Labor costs are key in managing overhead

You’ve no doubt heard that “If you increase your medical revenue by $1.00, you make $0.50 after overhead. If you reduce your expenses by $1.00, you get $1.00.” The logic is appealing, but misleading. The adage would be true if your practice only existed for a single moment. The $1.00 you save is saved once. The $0.50 you earn is earned over and over again. For this reason overhead should be managed, not necessarily reduced.

Staffing: A major expense
Support staff compensation, which includes contract labor, is the leading expense category in virtually every practice. Managing labor costs should, therefore, be one of your top concerns. Because “managing” is defined as the judicious use of means to accomplish an end, this is a particularly apt description of how to approach labor costs.

Certain labor costs are fixed. In general, a practice requires core office staff members whether one patient is scheduled per hour or five patients are scheduled per hour. Similarly, certain benefit costs, such as employer-paid insurance premiums and accrued time off, are generally considered fixed costs.

Some labor and benefit costs are semivariable. These costs can be adjusted, to a certain degree, by judicious management of the resources. One example is sending some staff members home when workload does not require a full complement of personnel. This not only reduces salary costs, but can also reduce benefit costs that are tied directly to salary, such as pension contributions.

You can also turn some fixed-benefit costs into semivariable costs by changing your benefit plan. Paid time off that is accrued based on hours worked (with an annual maximum), as opposed to a set number of hours per year based on longevity, may enable you to reduce time-off costs.

Most practices have no true variable labor costs. Staffing levels can be adjusted over time through hiring and firing, but generally cannot be totally controlled on an hour-by-hour or patient-by-patient basis.

Benchmarking staff
Traditionally, staff benchmarks have been based on either physician full-time equivalent (FTE) or total medical revenue (collections). More recently, comparative data has become available on a per-patient or per-relative value unit (RVU) basis. These are not particularly good benchmarks for staffing levels across the board. Ideally, a benchmark should be based on a closely related measure of workload. An example of a good, relatively consistent workload benchmark for staffing is the “by line” measurement used to measure transcriptionist productivity.

Benchmarking against other practices is often helpful. The lack of an appropriate external benchmark, however, should not deter you from using an internal benchmark that helps reveal trends and opportunities. In some cases, directly measuring a unit of productivity is not cost-effective. If the cost of collecting the data exceeds its benefit (a subjective measurement), consider using a proxy measure.

For example, a coder generally takes about the same amount of time to code a carpal tunnel release as to code a trigger injection. The revenue on a carpal tunnel release, however, is approximately nine times higher than the revenue on the trigger injection. As a result, benchmarking coder FTE based on revenue may not be a good proxy measure. Benchmarking by number of procedures billed may be a better proxy.

Benchmarking should always be used as a means to identify trends and aberrations, not as an absolute measure. A coder working primarily with the total joint surgeon may be able to code many more procedures than the coder working with the spine surgeon.

Table 1 is an example of our practice’s quarterly tracking of staffing levels. These benchmarks may or may not be applicable to your particular practice. You should examine your practice and determine the best workload proxies that can be collected in a cost-efficient manner. If a benchmark is not helpful in evaluating your practice or if the result of the evaluation is never put to use, collecting the data is a waste of resources.

Look behind the numbers
If all you want to do is cut costs to control overhead, you may view the increase in the number of medical assistants (MAs) as a negative. But if you want to manage overhead, you could look at the number of MAs in the context of needing fewer physician FTEs per 1,000 patient visits, the decrease in the number of total staff required to generate $1,000,000 in revenue, and the decrease in other staffing areas.

Thus, changes in internal workflow and responsibilities increased the number of clinic staff required to see patients, but had a positive effect on most other areas. In this case, an increase in cost had a positive impact on the bottom line and physician satisfaction.

Another example of the importance of viewing data in context is the decrease in the number of radiology staff needed per 1,000 films billed. Virtually all of the gain in our productivity could be attributed to the implementation of a picture archiving and communication system in mid-2007.

Salaries and benefits
When establishing staff pay ranges, carefully consider where you want to position your practice within the labor market. In critical positions or positions that take a lot of internal training, you want to recruit the best staff you can afford. For these jobs, salary and benefit packages should be above the median in your market area. If a position can be learned very quickly and turnover does not create a significant problem, the job can be offered at or below the median.

You should review your salary and benefit packages periodically, using an appropriate geographic area. For example, the geographic area is smaller (usually local) for a receptionist than it is for a physician assistant (national). Table 2 shows sources of data for salary and benefit information.

When evaluating your benefit package, you may need the assistance of a knowledgeable human resources professional who is current on federal, state, and local laws. Depending on your location, the age generation you are trying to recruit, and other factors, you should carefully decide how to allocate payroll dollars. It is not unusual for a young employee who is struggling to make ends meet to leave a job with a great benefit package for one with minimal benefits but a higher per-hour salary. In such cases, a generous benefit plan is not particularly beneficial to the practice’s efforts to recruit and retain employees. Unfortunately, IRS rules regarding top-heavy benefit plans make it more difficult to tailor benefit packages that appeal to a broad spectrum of people.

Regularly review the vendors you use for your various benefit plans. Keep in mind that reviews—and possible changes in vendors—include time and effort costs, and set the review period accordingly. Usually, conducting a review every other or every third year is sufficient.

More than the bottom line
A well-trained, motivated support staff is as much an asset to the practice as an expense. Most patients do not feel qualified to evaluate the physician. However, they do feel competent to judge whether the receptionist greeted them with courtesy and a smile, whether the MA kept them informed while they were waiting in an exam room, or whether the radiology technician was considerate and gentle when positioning them on the table. In many cases, the overall patient perception of the visit has more to do with staff than it does with the physician.

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

Editor’s note: This is the first of two articles looking at ways that practices can manage overhead costs. This article focuses on how to manage support staff compensation; the second article will provide tips for managing other overhead costs—such as occupancy expenses, medical liability insurance costs, and supply service costs.