Blair A. Keagy Marci S. Thomas
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ESSENTIALS OF PHYSICIAN PRACTICE MANAGEMENT
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ESSENTIALS OF PHYSICIAN PRACTICE MANAGEMENT
Blair A. Keagy Marci S. Thomas
Y
Copyright © 2004 by John Wiley & Sons, Inc. All rights
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Library of Congress Cataloging-in-Publication Data
Essentials of physician practice management / [edited by] Blair A.
Keagy, Marci S. Thomas.— 1st ed.
p. ; cm. Includes bibliographical references and index. ISBN
0-7879-7189-8 (alk. paper)
1. Medicine—Practice. [DNLM: 1. Practice Management,
Medical—organization & administration.
2. Financial Management. 3. Marketing of Health Services. 4.
Personnel Management. 5. Risk Management. W 80 E78 2004] I. Keagy,
Blair A., 1944- II. Thomas, Marci S., 1953-
R728.E87 2004 610'.68'1—dc22
Printed in the United States of America FIRST EDITION
HB Printing 10 9 8 7 6 5 4 3 2 1
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Acknowledgments xvii
Preface xix
1 Budgeting for Physician Practices 3
Marci S. Thomas
Suriya H. Grima, John A. Grima
4 Taxation and Physician Practices 85
Anne M. McGeorge
5 Capital Investment Decisions 100
Marci S. Thomas, Elisabeth Fowlie Mock
6 Monitoring Financial Performance 124
Teresa L. Edwards
7 Negotiating Managed Care Contracts and Contract Management
145
Beacham Wray
Bruce A. Johnson
Bruce A. Johnson
11 Governance and Leadership in a Medical Practice 241
Blair A. Keagy
Bruce J. Fried, Marci S. Thomas, Lisa L. Goodrich
13 Physician Compensation 291
14 The Role of Nonphysician Clinicians in Medical Practice
311
Blair A. Keagy
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15 Impact of Nursing Workforce Issues on the Physician and Practice
Manager 330
Elizabeth A. Arsenault
16 Developing a Business Plan 349
Lou Porn
17 Adding a New Service or Program to a Medical Practice 369
Blair A. Keagy
Karen McCall, Dan Dunlop
19 Integrating a Clinical Research Program into a Medical Practice
410
William A. Marston
Blair A. Keagy
Mary Jane Kagarise, Anthony A. Meyer
PART FIVE: INFORMATION MANAGEMENT 477
22 Information Systems 479
Bette G. Brotherton, Larry Mandelkehr
Contents ix
x Contents
George F. Sheldon
The Editors 536
The Contributors 538
LIST OF FIGURES AND TABLES
FIGURES
1.1 The Budget in Relation to the Planning and Control Cycle 1.2
Relationship Between Level of Effort and Precision 1.3 Budgeting
Process 2.1 Patient Service Revenue Cycle 2.2 Patient Access
Functions 2.3 Billing and Collections 2.4 Calculating Payment with
the RBRVS Methodology 3.1 Direct and Indirect Costs for Pittsburgh
Family Practice 3.2 Calculating Percentages to Allocate Support
Costs 3.3 Fully Allocated Cost for Newborn Visit 3.4 Proposed HMO
Fixed Rate to Cover Direct Costs for Newborn Visit 3.5 Simplified
Breakeven Formula 3.6 Mammography Screening Data 3.7 Breakeven
Calculations 3.8 Breakeven Graph for Mammography Screenings 3.9
Breakeven Calculation Including Profitability and Overhead 3.10
Expected Average Rate of Reimbursement 3.11 Group Practice
Acceptance of Capitated Contracts in 2000
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3.12 Capitation Breakeven Formula 3.13 Dr. Foster’s Capitation
Breakeven Calculation 3.14 Capitation Breakeven Calculation for New
Patients 3.15 Average Variable Cost per Visit 4.1 Advantages and
Disadvantages of Taxable and Tax-Exempt Status 5.1 Types of Capital
Investments 5.2 Components of the Project Business Case 5.3 Capital
Investment Analysis 6.1 Steps in the Benchmarking Process 7.1 Steps
in Contracting with MCOs 7.2 Categories of Payers 7.3 Evaluating
the Marketplace 7.4 Perform Financial Analysis and Model the
Effects of the Contract 8.1 Analytical Framework for Laws That
Apply to Medical Practices 10.1 Median Awards for Medical
