bcc consulting was founded in 2004 to integrate technology into healthcare practices. It has since expanded its offerings to include business operations like financial management and strategic planning. The document discusses running a primary care medical practice as a "lab" to test operational methodologies. It was started between two large hospitals with an electronic medical record system. Three years in, it has grown from 30 patients to over 4,500 patients with 3 physicians. The practice was profitable after 19 months.
2. 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.
4. 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
6. w w w . h i t b c c . c o m6
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.
8. w w w . h i t b c c . c o m8
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.
10. w w w . h i t b c c . c o m10
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.
12. w w w . h i t b c c . c o m12
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.
14. w w w . h i t b c c . c o m14
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.
16. w w w . h i t b c c . c o m16
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).
continued on page 17
18. w w w . h i t b c c . c o m18
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
20. w w w . h i t b c c . c o m20
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.
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