Supercharge your medical practice financial health by optimizing operations

As a private medical practice owner, it's easy to get caught up in the day-to-day tasks of patient care and put operations on the back burner. Start by optimizing operations with these financial best practices. We've found 9 habits to implement to ensure medical practice financial health plus a quiz to test your operational literacy.

For most businesses, tough economic times lead to tough choices. When profits start dropping, business owners will try to ramp up productivity, cut overhead costs, or streamline operations — or some combination of these options.

For private medical practices, maximizing financial performance is not always so simple. 

Unfortunately, cutting overhead costs is not convenient or even feasible for many practices. In fact, many practice owners have seen rising rent, utilities, and payroll. A recent MGMA survey found that 90% of medical practices saw their costs rise faster than their revenues in 2022, while only 10% said their revenues kept pace ahead of rising costs and inflation. On top of economic challenges, the Centers for Medicare and Medicaid Services (CMS) finalized a 3.37% pay cut in the 2024 Medicare physician payment schedule final rule in November.

Since increasing productivity and lowering overhead costs are challenging options for most independent medical practices, boosting financial performance often comes down to optimizing operations. 

This article will explore how to:

As for any business, defining and tracking financial performance is absolutely crucial to long-term practice success, growth, and sustainability. But doing so involves more than just tracking revenue and expenses. It requires a holistic understanding of all financial operations, from patient billing and collections to cost management and profitability analysis.

It’s impossible to track progress or goals that are poorly defined, so the first step is to identify key performance indicators (KPIs). KPIs can take many forms, but for an independent practice should include revenue, profit margins, patient volume, collection rates, and accounts receivable days. Each KPI should follow the SMART rubric.

Specific: KPIs should be clear about what they measure and track. For example, instead of "patient satisfaction," a more specific KPI would be "patient satisfaction ratings based on survey responses."

Measurable: Measurable KPIs are quantifiable. They provide a clear target and help the practice determine whether its on track to achieve it. For example, "increase patient volume" is a vague KPI, but "increase patient volume by 10% over the next quarter" is measurable.

Achievable: KPIs should be challenging but attainable. An achievable KPI takes into account the practice's resources, capabilities, and constraints. For instance, "reduce patient wait times to less than 10 minutes" might be an unachievable compared to "reduce patient wait times by 25% over the next month."

Relevant: KPIs must align with the practice's goals, mission, and vision. This means that "increase website traffic from pay per click ads" might not be a relevant KPI for a practice that doesn't rely heavily on paid online marketing. Instead, "increase the number of positive online reviews" could be a more relevant metric.

Time-bound: KPIs need specific timeframes for achievement. A time-bound KPI is easier to focus on and track. For instance, not "reduce the number of accounts receivable" but "reduce accounts receivable by 20% within the next 12 months." 

Setting SMART KPIs is a way to determine goals, approach, and success. Reevaluate KPIs at least every quarter. Work with a healthcare financial analyst as needed. Educate staff on the importance of KPIs and their role in achieving practice finance goals. Encourage them to take ownership of their performance and collaborate to achieve shared objectives. This will help the whole team focus the most important metrics, make data-driven decisions, and drive continuous improvement across operations.

Regularly collecting data on each financial and operational KPI and analyzing it will allow the practice team to identify trends and weaknesses. 

The first step to using data effectively to optimize operations is to create an operational dashboard that displays key metrics and KPIs in real-time. This will support a proactive response when needed. 

The easiest way to create a dashboard is to leverage technology, such as practice management software, electronic health records (EHRs), and data analytics tools. These programs streamline data collection and analysis and can help automate tasks, reduce errors, and provide healthcare financial analysts with valuable insights into practice performance.

Once the practice begins to collect data, it can begin to analyze financial performance to drive improvements and growth. One of the best ways to begin is to compare the practice to industry-leading healthcare benchmarks and data from national sources, such as the Medical Group Management Association.

For instance, practices can use data visualization tools to track claims denial trends, and then use this information to reduce future denials. A healthcare financial analyst or financial analytics tools can help practices identify opportunities to optimize fee schedules and payer contracts. They can also help track expenses, including staff salaries, rent/mortgage, utilities, equipment costs, and marketing expenses. Monitoring expenses will help identify opportunities to cut costs without sacrificing quality care.

Accurate and efficient medical billing is crucial. Leverage financial analytics tools or a healthcare financial analyst to identify potential lost revenue due to inefficiencies or errors in billing. 

For example, practices can track metrics such as days in accounts receivable, net collection percentage, and insurance claim submissions. It is helpful to have relevant comparisons to local and national practices to discover the top-level metrics in profitability, productivity, and compensation. Using these KPIs, practices can set targets for improvement and regularly review progress towards them. 