Negligence, 2002 11.1 Increase in Patient Choice Options During the
Late 1990s 11.2 Increase in Practice Size and in the Number of
Physicians in Large Groups 11.3 Increase in Administrator
Compensation, 1996–2000 11.4 Percentage Change in per Capita Health
Care Spending, 1995–2002 11.5 Increase in Operating Expenses and
Medical Revenue, 1998–2000 12.1 Advantages and Disadvantages of
Internal Versus External Candidates 12.2 Strategies to Improve Job
Satisfaction Factors 12.3 Behavioral Rating Scale Item for a
Practice Receptionist 13.1 Steps in the Compensation Process 13.2
Role of the Compensation Committee 13.3 Example of Compensation
Formula Design 13.4 Steps in the Conceptual Design Process 13.5
Overall Compensation Formula Design 13.6 Quality as an Allocation
Factor for Overall Practice Profit 15.1 National Supply and Demand
Projections for FTE Registered Nurses,
2000–2020 15.2 Ages of Registered Nurses, 1980–1996 16.1 Planning
Process Leadership 16.2 Characteristics of Mission and Vision
Statements 16.3 Examples of Strategy Initiatives 16.4 Sample Report
on Ratings for an Initiative of Improving Affiliate Operations 16.5
Sample Timeline for Plan Implementation 17.1 Median Revenue per FTE
MD After Operating Costs 17.2 Ancillary Services Producing the Most
Profit per FTE MD 20.1 Decreasing Discharge Rates and Lengths of
Hospital Stay
xii List of Figures and Tables
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20.2 Hospital Admissions per 1,000 Population in Selected
Industrialized Nations, 2000
20.3 Acute Care Beds per 1,000 Population and Average Length of
Stay in Selected Industrialized Nations, 2000
20.4 Comparison of Administrative Costs in Health Care in the
United States and Canada, 1999
20.5 The Top Three Hospital Revenue Generators per FTE Physician
21.1 Breakdown of Medical School Affiliations with AAMC COTH
(Council of
Teaching Hospitals) and Health System Hospitals 21.2 Relationship
of Medical Schools to Their Parent Universities 21.3 Structure of
the Faculty Practice Plan 21.4 Medical Schools by Geographic Region
22.1 Common Practice Applications and Functions 22.2 Common
Applications with a Patient Focus 22.3 Traditional Approach to
Strategic Planning 22.4 Emerging Approach to Strategic Planning
23.1 Sample Control Chart: Percentage of Children Not Receiving
Immunizations
During a Seven-Month Period 23.2 Sample Completed Action Plan 23.3
Sample of Data Collected, Analyzed, and Graphed in Preparation for
a One-
Hour AIDE Team Meeting 23.4 Sample Cause-and-Effect (Fishbone OR
Ishikawa) Diagram 23.5 Sample Cause-and-Effect Diagram Identifying
Root Causes of Problems 24.1 Health Care Spending as a Percentage
of Gross Domestic Product 24.2 Actual and Projected Numbers of
Active MDs and DOs per 100,000
Population in the United States 24.3 Numbers of Physicians per
1,000 Population in Selected Developed
Countries
TABLES
1.1 RBRVS Illustration 1.2 CPT Codes Categorized by Level of Effort
1.3 Actual and Projected Visits for 2003 and 2004 1.4 Projected
Population in Highgrove Service Area for 2004 1.5 Projected Income
Levels in Highgrove Service Area for 2004 1.6 Projected Patient
Visits by Month for 2004 1.7 Indicators for Additional Analysis 1.8
Percentage of Patients in Each Work Level by Specialty for
January
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1.9 Total Visits and RVUs by Specialty for January 1.10 CPT Codes
Converted to Work Level RVUs and Charges per Payer Type 1.11
Projected Gross and Net Revenue per Payer per Specialty for January
1.12 Revenue Budget for All Specialties for January 1.13 Budgeted
Physician Compensation for 2004 1.14 Budgeted Nonphysician
Compensation for 2004 1.15 Maximum RVUs per Month for Clinical
Employees 1.16 RVUs for January 1.17 Variable Labor Requirements
for January 1.18 Budgeted General Operating Costs for 2003 and 2004
