Rebuilding a Cash-Starved Practice

December 15, 2000

John W. McDaniel

Just about three years ago, a physician in a small Southern town began having trouble paying his bills. Previously, the physician (for this article, we’ll call him John Doe, MD), had always paid his bills promptly. But starting about December 1997, Doe began falling behind on his payments.
Doe’s practice had begun having trouble meeting expenses when one of his major payers suddenly stopped making payments. In Doe’s town, one large employer dominates the area. To this point, Doe had run a thriving ob-gyn practice and had opened an outpatient surgery center within the office. In December 1997, the health insurer for the local company stopped paying all claims to Doe citing a lack of medical necessity and refusing to pay facility fees. If Doe wanted to continue to perform procedures on women who work for the large employer, he would need to do so at the local hospital, he was told. These patients accounted for 25% of the practice’s volume.
Appeals Denied
Doe appealed the cases in which payment was denied, but the insurer turned down the appeals. Then, he arranged for another ob-gyn to review all claims in an attempt to prove medical necessity. Again, the insurer declined to pay.
Doe then contacted an attorney who specializes in employer-sponsored health care issues in an attempt to force the insurer to pay but Doe decided not to pursue this course of action, fearing he would be dropped from the company’s provider panel altogether.
Since Doe had always been a good customer at his local bank, it gave him an $8,000 line of credit to help meet expenses and cover overdrafts. Doe believed that his financial situation was temporary and that his income would return to the level it had been before December 1997. The worst was yet to come, however.
Each day, the number of calls from creditors rose, and eventually one staff person was required to deal with creditors full time. Checks bounced frequently, and the office manager needed to beg Doe’s banker to allow the payroll checks to clear each payday.
In July 1998, Doe contracted with a physician practice management consultant to review all delinquent bills and to consider a strategy for improving cash flow. A member of the Physician Management Group (PMG) staff contacted all the creditors and explained that PMG was now managing Doe’s office and was confident the financial situation would improve.
PMG attempted to negotiate with the insurer to pay some back claims. Through repeated phone calls to the facility and the insurer, PMG was assured that the claims would be examined.
When Doe’s practice income began to drop, several factors compounded the problem. First, Doe had been sending all his lab tests to an outside lab, had billed the insurer, and paid the lab company for performing the tests. By billing the insurer, Doe had earned some income on each lab test. Unfortunately, Doe allowed his account to get so far behind with the lab company that the lab refused to allow Doe to bill. Therefore, the lab started billing the insurer directly and Doe lost the extra income. Second, Doe needed to reduce overhead, so he had to lay off members of his office staff. This move meant he had to cut his office hours, cutting into his income still further.
Soon after it became apparent that the insurer was going to continue delaying payments, one of Doe’s creditors, the IRS, filed a tax lien on his assets. At this point, PMG suggested Doe file for bankruptcy protection. For Doe, the thought of filing for protection under Chapter 13 of the U.S. Bankruptcy Code was extremely disconcerting. He deeply wanted to honor his obligations, but at this point, he simply had no other alternative.
In September 1998, Doe filed for bankruptcy protection. The filing meant he no longer needed to deal with creditors or worry about assets being seized. Instead, Doe could rebuild his practice.
Restarting Cash Flow
One of the first steps taken to increase cash flow involved contacting the lab to which Doe owed several thousand dollars. Doe explained that he had filed for bankruptcy but that since Doe planned to pay all creditors in full, he wanted to return to the original agreement with the lab company. When the company refused, Doe found another lab and once again billed for procedures. This step alone increased his cash flow by approximately $8,000 per year.
To increase ancillary revenue still further, PMG suggested that Doe install an in-office pharmacy. Doe agreed, and PMG contacted a company that provided a turnkey service. The pharmacy profiled Doe’s drug prescribing patterns, installed the software, and provided staff training. Although this system is designed to fill only the initial prescription, the office makes at least $2.50 on each prescription.
Today, the staff is working to get Doe’s office enrolled with various insurance plans so that his patients will pay only the co-payment, and the insurers will reimburse the practice the remaining cost of each prescription. Also, the staff is working to become familiar with the service. Once the process is complete, in-office pharmacy should help improve Doe’s cash flow.
