JAN 2014

EyeWorld is the official news magazine of the American Society of Cataract & Refractive Surgery.

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January 2014 EW NEWS & OPINION 23 Insights The one number by J.C. Noreika, MD, MBA Analysis of cash J.C. Noreika, MD, MBA A t the recent American Academy of Ophthalmology's annual meeting, a publisher of one of the profession's popular periodicals reported that its two most requested themes involved surgical and therapeutic "new things" and practice management. The choice of the latter surprised me as "management" implies "business," often the lounge act for ophthalmology meetings, residency programs, and publications. Many owners of private practices ruminate about their costliest investment only in the hypnagogic state before sleep's bliss. But the "perfect storm" of an aging population, the chilling meddlesomeness of bureaucrats and the overdraft in perpetuity of the nation's checkbook portends the decline of private practice medicine. Then there are the abstruse effects of Sustainable Growth Rate reform. Is it surprising that eye surgeons, now fully awake, seek advice and direction on matters managerial? In the December 2003 Harvard Business Review, Frederick F. Reichheld's "The One Number You Need to Grow" roiled consultants across the nation. The article reduced costly analyses of marketing initiatives to one question. In the tradition of Reichheld, the following provides practice owners with a few numbers they must know to maneuver their most important asset through the shoals of reform. Analysis of accounts receivable Because the provision of medical services involves third-party payment, accounts receivable are a practice's lifeblood. A/R is money earned but not yet paid. The number: Days sales outstanding (DSO) The calculation: The practice's computerized management system reports total charges over a 12month period. This dollar amount is divided by 365. The result is then divided into the practice's total accounts receivable. This yields days sales outstanding. Total charges / 365 = Average charges per day Total accounts receivable / Average charges per day = DSO A DSO of 30 or less is above average. The benchmark is not as important as the trend. Analysis of practice productivity In 1992, HCFA introduced the Resource-Based Relative Value Scale, the construct of William Hsiao, PhD, an economist at the Harvard School of Public Health. By assigning Relative Value Units to provider services, payment across specialties is "rationalized." Although controversial, the RVU is indispensable in measuring intra-office productivity. The number: Overhead costs per generated RVU The calculation: Total practice RVUs are the denominator. The numerator can be any desired metric. For example, dividing RVUs into the practice's payroll over the same time period yields dollars of staff compensation per each RVU produced. A series of calculations over time provides a benchmark. Using the latter, a practice manager can staff the clinic based on tangible production data. Total staff compensation / Total RVUs = Staff compensation per RVU Staff compensation is a practice's principal cost center; its most expensive subset is remuneration accruing to the practice's professionals. It is critical to track their productivity. Computerized management systems can report RVU production by individual physician. Applying the aforementioned calculation and the reimbursement for each RVU, a physician's compensation can be equated to his or her RVU production. Total compensation includes wages, benefits such as health insurance premiums, perks such as meetings, memberships and journals, and employer-paid taxes. Allowance can be made for variance in professional liability insurance costs among doctors. Total physician compensation / Physician RVUs = Physician cost per RVU Physician cost per RVU / Reimbursement per RVU = % cost per RVU If accounts receivable are a practice's lifeblood, cash is its anima. Economics dictate that a dollar collected tomorrow is worth less than a dollar earned today. This "float" is thirdparty reimbursement arbitrage. Among their colleagues, ophthalmologists are more fortunate than all but concierge practitioners. LASIK and premium lens implantation and retail receipts of the optical dispensary provide ready cash. The number: Weekly cash flow The calculation: Cash-based cash flow reporting Computerized management systems generate a cash flow report specifying the increase or decrease in net cash over a given period. But there is a caveat. Cash flow reporting comes in two flavors based either on accrual or cash accounting principles. For example, accrual accounting recognizes non-cash credits and debits such as inventory. I recommend management provide ownership with a cash flow report noting the previous week's fiscal activity and any significant payables due the current week. Tracking these activities, an accurate budget can be formulated. "Black Swans," e.g., unpredicted expenses, can upset this process but, thankfully, are rare. Analysis of marketing efforts What, then, was Reichheld's query that rattled Madison Avenue and the mavens at McKinsey? The question: "How likely is it that you would recommend (company X) to a friend or colleague?" Hits, "stickiness" and website rankings, coupons redeemed from print media, patient satisfaction and target group surveys have their place. But is it not reassuring that it comes down to trust? And more than any of the players in the healthcare game, patients trust their doctors. See? It really isn't that hard after all. EW Editors' note: Dr. Noreika has practiced ophthalmology in Medina, Ohio, since 1983. He has been a member of ASCRS for more than 30 years. Contact information Noreika: JCNMD@aol.com

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