1.19 Operating Budget for 2004 1.20 Cash Budget for 2004 3.1
Assumptions Behind Allocation Bases 3.2 Allocated Costs and Total
Costs 3.3 Allocation of Costs to Visits and to RVUs 3.4 Payer Types
3.5 Payer Mix and Average Reimbursement Rates for Mammography 3.6
Use Rate Sensitivity 3.7 Payer Mix for Discussion Question 6 4.1
Comparison of Tax Structures 4.2 Establishing Comparability of
Physicians’ Compensation 5.1 Weighted Average Cost of Capital 5.2
Payback Period Analysis for Two Alternative Investments 5.3
Computation of Net Present Value for Densitometer 5.4 Computation
of Net Present Value for Mammography Unit 5.5 Excerpts from Present
Value of $1 Table 5.6 Calculation of Present Value of Ordinary
Annuity for Five Years at 10 Percent 5.7 Excerpts from the Present
Value of an Ordinary Annuity Table 5.8 Strengths and Weaknesses of
Return on Investment Analytical Tools 5.9 Cornerstone ENT Expansion
Evaluation 5.10 Lease or Buy Data 5.11 Cash Flow Evaluation for
Purchase 5.12 Cash Flow Evaluation for Operating Lease 5.13 Types
of Debt Financing 6.1 Report Card for the Richardson Obstetric
Group 6.2 Payer Evaluation Sheet 6.3 Stonehill Family Practice
Payer Mix Evaluation 6.4 Payer Mix for Discussion Question 2 8.1
Sources of Law by Practice Issue 9.1 Risk Areas Identified by the
OIG for Physician Practices
xiv List of Figures and Tables
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10.1 Malpractice Climate in Various States, 2003 13.1 Performance
Areas and Metrics for Compensation Formulas 13.2 Cost Allocation
Considerations 13.3 Allocation of Revenue and Costs by Specialty
13.4 Allocation of Revenue and Costs by Individual 16.1 Issues a
Strategic Plan May Address, by Type of Practice 16.2 Three Markets
with Different Characteristics 16.3 Sample Preliminary Task List
and Timeline for One Initiative 19.1 Typical Compensation from a
Phase III Trial of an Investigational Compound
for Healing Diabetic Foot Ulcers (DFUs) Versus Clinical Revenue
Generated from DFU Treatment (Medicare Allowable)
19.2 Personnel and Time Requirements for a Typical Trial 19.3 Media
Options for Recruitment and Relative Costs 19.4 Reasons for Patient
Dropout 21.1 Affiliated Health Schools 22.1 Electronic Products for
the Physician Practice 22.2 Information Technology Implementation
Steps 23.1 Goals to Monitor for Success of Practice Changes 23.2
Steps in the AIDE Process 24.1 The Greatest Decline in Mortality in
the History of the World Occurred
Between 1900 and 2000
ACKNOWLEDGMENTS
The editors want to acknowledge the help and support of their
friends and col- leagues: William Zelman, who brought us together;
Arnold Kaluzny, who helped
us find the right publisher; Erika Fulmer, who helped us keep
things moving; Kristin Keagy, Kay Grinnell, Donna Cooper, Betsy
Mann, and Raleigh Mann, who helped us edit the chapters; and all
the chapter authors and contributors, who gave this book its
breadth and depth. This book would not have been possible without
them.
xvii
PREFACE
The purpose of this book is to provide a comprehensive and
practical guide to the issues inherent in physician practice
management, as well as tools and techniques
to deal with those issues. Although primarily designed as a
textbook for students in- terested in the field, this book will
also provide physicians and their practice managers with a
fundamental understanding of the financial and regulatory issues
that influ- ence today’s medical practice and with insight into the
cultural, human resource, and governance issues that make physician
practices unique among health care organi- zations. (Businesspeople
who work in medical practices are known by a variety of ti- tles,
such as administrator, practice manager, or office manager. For
consistency we have chosen to use the title practice manager
throughout this book.)
