Tipping the Scale: A Methodological Approach to Revenue Analysis

Health systems that acquire a medical group should search for efficiencies using more precise tools than profit-and-loss statements, applying market-based metrics to evaluate each site or specialty.

The continued deterioration of financial performance for integrated health systems’ medical groups defies the conventional wisdom driving their acquisitions—that efficiencies created by scale inevitably improve operating margins. 

What we’re seeing instead is that leaders continue to face the same cost pressures, inefficient operations, and stunted revenue growth that diminish operating results, only at a new scale. In fact, given greater scale, inefficiencies are often more significant in many post-rollup enterprises. 

A 2017 survey of 49 medical groups and systems, representing more than 13,000 physicians, illustrates the pain. The operating loss (more positively referred to as investment) per physician increased from 10 percent of net revenue in 2016 to 17.5 percent in 2017. Median total loss (investment) per physician during this two-year period went from $95,138 to $140,856. Only private practices bucked the trend.

Provider Operating Losses per Physician

 There are indeed efficiencies of scale to capture after an acquisition, but a thorough analysis of those opportunities requires the right frame of reference. A rollup profit and loss (P&L) statement is a blunt instrument, and the acquiring system’s accounting, allocation, contracting, and other practices can cloud perceptions of the true level of performance of a medical group and its respective sites and specialties. However, if you shift the focus to the clinic and departmental level, more precise instruments are available.

Health system leaders should start by viewing each location or specialty within a medical group as its own company, with its own opportunities. The examination should begin by acknowledging that ownership, number and size of locations, staffing parameters, HR policies and wage scales, scope of ancillary services, and myriad other factors can impact the performance of individual locations and specialties. Each factor therefore should be evaluated in a careful, systematic manner.

An effective analytical approach breaks down performance into component parts, applying 10 to 15 market metrics to each site or specialty to create “actionable” indicators. Big-ticket items such as physician productivity and compensation, staffing ratios, managed contract rates, and facility costs present some of the greatest opportunities for improvement. As each component is addressed, opportunities are identified that, if taken in aggregate, can improve the performance of the medical group.

The Importance of Market-Based Metrics

It is especially important to utilize such a methodology when the integrated medical group is the result of multiple acquisitions and mergers, which often leads to fragmented cultures and a lack of maturity as a true functioning group. In our experience, many do not have even a basic level of internally standardized metrics that they apply within their group, much less metrics tied to the market. The analysis is more applicable and precise when it uses a market-based, metric approach. Thus, it uncovers the issues that truly impact the bottom line. 

For example, integrated systems often reassign ancillary services, and their associated revenue, from acquired medical groups to the system level and allocate corporate overhead and shared services in a manner that greatly impacts the bottom line of a group. If the reassignment of ancillaries is not considered or if allocations do not align with actual market-based metrics, perceptions of performance will be negatively impacted. 

Consider rental allocations. We’ve seen situations where the cost of rent allocated to system-employed physicians exceeds the actual rent charged to independent medical groups that lease space in the same system. The rationale is that the system is able to “generate” its target ROI from the rental rate it charges its integrated medical group. However, this type of arbitrary and artificial allocation formula ignores actual market conditions and skews perceptions of the medical group’s bottom-line performance.

Similarly, many systems will seek to maximize their inpatient managed care contracting rates, while paying less attention to the market updates that the medical group may receive from the same payers. The rationale is that the acute care volume dwarfs that of the medical group, so an increase on the inpatient side of the system will reap greater rewards. 

While this strategic decision is conducive to maximizing overall revenue, it impacts the medical group if rates fall behind market comparators. Holding the medical group accountable for the revenue-maximizing strategy of the system is not appropriate and will lead to inaccurate perceptions of performance. Thus, the strategy should acknowledge the impact to the medical group, and performance comparisons should account for this impact. 

Key Areas of Focus

Where to start? To drive improvement, health systems should consider the following steps, which typically drive a significant portion of medical group performance and can be measured at the market-based metric level:

• Right-size the number of physicians and advanced practice clinicians (APCs) in the practice to match demand for services (whether that is measured on an RVU, panel-size, or shift basis). 
• Align provider salary with productivity levels, indexed to RVUs, panel size, shifts, or an alternative measure. 
• Align resources (e.g., staff, space, supplies) in a manner that is metric-based and consistent with production or activity.  
• Examine the access model and match support staff to patient volume. The key metric to watch is typically your providers’ third next available appointment, a standard access metric that tends to provide the cleanest measure of true appointment availability. Develop protocols for lab orders, pre-visit activities, patient flow processes, and the like to ensure the environment is standardized to operate in an efficient manner. 
• Understand the goals and work-life balance needs of your clinician workforce. An annual survey of physician and other-clinician satisfaction can help you understand and identify factors leading to satisfaction and burnout. This insight may bring about the development of customized approaches or packages to retain physicians long enough to ensure smooth transitions through planned retirement and recruitment.
• Use an allocation methodology that ensures system-level costs are market-based and allocated in the correct manner, eliminating erroneous perceptions of performance due to an arbitrary allocation formula.

The Benefits of a Clear Focus

How significant can these revenue opportunities be for a health system? Consider the case of a health system that was concerned about the financial and operational performance of its 350-provider (physicians and APCs) medical group. 

This medical group operates at 70 different sites, with small primary and specialty care practices, and has annual net revenue of approximately $75 million. The system was concerned that its investment per physician was in excess of various P&L performance metrics in the marketplace. By focusing on the areas outlined above, the health system identified more than $24 million in opportunities for either revenue enhancement or expense reduction, including:

• Net patient revenue/contracting: $8.1 million enhancement by bringing contracting rates in line with the market
• Provider compensation alignment: $12 million opportunity to either decrease compensation or increase productivity to create alignment with market data
• Staff salaries: $300,000 opportunity to reduce staffing costs to align with actual productivity/activity
• Drug costs and medical/surgical supplies: $1.8 million opportunity to reduce expenses through a proper focus on bringing costs in line with market rates
• IT services: $2.3 million opportunity to reduce expenses that primarily stem from operating legacy EHRs and applying allocations in a manner that leads to higher-than-market IT expenses for the medical group  

As you can see, a structured, analytical approach with appropriate metrics can uncover significant revenue opportunities.

Protecting a Key Investment

Medical groups represent one of the most significant investments made by health systems. With the right care management infrastructure, they can enhance patients’ access to care and serve as a major component in the move toward risk and value. Given the investment and the potential, it is imperative to analyze performance in a manner that yields improvement and does not create a negative culture. 

Utilizing the blunt instrument of a P&L statement risks leading to inappropriate conclusions and cultural erosion. Analysis based on component metrics is a much better approach and will lead to improvement in the culture and performance of the medical group.

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Fredrick T. Horton, MHA, is president, AMGA Consulting.