opportunity cost and the second
is sunk cost.
Opportunity cost is simply the cost
or value that would be realized
if the resources required for the
contemplated undertaking were
otherwise deployed. In other
words, say a physician spends
30 minutes trying to configure a
network printer. Had he opted
instead to see 2 patients, he could
have potentially billed $500 in
charges, and collected $300. His
opportunity cost is $300. Rather
than trying to fix the printer
himself, he could have hired a
professional to fix the printer
for $50. So, while the physician
probably felt he was saving $50, he
really lost $250.
As its name suggests, opportunity
cost assumes an “opportunity.”
The physician’s time cannot
generically be expressed as $300
per 30 minutes or $600 an hour.
Such reasoning would prevent our
physician from doing anything but
seeing patients. Just because the
physician has 30 minute periods
where he can earn $300, does
not mean that every 30 minutes
of his time is worth $300. If,
for instance, he had no other
patients to see at 5:30pm, it may
be more advantageous to take
out the garbage and sweep and
mop the office floors if the only
other alternative were to sit and
do nothing. (Though, sitting and
doing nothing, in turn, has its own
value that is harder to compute
and may ultimately be more
valuable than the $20 of cleaning
services saved.)
continued on page 16

Structuring our staff in this manner will not increase our supply, but it will
lower our monthly costs by smoothing our cost curve.
For example, assume we can reduce both physician and MA staffing levels
to 90%. This reduces physician salaries by $4,000 per month and MA salary
by another $1,000. So, while we still have excess capacity, we have reduced
our fixed costs by $5,000 (not including any potential benefits reductions).
If instead, we decided to actively market for additional patients, how much
should we be willing to spend? Using our previous assumptions that our
shortfall would naturally be filled over the course of a year (through word
of mouth, insurance directories, etc…), the value of the loss would equal:
The point is that opportunity cost
is dynamic and requires continuous
reevaluation. Activities that during
one interval may have a negative
value can in another prove positive.
Sunk costs, on the other hand,
are non-recoverable costs. A
commonly used example is that of
a non-refundable movie ticket. If
a person buys a non-refundable
ticket and decides at some point
during the movie that she is
not enjoying it, she should only
consider her opportunity cost and
not the sunk cost of the movie
ticket. In other words, the $7.50
for the ticket is gone. If she had
the opportunity to do something
else that would be preferable to
sitting through a bad movie, she
should do it. To do otherwise
because of a mistaken belief that
leaving early would somehow be
“losing” the $7.50 is known as the
sunk cost fallacy. The money was
gone at the moment the ticket was
purchased, and should not be a
factor in any future decision.
As applied to medical practice
management, a common
example of the sunk cost fallacy
is a practice’s decision to keep
“plugging-away” on the same
old computer system that it has
been using for the last 10 years
(most likely a legacy practice
management system). The
argument that it has already been
paid for has zero implications in
calculating net present value (NPV)
– the fundamental benchmark for
any decision.
By definition, “NPV is a standard
method for the financial appraisal
of long-term projects. Used for
capital budgeting, and widely
throughout economics, it measures
the excess or shortfall of cash
flows, in present value terms, once
financing charges are met.”
ALL decisions should involve an
NPV calculation, whether formal
or informal. Those with a positive
value should be undertaken,
and those with a negative value
should not. At no point in an NPV
calculation should you consider
previous, unrecoverable, or sunk,
costs.
In fact, if you spent $10,000 on a
system as recently as yesterday (and
for simplicity’s sake assume
TRTC
a
By building a degree of variability
into our staffing, we can smooth our
total cost (TC) curve as shown. The
net effect is smaller negative profit-
ability (area a) and greater positive
profitability (area b).

