Essentials of Physician Practice Management / Edition 1

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Essentials of Physician Practice Management offers a practical reference for administrators and medical directors and provides a comprehensive text for those preparing for a career in medical administration, practice management, and health plan administration. Essentials of Physician Practice Management is filled with valuable insights into every aspect of medical practice management including operations, financial management, strategic planning, regulation and risk management, human resources, and community relations.

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Product Details

  • ISBN-13: 9780787971892
  • Publisher: Wiley
  • Publication date: 8/6/2004
  • Series: Jossey-Bass Public Health Series , #6
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 592
  • Product dimensions: 7.30 (w) x 9.37 (h) x 1.68 (d)

Meet the Author

Blair A. Keagy is the George Johnson Distinguished Professor of Surgery and chief of the Division of Vascular Surgery at the University of North Carolina.

Marci S. Thomas is a clinical assistant professor in the Department of Health Policy and Administration in the School of Public Health at the University of North Carolina, Chapel Hill.

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Table of Contents

List of Figures and Tables.




1. Budgeting for Physician Practices (Marci S. Thomas).

2. Revenue Cycle (Lou Porn, Polly Minugh).

3. Understanding the Cost of Providing Services (Suriya H. Grima, John A. Grima).

4. Taxation and Physician Practices (Anne M. McGeorge).

5. Capital Investment Decisions (Marci S. Thomas, Elisabeth Fowlie Mock).

6. Monitoring Financial Performance (Teresa L. Edwards).


7. Negotiating Managed Care Contracts and Contract Management (Beacham Wray).

8. Federal and State Regulations (Bruce A. Johnson).

9. Corporate Compliance in a Medical Practice Setting (Bruce A. Johnson).

10. Risk Management (Kathryn Johnson).


11. Governance and Leadership in a Medical Practice (Blair A. Keagy).

12. Human Resource Management (Bruce J. Fried, Marci S. Thomas, Lisa L. Goodrich).

13. Physician Compensation (Lou Porn).

14. The Role of Nonphysician Clinicians in Medical Practice (Blair A. Keagy).

15. Impact of Nursing Workforce Issues on the Physician and Practice Manager (Elizabeth A. Arsenault).


16. Developing a Business Plan (Lou Porn).

17. Adding a New Service or Program to a Medical Practice (Blair A. Keagy).

18. Marketing a Practice (Karen McCall, Dan Dunlop).

19. Integrating a Clinical Research Program into a Medical Practice (William A. Marston).

20. Relationships Between Medical Practices and Community Hospitals (Blair A. Keagy).

21. Academic Medical Centers (Mary Jane Kagarise, Anthony A. Meyer).


22. Information Systems (David D. Potenziani).

23. Performance Improvement, Teamwork, and Monitoring Outcomes (Bette G. Brotherton, Larry Mandelkehr).

24. The Twenty-First-Century Medical Environment (George F. Sheldon).

The Editors.

The Contributors.


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First Chapter

Essentials of Physician Practice Management

John Wiley & Sons

ISBN: 0-7879-7189-8

Chapter One


Marci S. Thomas


This chapter will help the reader to Understand the purposes and advantages of budgeting. Describe the process of budgeting. Prepare a budget for a physician practice.

Each year physician practices go through the all-important exercise of planning for the coming year's activity. As more fully discussed in Chapter Sixteen, this should be a joint activity between practice management and the physician-owners. The budget is the tool that group practice managers use to translate the practice's goals and objectives for the year into dollars. The budget also serves as a vehicle to communicate financial targets to physician-owners and other stakeholders in the practice.

To the wise practice manager the budget is not just a financial plan. It is also a mechanism for monitoring and managing the activity of the practice on a periodic basis. Some practices compare actual results to the budget on a monthly basis. Others do it more or less frequently. The comparison of actual results to budgeted amounts enables practice management to

Focus on where the practice is going and what it will take to get there.

Determine where resources should be allocated.

Assess the productivity of the practice.

Foster accountability in department managers.

Analyze the areas in which variances in volume have occurred.

Identify rates paid bythird-party payers that are either more or less than originally predicted.

Identify costs of various inputs to the practice, such as labor and supplies, that are either more or less than originally predicted.

Make the necessary changes on a timely basis to keep the practice healthy.

Note opportunities for future expansion.

Practice managers can use this information to make timely changes to practice operations. Corrective action is particularly important in times like the present when reimbursement is low in comparison to the resources it takes to adequately deliver services and manage a practice. Thus the budget as a control mechanism takes on additional importance. Figure 1.1 illustrates the relationship between the budget and the planning and control cycle.

