Although physicians may not realize it, their medical practices are big businesses and need to be run as such, according to Ron Howrigon, president of Fulcrum Strategies, a contract negotiation and healthcare marketing firm that works with physician groups of all sizes and specialties across the United States. “When you look at the millions of dollars of revenue that flow through physician practices—even small practices—you realize that they really are big businesses. Unfortunately, many of the medical practices I consult with fail to follow even the simplest business guidelines,” he said.

Speaking at the 2013 American Association of Orthopaedic Executives Annual Conference, Mr. Howrigon outlined the following 10 steps that every medical practice should take to achieve success.

Conduct a market evaluation
“Conducting a formal analysis of your market coverage, payer mix, competitors, and patient locations does not have to be a costly undertaking,” said Mr. Howrigon. He pointed out that inexpensive mapping software programs containing census data enable practices to plot their locations and compare those locations against their competitors. The same software can be used to identify patient demographics and determine underserved areas.

Create a budget
Adhering to a budget is critical to success, yet very few medical practices have budgets, according to Mr. Howrigon. “Practices need to know where they stand monthly, year-to-date, and year by year—by location and by service,” he said.

Budgets—broken down by general ledger items or by service areas—enable practices to compare budget dollars against actual dollars and see variances at a glance. “A quick look will identify the problem areas that need to be addressed and the things that are working well,” he said.

Build 5-year financial projections
The purpose of building 5-year projections for both expenses and revenues is to give physicians a realistic picture of what’s going to happen down the road, said Mr. Howrigon. Projections are based on current information and realistic assumptions. For example:

• What would happen to physician salaries if Medicare reimbursements are reduced to the extent mandated by the Sustainable Growth Rate formula?
• What would happen to revenues if the practice’s Medicare mix increases by 10 percent?
• What impact would adding another physician to the practice have?

“Five-year projections are a foundation tool for ‘what-if’ scenarios; they are also good starting points for making buying decisions,” he said. Projections should be updated annually and must tie to the practice’s budget.

Develop a strategic plan
“Like all businesses, medical practices need a strategic plan,” stressed Mr. Howrigon. “Strategic plans should address growth, location expansion, facility changes, service line expansion, and possible mergers. And just as 5-year projections should be reviewed and updated annually, so should a practice’s strategic plan.”

Diversify revenues
The old adage of not putting all of your eggs in one basket holds true for medical practices, too, according to Mr. Howrigon. “Practices should consider diversifying their revenues with new services, new technologies, joint ventures, or partnerships. Just because something was profitable yesterday doesn’t mean it’s going to be profitable tomorrow. Practices need to insulate themselves from what would happen if their current revenue drivers went away,” he said.

Have a marketing plan
Practices need to understand who their customers—and who the customers they want—are and invest their marketing dollars accordingly, Mr. Howrigon advised. He offered the following marketing dos and don’ts:

Do:

• Have a functional website.
• Engage in social media.
• Reach out to other physicians; specialty practices should become familiar with referring primary care physicians in the community.
• Know your customer.
• Engage in targeted consumer marketing.
• Develop a clear message and stay on it.
• Tell your story!

Don’t:

• Buy a telephone directory ad.
• Spend like you are rich.
• Spend like you are poor.
• Market without a message.
• Assume that there will always be new patients.

Understand the patient mix
When it comes to a practice’s patient mix, the focus should be on getting the “right” patients, not just more patients, Mr. Howrigon stressed. He recommends that practices change their Medicare/Medicaid mix to fill more patient slots with commercial patients to increase income.

“Practices should also measure benefit and policy differences among their payers and examine their service line profitability. Invest in profitable service lines and divest of unprofitable service lines,” he advised.

Negotiate managed care contracts
To offset rising costs and lower Medicare reimbursements, practices will need to negotiate their managed care contracts to get more money from their payers, Mr. Howrigon explained. “Negotiating contracts to increase revenue from payers is all about leverage. It’s not easy, but practices have to do it to stay profitable. If they don’t, they’ll be in trouble,” he warned.

Thin the herd
Mr. Howrigon also recommended that practices examine how many patients they get from various payers and calculate the average revenue per patient or per procedure for each insurance carrier. This enables practices to “thin the herd” by negotiating or terminating their lowest payers and refilling those appointment slots with patient visits that will generate more revenue.

Prepare for new reimbursement methods
“Just when practices thought they had everything figured out, they’re now dealing with new compensation models such as episode of care, accountable care organizations, patient-centered medical homes, capitation, and incentive agreements,” said Mr. Howrigon.

For practices to survive in this new environment, it’s critical they have the following:

• data and reporting systems robust enough to quickly analyze new reimbursement mechanisms
• billing and collecting flexibility
• internal utilization management tools
• physician outreach and education
• increased negotiation skills

Conclusions
“The future is incredibly uncertain; there is little margin for error,” said Mr. Howrigon. “Medical practices today have to be sharp, agile, and forward-thinking. You wouldn’t drive a car by looking out the back window—you shouldn’t drive your practice that way either.”

Maureen Leahy is assistant managing editor of AAOS Now. She can be reached at leahy@aaos.org