A Better Way to Measure Practice Profitability

Most physicians will say they're putting more time and effort into their medical practice than 10 or 15 years ago. But the important question is whether or not that extra time it used profitably. Unfortunately, they don't often know.

Ask most physicians today about the amount of time and effort they’re putting into their medical practice and it’s likely they’ll say that they’re working harder than they did 10 or 15 years ago. But perhaps the more important question is whether or not that extra time is being used profitably.

It has been suggested that medical practices can use relative value units (RVUs) — a measure of value used in the United States Medicare reimbursement formula for physician services — to help measure the profitability of their procedures. But Tom Ferkovic, R.Ph., MS, managing director, SS&G Healthcare Services LLC, suggests that RVUs are a better measure of productivity within medical practices, not necessarily profitability.

“Medicare will not pay certain modifiers on RVUs for certain things that a commercial insurer may pay, or that workers’ compensation may pay,” Ferkovic explains. “So, how do you give credit for certain things that Medicare does not pay, or that a commercial insurer may pay?”

Apples to apples

To illustrate, Ferkovic suggests that in some cases in general surgery, Medicare and the government payers may not pay for consults. As such, a physician may bill for an initial office visit, which is lower for a governmental payer than billing for a consult. If a physician uses a work RVU, that could complicate things.

“The physician could be saying, ‘Wait a minute. I’m seeing all these people. Why is our profitability down?’” Ferkovic says. “The answer is that the payer mix has changed. And that the rules have changed.”

He explains that some RVUs change annually, but not all of them. Some RVUs may disappear and some will receive a different value.

“We always suggest that physicians peg [their compensational work RVUs] to a certain year, say 2010,” Ferkovic explains. “Then, what you have to do [in 2011] is run your database against the 2010 tables to find out what the real work RVUs were for this year, which would be different than the actual work RVUs based on 2011 tables.”

That complicates matters, Ferkovic says, if you’re using work RVUs in an attempt to measure profitability — unless all the physicians in the medical practice work within the same specialty.

“You’re just going to look at your work RVUs because you’re all in the same specialty,” he says. “You don’t really care about payer mix. If you have a million dollars between you, just look at your work RVUs. If one doctor has 20% of [the work RVU], he gets 20% of the million dollars. And it doesn’t matter if they change the RVU because all the doctors change together.”

Measuring profitability

So, is there a better way for physicians to measure profitability if not with RVUs? Ferkovic suggests studying or analyzing the practice by year, and applying the 80/20 rule — where 20% of a practice’s procedures will make up 80% of its revenue. Then, do the same for the practice’s payer mix.

“A doctor’s payer mix doesn’t change overnight,” Ferkovic points out. “It trends if there’s going to be a change. So, you do the same thing; you do the 80/20 rule. Procedures that they use and the payer mix of the practice. You can look at the actual reimbursement, and that would give you profitability.”

But, Ferkovic points out, physicians don’t always do procedures because they’re profitable. However, “they have a fiscal responsibility to know what they’re doing; whether or not they’re making money from a procedure.”

Do most medical practices take these steps, or do they tend to oversimplify things and determine profitability just by looking at revenue versus cost? Ferkovic says that, unfortunately, too many practices don’t go the extra mile.

“My experience is that the majority of practices look at the end of the year, and if the doctor has enough cash to pay their pension or to fund their pensions, and to take home either the salary they expected or a little more, then they feel it’s profitable,” Ferkovic says.

Unfortunately, though doctors can’t always say what exactly is making their practices money and what does not.

“They may be able to say, ‘But I do this hip joint, and I get $3,500 for it.’” Ferkovic says “Okay, that’s great. But are they making money on that or not? I’m not sure that they can always tell.”