Physicians and medical groups face increasing challenges to compete
as the cost to provide health care services continues to rise.
Because reimbursement from governmental and other third-party
payers is flat or decreasing, improvements in tech- nology,
increases in costs of pharmaceuticals and for medical malpractice
coverage, and the costs of complying with the Health Insurance
Portability and Accountability Act (HIPAA) and other legislation
have put a strain on practice financial margins. As a result many
physicians and their practice managers now realize that they need
additional knowledge and administrative skills to understand and
deal with the chang- ing regulatory and fiscal environment.
Physicians seldom learn about medical practice management issues
and techniques during their years of medical education, and many
practice managers have
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no formal training as health care administrators. Lack of awareness
of critically im- portant practice issues such as the
organization’s cost structure, the negotiation of man- aged care
contracts, and the importance of federal and state regulations can
cause the practice to lose income or, even worse, face civil or
criminal action.
In this environment physicians and their practice managers must
have a general understanding of the many elements of practice
management and a depth of under- standing in a few. To ignore these
concepts could lead to loss of income as well as sanc- tions for
violations of regulatory requirements. The practical tools and
references in this book will help those who lead and manage
physician practices to understand the principles behind effective
practice management and increase their own proficiency.
As the external environment has changed over the last few years so
has the in- ternal environment in which the physician has to
practice. Physicians coming from their residency programs face
issues resulting from changes in the way practices do business. The
loss of control in medical decision making is very much on the
minds of many physicians in today’s managed care environment. Newer
physicians entering an existing practice also need to understand
the culture of that practice and be aware of governance and equity
issues. Physicians and their practice managers must work
collaboratively to maximize the success of the practice.
The Framework of This Book
In July 2002, the American College of Medical Practice Executives
(ACMPE) published The ACMPE Guide to the Body of Knowledge for
Medical Practice Management. It summarizes the body of knowledge
and skills that the ACMPE considers a prac- tice manager must
possess to be effective in today’s health care environment. The
“general competencies” that the ACMPE believes necessary are
• Professionalism • Leadership • Communication skills •
Organizational and analytical skills • Technical knowledge and
skills
Technical knowledge and skills should be developed in eight
domains:
• Financial management • Human resource management • Planning and
marketing
xx Preface
• Information management • Risk management • Governance and
organizational dynamics • Business and clinical operations •
Professional responsibility
This book provides the reader with practical, easy-to-implement
infor- mation related to the majority of these topics. Each chapter
contains illustrations of important concepts or management
techniques as well as tools and templates that can be used in
practice. The book is organized in logical divisions based on the
eight domains of the ACMPE body of knowledge, as follows:
Part One, “Financial Management,” provides the reader with the
information nec- essary to understand how to turn strategic plans
into financial reality. Beginning with a description of developing
budgeting templates to model financial performance in Chap- ter
One, the chapters in this section also discuss increasing net
reimbursement through management of the revenue cycle (Chapter
Two); understanding the cost of providing medical services and
management accounting (Chapter Three); the taxation of physi- cians
and of the profits from their practice (Chapter Four); capital
budgeting for the most efficient allocation of practice resources
(Chapter Five); and monitoring financial performance through
variance analysis, benchmarks, and ratios in order to maintain the
practice’s competitive edge (Chapter Six).
