Strengthen Your Practice Finances With this Basic Analysis

by Corporate Relations and Business Strategy Staff

A past issue of the PracticeUpdate e-newsletter included an article with key ratios to help you assess your practice's financial status. While informative, such an analysis doesn't necessarily help you understand how your operations affect your practice finances.

Analyzing operating data for your practice goes a step further and helps explain your performance, so you can make adjustments and implement strategies to strengthen your finances as needed.

As with your financial ratio analysis, begin by gathering relevant data from the past three years. Most of the data you need to analyze your operations —such as the mix of professional services you provide and insurance payers you use, along with productivity measures— will come from your practice management records, rather than from your financial statements.

Once you have compiled this information:

• Calculate the operating indicators listed below, using the same time interval (e.g., annual, quarterly, monthly) you used in your financial analysis.

• Look for changes and trends. Long-term patterns or gradual changes are often easier to identify visually, so it may be helpful to use a chart or graph.

• Pinpoint indicators that look problematic and think about how can you address these problem areas and make improvements.

• Once you have examined the historical data, start tracking these indicators on an ongoing basis to monitor your practice operations over time.

Although there are many operating variables you can explore, the following examples may be particularly helpful to track.

PAYER MIX: Break down the percentage of your total payments, the percentage of your total revenues and the percentage of your total clients by payer. For example, do Medicare clients make up 30 percent of your total client base, do 17 percent of your total revenues come from payments from a particular managed care contract, or are 61 percent of your total payments from private pay clients?

Having a larger percentage of clients or payments coming from a source with higher reimbursement rates is good for your practice finances. Conversely, growing segments from lower paying sources can put a dent in your revenues.

Just like investing, however, you should diversify your revenue sources. This will buffer you in the event of unforeseen changes, such as losing a contract, getting dropped from a panel or having a particular payer drastically reduce reimbursement rates or no longer cover a particular service.

Percentage of Total Payment = (number of payments from each payer / total number of payments) x 100

Percentage of Total Revenues = (net revenue from each payer / total net revenue) x 100

Percentage of Total Client Base = (total number of clients from each payer / total number of clients) x 100

SERVICE MIX: Look at the percentage of your time and revenues broken down by service type, such as individual therapy, group therapy, assessment, consultation and expert witness work. This will help you better understand how you are spending your time and what percentage of your total revenue comes from each type of service you provide.

Don't forget to include administrative time for each activity in your calculations. A service that pays $200 per hour might not seem so lucrative if you realize that you spend seven unbillable hours on administrative work for each billable hour.

Percentage of Time = (total hours spent on a particular type of service / total number of hours worked) x 100

Percentage of Revenues = (net revenue generated by a particular type of service / total net revenue) x 100

OTHER OPERATING VARIABLES: You might also want to calculate and track variables such as:

Average Length of Treatment = total number of sessions for all discharged clients / total number of discharges

Total number of sessions or units of service per year, month and week

Percentage of Cancellations = (total number of cancellations / total number of scheduled sessions) x 100

Percentage of No-Shows = (total number of no-shows / total number of scheduled sessions) x 100

Percentage of Referrals by Referral Source = (number of referrals from each referral source / total number of referrals) x 100

Client Mix Percentage = (number of clients with a particular primary diagnoses or core issue / total number of clients) x 100

You can calculate many of these operating variables by payer and client mix. For example, you might compute average length of treatment or percentage of cancellations and no-shows for each payer and for each primary diagnosis.

A couple of additional considerations reflect your practice setting:

• If you operate a larger practice with multiple health professionals, you can gain a better understanding of how the practice is functioning by also tracking the "other operating variables" listed above as well as percentage of total revenues generated by each professional.

• If based in an institutional setting such as a hospital or university counseling center, even though you may not have access to financial data, it should be feasible to track the percentage of your time spent delivering each type of service and the "other operating variables" listed above.