Adding New Patients
Many physician practices can increase cash flow simply by extending their office hours. When Doe’s practice started having trouble, he was forced to reduce his hours when he let some staff members go. PMG suggested Doe extend his office hours to make them more convenient for working women. Doe is now open late two nights each week and two Saturday mornings each month. The staff had to make changes to accommodate the increased hours, but the new schedule has helped to increase Doe’s patient volume.
Before the financial problems, the office had employed several nurse practitioners. Doe considered employing physician extenders again, but decided that adding highly paid workers would be premature at this time. Instead, Doe decided to allow several nurse practitioners to rent space when the office was closed. Although the rental income was nominal, the arrangement helped to boost referrals to Doe.
After Doe filed for bankruptcy protection, he continued to pursue the insurer that had precipitated the crisis and began to receive payment for some back claims, although the company continued to refuse payment for facility fees unless the procedure was performed in the hospital. Rather than continuing to fight with the insurer, PMG suggested that Doe perform all outpatient procedures for these patients at the hospital. For other patients, Doe continued to perform outpatient procedures in the office and received the facility fees for this work.
One of the most important lessons for Doe (and any physician) is that having one payer account for so much revenue is dangerous. Since the insurer that worked with the one large employer in town accounted for 25% of Doe’s practice income, PMG suggested that Doe attempt to change the payer mix. By extending his office hours, by getting his name out into the community by speaking at a local forum on health care, and by sending out a newsletter to current and former patients and to women in a desirable income bracket, Doe increased his patient volume. Today, Doe has a wider mix of insurers and the one most troublesome company accounts for only about 10% of his total income.
Whenever a practice struggles financially, it is appropriate to conduct a chart audit to ensure that the physician is coding appropriately and to seek an opportunity for fee increases if appropriate. An audit showed that Doe had been coding well but that his fees could be raised slightly.
Cost Cutting
Raising fees and adding patients are important for any practice seeking to increase income, but consultants also believe strongly in the value of cost cutting. Since dictation was costing Doe $600 and $800 per month, PMG suggested a voice recognition system. While the system proved inadequate for medical dictation, it was useful for the office reports and staff meeting minutes and helped cut dictation costs to $300 to $600 per month.
Another area ripe for cutting was the money spent on Yellow Page ads, for which the practice was spending about $1,800 per month. Since some of the phone books covered the same areas, the practice saved $900 per month by cutting redundant ads.
An audit of Doe’s insurance coverage showed that he could save about $8,000 annually by changing malpractice insurers. The change also resulted in increased coverage limits.
Lessons Learned
Today, the practice has seen improvements in a variety of areas. Patient visits increased 76%, gross charges increased 20%, net collections increased 32%, and the net profit per visit increased 86%. Overhead was cut by 25%, and accounts receivable decreased by $219,000.
While not all of the changes have gone smoothly, Doe and his staff are continuing to rebuild the practice. The lessons Doe learned, however, are applicable to many physician practices. When trouble strikes, it may take a combination of drastic steps, such as filing for bankruptcy, and a number of small steps, such as seeking a wide variety of ways to increase revenue and decrease expenses. It is possible to turn around most struggling practices. Doing so takes time, effort, and a willingness to change the way things have been done in the past.

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Steps Taken to Rebuild Practice
Here are some of the steps that consultants took on behalf of John Doe, MD, to help him rebuild his practice.
• Audited the use of evaluation and management codes to assess reimbursement potential
• Audited charts to ensure appropriate utilization of codes and documentation
• Followed up with insurers to review outstanding claims and attempt to work out new arrangements for facility and professional fees
• Analyzed practice fee schedule
• Conducted a charge and collection analysis by payer
• Developed a coding policy and procedure manual
• Monitored payment of outstanding claims, including reasons for denials and frequency of claims submission
• Developed system to follow-up on unpaid claims
• Reviewed performance of collection agency
• Implemented electronic claims submission
• Established collections policies
• Established targets for over-the-counter collections.
Source: Physician Management Group Inc., New Orleans.