Practicing to Win
$28,350 per month
x 12 months
= $340,200
÷ 2 (assuming patient growth is
equally distributed over 12 months)
= $170,100
By comparison, if we were able to reduce the shortfall from 12 to 6
months, our loss would equal only:
$28,350 per month
x 6 months
= $170,100
÷ 2 (assuming patient growth is
equally distributed over 6 months)
= $85,050
This suggests that if we are able to run a marketing campaign that would
reduce the period of our patient shortfall from 12 to 6 months, we would
earn an additional $85,050. To put this
there are no recurring costs
associated with supporting the
system), and find a different system
today that costs say, $50,000, but
offers a positive NPV, then you
should purchase it. The system
you purchased yesterday has no
bearing on today’s decision. In
other words, you cannot make-up
for a previous poor decision by
“sticking it out.” The result of such
thinking is a multiplication of the
number and effect of your poor
decisions.
These economic concepts extend
well beyond easily calculable
monetary decisions. For example,
I would argue that the primary
reason there is so much resistance
to change is the sunk cost fallacy.
When presented with a new
system, policy, or procedure,
people resist change. While people
can be pig-headed, or “irrational”
as an economist would say, they
generally are not. The rash of
failures and challenges associated
with system change is not caused
by rampant irrationality, or
incompetence. Something else is
at play.
Whether the front-office
receptionist, the office manager,
or even the physician, each
person learned to do their job a
certain way. They invested time
and energy, and likely feel they
are proficient at accomplishing
their responsibilities, regardless
of whether true or not. The
point is that they believe they are
good at what they do. (Consider,
for example, that research has
consistently found that 9 out of 10
people believe they are smarter
than the average person.)
When confronted with change,
the near-universal reaction is that
the effort of learning something
new does not justify the cost.
The problem is that the person
making the decision typically
overvalues their current efficiency,
undervalues the potential gains
to be realized by changing (thus,
resulting in an understated NPV),
and finally cannot let go of the
original effort required to learn
their job in the first place (sunk
cost fallacy).
Nearly every decision in medical
practice management involves
these concepts and having a better
understanding of their implications
can greatly simplify and improve
decision-making.

into perspective, an aggressive marketing campaign might cost $5,000 to
$10,000. So, to earn $85,000 at a cost of even $10,000 nets an additional
$75,000 of income.
Finally, with some basic principles in place, we can graphically display the
effect productivity enhancing tools and processes have on our cost curve
and ultimately profitability:
The Top-Line
Up to this point, we have focused on the lower half of the factory’s
income statement, or the expenses. Working in the perfectly competitive
commodity business of widgets, our ability to improve our performance
is primarily limited to the realm of cost and productivity management.
Remember, we are not setting the price of our goods, the market is.
After all the work we have discussed to run our factory as efficiently as
possible, what do you think the net difference is between the best and
worst performing practices? I would bet that, adjusting for outliers and
normalizing for comparison, the best practices earn 10% higher income as
a result of good practice management. 10% is substantial, particularly if it
all flows through to the bottom line.
Now, let’s relax our assumption that the market fixes the price of widgets.
It still does, but instead of a single price, let’s assume it fixes the price for
widgets at 3 distinct levels: 1 small independent practice, 2 moderate
group affiliated practice, and 3 large affiliated practice.
Small independent practices as the label describes are independent (not
group or hospital owned) and are typically comprised of 5 or fewer
physicians. Roughly 75% of all physicians practice in these groups.
Moderate group affiliated practices are either: a) larger group practices, b)
belong to a larger parent organization, or c) affiliate with enough practices
to form an association, such as an independent physician association (IPA).
Moderate group affiliated practices typically include anywhere from 50 to
The enhanced productivity provided
by an effective EMR/PMS increases
initial total cost (TC1 vs. TC0), but ex-
tends the reach of fixed cost tranches
– essentially, you can do more with
less. This graph is conceptual only
and not drawn to scale. The net
effect is greater total profitability
(areas under the TR curve) for TC1 vs.
TC0.
TC0
TC1
TR

Practicing to Win
several -hundred physicians, or more. A small independent practice can
gain leverage by joining such an association, as my wife’s practice has done.
Finally, the large affiliated practice is either part of a large hospital or
group affiliation that may have many thousands of physicians.
What do you think the market pays for widgets across these 3 groups?
Keep in mind that fee schedules are confidential, so not readily
comparable.
When the small independent practice “opts-in” to a payer’s contract, they
are given the most basic and lopsided fee schedule possible. Let’s just call
this Y per widget (our baseline).
With the added leverage of a moderate group affiliation the exact same
practice would likely see their fee schedule jump to somewhere between
1.15Y to 1.20Y – a 15%-20% increase.
The large affiliated practice, in turn, would likely see fee schedules in the
neighborhood of 1.2Y to 1.4Y – a 20% to 40% increase over the baseline!
Again, these different fee schedules have zero correlation to quality.
It should be very clear that while it is important to run a good practice
– a 10% differential is enormous ($100,000 to the bottom line for every
$1,000,000 of gross revenue) – it is more critical to get on the right
contracts. This should help explain to the casual observer how some
apparently well run practices have difficulty staying afloat, while other
clearly inefficient operations seem to thrive.
Keep in mind that this situation is not sustainable. Eventually, the market
will correct itself and those providing good, quality care will be justly
rewarded, and better so if they can also run a good business operation.
In the interim, practices must understand the dynamics of the current
environment if they are to succeed.
If the same firm, with the same cost
curve, were offered three different
fee schedules (total revenue curves),
the impact to total profitability is
represented by TT0
, TT1
, and TT2
.
TR0
TR1
TR2
TC
TT0
TT1
TT2