Part Two, “Regulatory Environment and Risk Management,” provides
the reader with the information necessary to understand the risks
that physician practices face in today’s regulatory and litigious
environment. The reader will learn how to combine the knowledge
obtained in the section on understanding practice costs with
knowledge of legal and contract terminology in order to negotiate
contracts with third-party pay- ers and minimize risk to the
practice (Chapter Seven). Chapters Eight and Nine ad- dress federal
and state regulations and corporate compliance and will help the
reader interpret those complex laws and regulations and know when
to seek the advice of legal counsel. Finally, Chapter Ten, on risk
management, will help the reader under- stand the risk of medical
malpractice suits and how to reduce that risk.
Part Three, “Human Resource Management,” provides the reader with
the in- formation necessary to understand and implement the various
governance models ap- propriate to physician practices. The reader
will also learn to interpret and integrate the various laws and
regulations that affect the practice’s human resource policies and
procedures and to design recruitment and retention strategies
(Chapter Twelve); to understand, choose, and apply the best
physician compensation model for the prac- tice (Chapter Thirteen);
to understand the role of midlevel providers in a practice (Chapter
Fourteen); and to understand the impact on the practice of nursing
work- force issues and how to address those issues (Chapter
Fifteen).
Preface xxi
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Part Four, “Strategic Considerations: Planning, Marketing, and
Management,” provides the reader with the information necessary to
create and implement a business plan for the practice, including
creating or refining the mission and vision; performing, analyzing,
and interpreting market research; building consensus for the plan
among key stakeholders; and communicating the plan and obtaining
buy-in for the plan from all parties (Chapter Sixteen). Chapters
Seventeen, Eighteen, and Nineteen offer informa- tion on how to add
a new service or program to the practice, develop an effective mar-
keting plan, and integrate a program in clinical research into the
practice. Chapters Twenty and Twenty-One present information that
will help the reader develop skills in dealing with relationships
between medical practices and community hospitals and in working
with physicians in academic settings.
Part Five, “Information Management,” provides the reader with the
information necessary to assess the short- and long-term needs of
the practice and incorporate that information into the strategic
plan. The reader will also learn to write requests for pro- posals
(RFPs), understand the various laws and regulations affecting
security and trans- mission of information, and gain awareness of
technologies that can add to practice efficiency and quality
(Chapter Twenty-Two). Chapter Twenty-Three includes in- formation
on performance improvement, teamwork, and monitoring outcomes that
is critical to practice management because medical practices are
obligated to pro- vide data on clinical results and practice
quality to regulatory agencies. The reader will come to understand
the necessity of developing databases to gather information that
will aid in quality control without providing detrimental
information in the event of litigation. Finally, Chapter
Twenty-Four discusses the realities that medical prac- tices are
facing in the twenty-first century.
Many examples are included as illustrations. All the practices and
physicians used in these examples are hypothetical examples
developed out of the authors’ experience or based on contemporary
medical news stories.
Essentials of Physician Practice Management Practice Aids
To assist our readers in gaining the most value they can from this
book, we are also providing supplemental materials on the World
Wide Web. Included are
• Answers to the discussion questions at the end of each chapter •
Selected mini–case studies • Two comprehensive case studies, one on
human resources and one on general prac-
tice management issues
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• Templates where appropriate, in the form of checklists and
spreadsheets, that il- lustrate best practices that can be used by
physicians or their practice managers to effect change in the
practice
Essentials of Physician Practice Management is a collaborative
effort between a physician and a businessperson. We have tried to
address the needs of physicians and their prac- tice managers in
practices of varying sizes (small to large) and types (for-profit
and nonprofit group practices and faculty practice plans). Our goal
is to give the readers of this book practical knowledge about and
insight into the operation of medical prac- tices. It is our belief
that the challenges faced by practices today cannot be solved by
either the physician or the practice manager alone. A team effort
is needed to acquire and apply the deep knowledge and skills
necessary to thrive in today’s challenging environment.
June 2004 Blair A. Keagy and Marci S. Thomas Chapel Hill, North
Carolina
Preface xxiii
ESSENTIALS OF PHYSICIAN PRACTICE MANAGEMENT
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PART ONE
FINANCIAL MANAGEMENT