Variety in Budgeting Methods

There is a great deal of variety in how physician practices budget. Some take budgeting very seriously and use it as a planning tool, whereas others don't prepare budgets at all. The wise group practice manager will develop a budget in sufficient detail to provide himself, the physician-owners, and other practice stakeholders with information that will be useful in guiding the practice and monitoring results. At the same time, the budget should not be so detailed that it takes an inordinate amount of time to accumulate and analyze the information. The size and complexity of the practice as well as the level of its administrative resources will play a role in determining the appropriate level at which to budget. However, it is better to budget with less detail than not to budget at all. Practice budgets vary in

Level of stakeholder participation

Level of detail

Budgeting method used-incremental or zero-based

Level of Participation

Participation in the budgeting process varies from practice to practice. In some practices budgeting is left to the practice administrator, with little input from the physicians other than how much they intend to work in the coming year. This is unwise. Input from physicians, department heads, and other clinical staff can provide the practice manager with fresh ideas. In addition to making the budget more reliable, such input increases buy-in to the financial plan as well as awareness of what it costs to run a practice. At the same time, where participation is advisable and will most likely produce the best result, the practice manager must also consider the following:

The budgeting process will take longer and consume resources that the practice might otherwise devote to patient care.

Estimates of patient volume and of costs of the inputs to deliver patient care may be unrealistic.

People who take time to provide their input to the budgeting process may be disappointed if their input is overridden by the practice manager.

Level of Detail

As more fully discussed later in this chapter, revenue budgets are constructed using estimates of patient volume at varying levels of reimbursement. Expense budgets are constructed using estimates of labor, supplies, and overhead. How far the practice manager disaggregates those estimates depends on the precision desired. For example, a more precise budget can be created by budgeting patient visits by intensity as well as by payer and contract type.

Physicians provide services in several settings. Office visits, surgical procedures, and other types of diagnostic and therapeutic services can be provided in physicians' offices, hospitals, skilled nursing facilities, hospices, outpatient dialysis facilities, clinical laboratories, and ambulatory surgical centers. Physician practices frequently use relative value units (RVUs) to express intensity of service. The resource-based relative value scale (RBRVS) was enacted into law as part of the Omnibus Budget Reconciliation Act of 1989. The fee schedule, phased in over a four-year period (1992 to 1996), reimburses physicians for their services based on three distinct components:

Work (physician effort and skill)

Practice expenses (rent, supplies, staff effort)

Malpractice expenses

The objective of the RBRVS is to compensate physicians based on both the work involved and the resources used in patient care. There are codes for 7,000 distinct services, ranging from basic services such as injections to complex bundles of procedures associated with particular surgeries. These more complex bundles include the surgery and preoperative and postoperative visits. Each HCPCS (Healthcare Common Procedure Coding System) procedure code has a relative value (the basic value is 1). These values are adjusted for geographic factors to produce the reimbursement level. Although this payment system was created for services to Medicare patients, the methodology can be used to predict the level of effort involved in serving other patients as well.

In 2001, the American Medical Association performed a survey to determine whether non-Medicare payers used the RBRVS relative rankings in their payment systems. Respondents to the survey included Blue Cross Blue Shield organizations, health maintenance organizations, point-of-service plans, preferred provider organizations, Medicaid agencies, and workers' compensation plans. Of the 226 entities surveyed, 74 percent used the RBRVS in at least one of their product lines. The American Academy of Pediatrics has adapted the RBRVS relative rankings for services to pediatric populations.

If a practice manager is budgeting using a high level of detail, she might compile a list of the Current Procedural Terminology (CPT) codes most frequently used by the practice and estimate the number of times each would occur during the year. Table 1.1 presents an example of such a list, in which estimated RVUs for each of the three reimbursement components are multiplied by the geographic adjustment to estimate the total RVUs. However, if that level of detail is not desired, the practice manager can determine the procedures most commonly performed and categorize them according to the average time it takes to perform each one, as illustrated in Table 1.2, using the following scale:

Work Level RVUs Time

0-2 = 15 minutes 2.01-3.5 = 30 minutes >3.5 = 45 minutes

Level of detail also comes into play when estimating the reimbursement to be received for a particular service. Depending on size and geographic location, a practice may have dozens of reimbursement levels for the same service. If a high level of precision is desired, the group practice manager will estimate by payer and by contract. Depending on the number of payers and of contracts per payer, this level of detail may be overwhelming. Practice managers may wish to use only a few payment levels, aggregating contracts with similar payment features and amounts.

The most basic level of detail that a practice can use is number of patient visits. If patient visits are generally homogeneous (that is, they require the same level of effort) and reimbursement levels do not vary significantly by payer, this level of detail may be all that is required. Figure 1.2 illustrates various levels of effort in relation to the precision achieved.