Future Challenges
Regardless of the appropriateness of the moniker “Consumer-Driven
Healthcare,” the shift of ultimate financial responsibility from employers
to employees, or healthcare consumers, brings with it both good and
bad. For one, quality cannot be driven by payers. There are far too many
variables and unknowns to effectively benchmark clinical outcomes. Worse
yet, allowing the payers to define the quality criteria and metrics is a bit
like having the foxes establish security protocols at the hen houses. Payers
are far more interested in and incentivized to maximize profitability than
improve clinical outcomes. Don’t let the fact that the two occasionally
intersect lead you to conclude otherwise.
As in all industries, the consumers of goods or services should be the ones
to determine the value of that which they seek. To assume that a third
party is better equipped to measure the quality of care provided than the
patient receiving the care is beyond paternalistic, and has consistently
proven inaccurate. I am much better equipped, for instance, to determine
the quality provided by my physician than my auto mechanic. But other
than industry self-regulation, which healthcare does as well, no outside
organization intervenes directly on my behalf to protect me from making a
bad auto repair decision or from being taken advantage of.
Ultimately, as patients become
more empowered to spend their
own dollars on healthcare, the
tried and true laws of supply
and demand will kick in. Good
physicians will be highly sought
after. Lesser physicians will be
in less demand, and the market
will adjust prices accordingly. The
platforms for consumers sharing
their experiences and feedback
have grown exponentially over
the last few years and will likely
continue as patients assume
more of their responsibilities as
consumers.
A short-term problem with the
newer healthcare financing model
is that more reimbursement is coming directly from the patient. When you
consider that your worst payer is almost certainly your patients themselves
(consumer spending reports generally show that consumers place medical
bills somewhere between Ho-Hos and Ding-Dongs on their priority list
of debt repayment), practices must become more aggressive in verifying
benefit eligibility and collecting payment in advance of service.
As in all industries,
the consumers of goods
or services should be
the ones to determine
the value of that which
they seek.

Practicing to Win
Final Thoughts
Again, my rationale for comparing the physician office to a factory is in
no way intended to detract from the great care and sacrifice so many
countless physicians make day in and day out. To the contrary, I feel that
our healthcare system should reward those commensurate to the service
they provide, rather than arbitrarily, or even worse, politically.
Healthcare has historically fallen
into a special class of industry and
business that even in the eyes of the
staunchest laissez-faire economists
has deservedly required government
intervention and oversight. The
argument has long been based
on the notion of information
asymmetry – the physician or
provider has a disproportionate
knowledge or access to information
than the consumer. Thus, in
protecting the rights of the
consumer, the government is
justified in intervening to ensure a
level playing field.
It’s a reasonable concept, but
in practice, does not work. The
government is largely responsible
for the dysfunctional system that we
have today. Rather than embarking
on a tirade of Medicare and
Medicaid, I prefer to focus on those things that physicians and practices can
do to not only survive, but thrive.
Sound economic and financial practices can greatly improve any medical
practice, even in today’s managed care environment. As healthcare shifts
to a more traditional free-market system, understanding of economic
theory and principles will become even more pertinent and crucial.
The continued transformation of healthcare over the next decade promises
yet more chaos; but rather than throwing your hands up in resignation,
ponder Albert Einstein’s wisdom and appreciate the boundless opportunity
before us.

Unlimited Plus is North Carolina’s premier Healthcare IT Services Provider,
specializing in network management, EMR/PMS implementation and infor-
mation technology consulting services. With hundreds of machines under
management across healthcare organizations large and small, Unlimited
Plus consistently delivers high-quality and responsive technical support.
To learn more, visit us at http://www.unlimitedplus.com/Healthcare,
or call (888) 865-7587.

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