AAOS Now

Published 1/1/2007
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Stephen P. Makk, MD, MBA

Take off your white coat and put on your blue suit

Think about what you can do differently to generate more revenue

Over the last decade or so, the rapid rise of fiscal challenges has rivaled the technological progress in the practice of orthopaedic surgery. And with that shift has come a need for orthopaedic surgeons to take off their white coats and put on their blue suits—to understand economies of scale and scope as well as they understand the complexities of the musculoskeletal system.

In the “golden days of medicine”—before the advent of the resource-based relative value system—doctors could increase their incomes significantly simply by increasing their revenue-generating activities. Although this seems relatively simplistic, digging a bit deeper uncovers some startling figures.

For example, at one time, for every $1.00 that physicians billed, they typically collected about 95 cents. After subtracting their overhead costs (about 15 cents per dollar billed), they would realize a profit of 80 cents on every additional $1.00 of revenue that they generated. A physician who needed to pay tuition, buy a vacation home or a new car, simply worked a bit harder. The numbers made the extra effort worthwhile.

Today, these numbers and percentages have changed dramatically. Contemporary orthopaedic surgeons may collect only 50 cents for every $1.00 they bill, after allowing for bad debts and contractual write-offs. With overhead costs up to 25 cents per dollar billed, orthopaedic surgeons realize just 25 cents profit on every $1.00 of additional “revenue” generated. So, while additional revenue generation was once a powerful strategy, it is less so today.

A different model
Now consider the effect of cost-cutting. Every $1.00 in practice costs that can be trimmed essentially gives you $1.00 back, because those costs have already been written off and applied to overhead. Compared to the 25 cents collectable from increasing revenue, cost-cutting is a superior strategy that yields approximately 400 percent more revenue. Of course, orthopaedic practices need to focus on both sides of the equation—increasing revenues while keeping costs in check. This increases the practice’s margin or the net profits.

Economically speaking, different kinds of “economies” can result in savings to a practice. Economies of scope are cost savings or efficiencies realized by the nature or breadth of services or capacity. Economies of scale are cost savings or efficiencies realized by size or capacity.

An economy of scope, for example, would be a large multispecialty orthopaedic group. Because such entities offer a wider breadth of services (total joints, sports, hand, spine, physiatry, etc.), the group can care for a comprehensive patient population and has no need to refer cases to subspecialists in other practices.

The purchase of an electronic medical records (EMR) system could be an example of an economy of scale that larger orthopaedic groups might also enjoy. EMR systems can be quite expensive for a solo practitioner or a small group because the initial charges for the software license and the necessary hardware are quite high and relatively constant. Once the purchase is made, however, individual user fees are relatively small. So, although it may be marginally more expensive for a large group to purchase an EMR system, the costs can be more easily spread among the greater number of physicians.

A larger group may also afford opportunities to participate in many ancillary services such as ambulatory surgery centers, imaging services and physical therapy services. In some geographic areas, however, a smaller group of orthopaedic surgeons may be able to take advantage of offerings and make them economically feasible.

Don’t leave dollars on the table
Another strategy is not to leave dollars on the table. This means that orthopaedic surgeons should keep up with proper coding and documentation and keep allowable charges up-to-date. Surgeons also need to keep billing and collections efforts efficient and to track those numbers. As painful as it is, surgeons need to become familiar with some of the basic numbers and meet with the appropriate staff on at least a monthly basis. Managers and billing people are generally glad to go through this with you.

It’s also important to graph out and keep tabs on the different insurance contracts that you accept. Be prepared to kick out deadbeat plans or use the information to negotiate better terms.

Getting the best price for the supplies used in the office is another area where orthopaedic surgeons can effect cost savings. Negotiate the best terms possible with your suppliers. To help AAOS members control costs, the American Association of Orthopaedic Surgeons has signed an agreement with Esurg Corporation for a group purchasing service for orthopaedic practices located in the continental United States and Alaska. The service will be introduced at the AAOS 2007 Annual Meeting in San Diego. For more on this new member benefit, see the article on page 00.

As individual and group health insurance plans transition to more “consumer-centric and health savings accounts” models, patients are becoming increasingly responsible for a greater portion of the reimbursements to providers. Orthopaedic practices will need to watch both bad debt and so-called slow collections very carefully and manage these areas swiftly to avoid revenue shortfalls.

Take care of yourself
Every orthopaedic surgeon should have a well thought out and solid personal financial strategy. Avoid making stupid, expensive mistakes by carefully evaluating your practice opportunities and reading the fine print in employment and partnership contracts.

Be especially careful when making investments. I have friends in the private equity world who will not invest in deals in which a lot of doctors have invested—so-called “dumb doctor deals.”

Be sure to maintain board certification because many payors will not reimburse practitioners who are not board-certified.

Plan for uncertainty and make sure that you are properly insured with life insurance, disability insurance, and umbrella liability insurance.

As far as planning for retirement, make sure that you have a good plan and good advisors. Invest as much as your needs will require, diversify your investments (both in terms of the types of investments and the risks those investments generate), invest regularly, and try to maximize your retirement contributions while living within your means.

It goes without saying that orthopaedic practices should keep revenues as high as possible in this economic climate while reducing costs. Remember, the goal is to increase your margins and be able to retire comfortably at a reasonable age.

Today’s challenges
The U.S. healthcare market is the largest single market in the world, surpassing even the computer and energy industries. The current healthcare environment reflects decreasing third-party reimbursements, increasing overhead and other operating costs, and the rise of the assertive consumer. Employers and health insurers are driving both the supply and the demand for health insurance coverage in which patients assume some of the burden of paying for their health care. In essence, orthopaedic surgeons and other physicians are continually expected to provide more and better services for less reimbursement. But orthopaedic surgeons are not like computer companies, which have been able to add bells and whistles to their products while cutting prices.

Over the last decade, healthcare revenue trends indicate that publicly traded insurers are increasing their profits, hospitals are doing fairly well, and pharmaceutical and medical de-vice companies are maintaining profitability. Physicians, who represent the other cog in the wheel, have seen their reimbursements drop significantly.

Despite these reimbursement cuts, healthcare spending has continued to grow quickly and even outstrip the pace of inflation. In other words, the entire healthcare pie grows bigger and at a faster rate on an annual basis than other markets while the physician’s share of this ever-increasing pie continues to shrink.

The main demographic factor affecting the practice of medicine in the foreseeable future is the so-called “graying” of the population. According to the U.S. Census Bureau, the number of people older than 65 will increase by 13.3 percent by 2010 and by 53.2 percent by 2020 to a total of 53.7 million people. The largest economic subgroup will include the so-called “baby boomers,” made up of “bionic boomers” and “cyberchondriacs,” who suffer increasingly from “boomeritis.” This active cohort wants to remain active; they are also well-educated, informed, and Internet-savvy.

The Internet and its health content—as well as the increasing number of seniors who are on line on a regular basis—is also an important factor affecting medical practices. The number of people who search the Internet for medical information and research healthcare providers online is growing. Every orthopaedic practice should have a vibrant Internet presence with convenient on-line information and service offerings. If you don’t yet have a practice site, take advantage of the customized Web site services available through the AAOS; visit http://aaos.org/pows.cfm for details.

In upcoming issues of AAOS Now, the Practice Management Committee will present additional information on how orthopaedic surgeons can strategically position their practices to the best advantage in this environment.

Stephen P. Makk, MD, MBA is chair of the AAOS Practice Management Committee. He can be reached at smakk@lbjs.net.