Physician practices may experience daily, weekly, or monthly variations in volume. This level of detail will be important to consider, especially when it comes to budgeting for revenue, labor usage, and cash flow.

Incremental Versus Zero-Based Budgeting

Incremental budgeting begins with the results of the prior year's activity and adjusts for expectations of

Increased or decreased patient volume for current payer contracts

Additional patient volume from anticipated contracts

Additional patient volume due to increased marketing activities

Additional patient volume due to referrals from networking with other providers

Changes in reimbursement for current contracts

Changes in personnel, including increases or decreases in pay rates

Changes in overhead costs due to increased space, additional machinery and equipment, changes in supply costs, or overall inflation

This form of budgeting takes the least amount of time to perform. However, the necessary research must still be performed to ensure that variables such as reimbursement levels and changes in market share and patient mix are accurate. Otherwise the practice might find that revenue is not sufficient to pay operating expenses. Because physician practices operate mainly with costs that are fixed, accurate volume and reimbursement projections are critical. In addition the importance of obtaining accurate predictions for expenses that are proportionately high and nondiscretionary, such as for malpractice insurance, cannot be overemphasized.

An alternative method of budgeting for established practices is zero-based budgeting. Zero-based budgeting is a concept that has reemerged a number of times since the term was first used by Peter Phyrr in 1970. The technique, as its name implies, involves starting from ground zero and building a budget by identifying and prioritizing discrete business activities and then developing alternative methods for completing these activities. The alternatives include both different ways the activity can be completed and different levels of effort that can be used, so that the budgeting process attempts to align resource allocation with strategic business priorities.

This method of budgeting requires the practice manager to

Understand the possible volume, costs, and reimbursement of the activity.

Determine the profitability of the activity.

Review and evaluate the profitability of third-party reimbursement contracts.

Look at how well the activity fits into the practice as a whole.

Evaluate alternative ways to conduct the activity that may be more cost effective.

Zero-based budgeting can be used as a continuous quality improvement (CQI) tool because it challenges leaders to routinely question and justify their activities and resource allocation. However, its implementation presents challenges such as these:

The process requires a significant investment of time and effort. One KPMG study suggested that inefficient budgeting can consume up to 20 to 30 percent of senior leadership's time.

The budgeting time horizon is often in conflict with business demands. Budgeting takes more time in dynamic, rapidly moving business sectors that need to respond quickly and less time in more stable settings where immediate decision making may not be required.

Early proponents of the technique touted zero-based budgeting as a way to increase decision making by providing more timely feedback to managers. However, implementation of the process tends to be most successful in settings with centralized decision-making authority or in practices that are more procedure or project oriented, good news for small to moderate size physician practices. In a group practice setting, zero-based budgeting may be a useful technique if stakeholders are given a clear explanation of why the change to this method is taking place and if there is commitment to the time and effort necessary to implement the process.

Notwithstanding its useful characteristics, zero-based budgeting has not caught on with many medical groups. In fact, newer techniques such as activity based costing (ABC) (discussed in Chapter Three) may be preferable in light of increased software options designed to facilitate their implementation.

Cash Versus Accrual Accounting Method

A physician practice may maintain its accounting records on either a cash basis or an accrual basis. In the cash basis method of accounting, revenues are recorded when cash is received, and expenses are recorded when cash is spent. Generally, larger expenditures, such as those for building and equipment, will not follow the rule for operating expenses because they must be depreciated for tax purposes.

The accrual method of accounting is the method prescribed by generally accepted accounting principles (GAAP). In the accrual method, revenues are recorded when they are earned, and expenses are recorded when they are incurred. The accrual method provides for a better matching of revenues with the inputs or expenses it takes to produce them.

Although the cash method of accounting takes a little less effort, it does not provide the practice manager with information that helps him understand and monitor the profitability of the practice because revenues are not recorded as the service is delivered although the majority of expenses are recorded at that time. Given the prevalence of third-party payers in medicine, collection of receivables generally takes from thirty to ninety days, whereas expenses are generally paid by the end of the month.

Overview of the Budget Process

In order to get the desired level of precision for the budget, the practice manager should prepare several types of budgets. As illustrated in Figure 1.3, each of the individual budget types plays an important role in the overall budget process. The individual budgets are then integrated to create pro forma financial statements. The pro forma financial statements provide the practice manager with a view of the financial position and results of operations as they will be if budget forecasts are achieved as planned.

The statistics budget is the first budget that should be prepared.


Excerpted from Essentials of Physician Practice Management Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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