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AAOS Now

Published 11/1/2009
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Dale A. Reigle

Managing overhead in the orthopaedic practice

Controlling costs is key component of practice’s long-term success

Although labor costs are a practice’s largest overhead expense, controlling other aspects of overhead should not be overlooked. Practices need to effectively manage—not simply reduce—these costs to maintain their present viability and ensure future success.

Controlling fixed costs
Occupancy costs include rents/mortgage, property taxes and insurance, utilities, housekeeping, and maintenance. Although most occupancy costs are fixed, they can still be managed or improved.

If you lease, keep in mind that most leases contain provisions for increases in rent, but few have provisions for decreases. If the local commercial lease market experiences a significant decline (as many have during the past year), do not hesitate to approach the property management company for a decrease in rent or for some other type of adjustment.

If you own the building, you may be able to refinance your mortgage at a lower rate. You may also use your equity as collateral to borrow funds for other capital items at a rate lower than a straight equipment lease.

Keep in mind that physicians are a practice’s most important—and costly—asset. When building a new facility, design it to maximize their efficiency. A few extra dollars spent on design and construction may quickly be recouped.

To help control utility costs, consider installing motion detectors or door switches to turn lights on and off in closets. Use programmable thermostats and limit access to the controls. In an office, hot water heaters can generally be set several degrees lower than in a home, resulting in additional savings. Depending on your location and your utility carrier, installing solar panels can reduce energy costs and usually pay for themselves in 6 to 8 years.

Lowering insurance premiums
The best method to control medical liability insurance costs is through legislative action. On average, states that have enacted strong tort legislation have the lowest medical liability insurance premiums. Work with other providers in your state to lobby for reform.

Shopping for medical liability insurance may provide savings from time to time, but often the costs of tail coverage on transfer make this option unreasonable. Many carriers, however, do have programs that may reduce your premiums. Some insurers apply credits if physicians or staff attend risk management classes; others consider reductions for use of qualified electronic medical records or participation in community health information networks. Physicians who have reduced their practice hours or work only in clinic may qualify for lower rates. Contact your carrier and request information on ways to lower your premiums.

Keep supply costs down
Medical offices can experience significant losses due to waste and theft. Pens, paper, and other office items may be taken out of the office and never returned; some employees may help themselves to samples and other noncontrolled drugs. Let your employees know this conduct is not acceptable.

Do not allow hoarding or secret stashes of supplies; this can lead to unnecessary supply costs. Some items are so well hidden that they are never found; medicines pass their expiration date, and other materials deteriorate or are ruined by improper storage. Instead, establish and maintain par levels for both medical and office supplies for each authorized holding area in your office.

Purchasing cooperatives can often help reduce supply costs. The AAOS group purchasing plan offers members significant savings across a broad range of medical, surgical, pharmaceutical, and office supplies. (See “Leverage your buying power to control costs” September 2009 AAOS Now for more information, or visit www.aaos.org/esurg) Hospitals often allow physicians with staff privileges to order through their pricing networks. Local office supply and discount stores are another option.

Don’t just consider price when selecting suppliers. The level of service provided may have value over and above the savings you get. Among the services you should expect are assistance in maintaining inventory and selecting items, lower-priced alternative suggestions, unused inventory trade-outs, installation help, and immediate responses to urgent needs.

The value of purchased services, especially professional services from an accountant or attorney, is much more subjective. Nonetheless, you should evaluate and quantify your return on investment to ensure you’re not paying for more service than you need (Table 1).

Track your spending
Your financial reporting system can be your best tool in tracking and benchmarking practice spending on supplies and services. The Medical Group Management Association (MGMA) and the American Association of Orthopaedic Executives (AAOE, formerly BONES) conduct annual surveys that provide useful comparative information. External benchmarks should be used to help identify potential areas for improvement on a macro level, but are not absolute standards. Internal longitudinal benchmarks are generally more suited to micro level evaluations, such as appropriate staffing or supply usage in a department.

Many commercial computerized accounting programs allow you to customize the chart of accounts (COA). The MGMA’s Chart of Accounts for Health Care Organizations can be used as the basis for your own COA, and you can establish subaccounts to track expenses at a more detailed level (Table 2) than possible just using the MGMA COA. There are generally two common ways to accomplish this task. One is to use subaccounts.

Classifications can often be used in addition to, or instead of, subaccounts. Classifications are generally used to identify cost centers and are especially useful for tracking ancillary service revenue and expense without creating an enormous COA. Common classifications in orthopaedics clinics include magnetic resonance imaging, physical therapy, rheumatology, and physical medicine and rehabilitation. By adding a classification to expenses, you can identify a single account as well as run reports to track spending by a particular cost center.

Ideally, your COA and classifications should allow you to track and evaluate revenues and expenses easily, but should not be so detailed or cumbersome that the information is overwhelming.

Don’t lose sight of the big picture
Keep in mind that medical practices are a service industry. The biggest costs are people-related: physicians, midlevel providers, and staff. If you can increase efficiency without decreasing perceived service or increasing total cost, the practice benefits.

Too often, however, practices often “save” costs at the expense of efficiency. For example, because high-speed, high-volume printers generally have a lower cost per page, and one large copier is often less expensive to purchase or lease than two midsized copiers, many practices centralize copy functions. But these “savings” may be offset by staff time lost to walk to, wait for, and visit by a centralized printer and by intangibles such as patient perceptions of decreased service due to longer waits or staff unavailability.

Evaluate the benefits of decentralized technology. Productivity increases and a reduction in full-time employees may offset the additional expense. Opting for a lower-priced computer, for example, is no bargain if work output is compromised because the processor cannot keep up with demand.

As a long-term strategy, managing overhead requires analyzing data to make the most appropriate decision for a given situation. Although each piece of the puzzle should be examined individually, it is important to keep the big picture in mind. Increased expenses in one area might lead to greater savings in another area or to increases in revenue that exceed the expense incurred.

Cutting overhead is an end-game strategy that can only be applied when the practice is winding down. Managing overhead is a long-term strategy that helps ensure future viability.

Dale A. Reigle is chief executive officer of Rocky Mountain Orthopaedic Associates and past president of the American Association of Orthopaedic Executives. He can be reached at dreigle@rmodocs.com

Editor’s note: This is the second of two articles examining ways that practices can manage overhead costs. The first article “Don’t simply reduce overhead…manage it!” appeared in the October 2009 issue of AAOS Now and focused on managing support staff costs and compensation. This article provides tips for controlling other overhead costs.