By leveraging KPIs and financial modeling, the practice can maximize revenue potential and minimize losses due to inefficient billing practices. 

Financial reports are essential tools with which to monitor practice financial health, make decisions, and achieve success. Accurate and timely reports provide the necessary insights to optimize revenue cycle management, streamline expenses, and allocate resources. 

At the very least, a practice should create the following reports:

These reports are critical for practice success, so seek professional advice when needed. Partnering with a healthcare financial analyst, and healthcare accounting and legal firms, ensures accuracy. These reports must consider tax liabilities, laws, and regulations such as the Stark law and antitrust laws, particularly if the practice has ancillary services.

Regularly reviewing balance sheets, income statements, cash flow statements, accounts receivable and payable aging reports, and practice performance metrics prepares practice owners and  managers to make data-driven decisions and optimize revenue cycle management. 

Practice operation reports should be reviewed monthly by the physician leader and administrator at a minimum. Quarterly, biyearly, and end-of-year reports should be reviewed by an accountant experienced in healthcare, as well as by the practice administrator and physician leader. Year-end reports must include tax projections. 

Always inform the healthcare accountant or financial analyst of any sudden or anticipated changes, such as a physician being out on maternity leave, as soon as possible to prepare ahead of time.

With the right financial information and analysis, your medical practice can thrive in today's complex healthcare environment and throughout tough economic times.

Physicians and other healthcare professionals often start their own practices hoping for more flexibility and better earnings. Yet many struggle due to the rising costs of running a business, declining insurance reimbursements, and increased competition. 

A financial management crisis plan is critical for identifying possible risks and mitigating their effects should they arise.

A crisis management plan should include strategies to manage cash flow during tough times, such as cutting non-essential expenses, renegotiating contracts with suppliers or managed care contracts, or exploring alternative revenue streams, such as ancillary services. It should also include an emergency fund or line of credit set up to cover expenses during short-term financial difficulties. Physicians can find access to financing with favorable terms through the Small Business Administration. 

To create a financial crisis management plan, brainstorm possible challenges. These might include economic downturns, loss of providers, loss of managed care contracts, billing problems, staffing shortages, increased competition, or unexpected expenses. 

Bring together a cross-disciplinary group of key practice stakeholders to identify possible risks and solutions. Include physicians owners, practice administrators, investors, and financial experts, such as a healthcare financial analyst. Analyze the practice's strengths, weaknesses, opportunities, and threats (SWOT analysis).

Next, revise or create policies for lean times, such as budgeting, cash flow monitoring, and accounts management. Create disaster strategies, such as establishing an emergency fund, negotiating better payment conditions with insurance providers, or consolidating costs with other practices.

Ensure the practice has access to cash, such as a line of credit or emergency fund, to weather any surprises. Analyze the debt-to-equity ratio and look into refinancing possibilities if necessary to lower debt and boost financial flexibility.

In addition to cash shortfalls, consider tax liabilities, particularly if the practice is an S-corporation. Consult with a tax accountant and attorney for the best practices. Some physicians may owe taxes on practice operations without sufficient money to cover the pass-through taxes. Though it may sound counterintuitive, some practices take out short-term loans to distribute to physician owners to cover year-end tax liabilities. The goal is then to improve practice revenue enough to pay the loans back quickly without disrupting normal operations.

After developing the policy, review and update it regularly to ensure that it reflects the practice and marketplace. 

Staying on top of financial performance is part of ensuring practice longevity and success. By defining and tracking financial metrics, optimizing billing through analytics, preparing for financial crises, and running regular management reports, practice owners and managers can create a roadmap for financial stability and operational efficiency. 

Take this quiz to determine how your private medical practice is performing at optimizing operations and financial performance.

Setting financial goals helps you stay focused on your practice's financial health. Determine what you want to achieve, such as increasing profitability or reducing debt, and then create a comprehensive plan to reach those goals. Regularly review your progress and adjust your strategy as needed.

To stay on top of your practice's financial performance, it's essential to monitor your financial statements at least monthly. This includes tracking income, expenses, profits, and losses. Use financial software or work with an accountant to stay organized and identify areas for improvement.

Controlling expenses is crucial for maintaining financial health. Identify areas where you can cut costs without compromising patient care, such as renegotiating contracts with suppliers or finding more affordable insurance options. Implement efficient systems for managing expenses, like using accounting software to track your spending.

Efficient patient collections are vital for maintaining a healthy cash flow. Streamline your billing processes by using EHRs or practice management software to simplify the billing process. Offer convenient payment options, such as online payments or payment plans, to make it easier for patients to settle their accounts promptly. Be wary of outside billing and collection services that charge management fees equal to a percentage of billing. They might promise great returns, but they usually under deliver. 

Regularly review your accounts receivable and payable to ensure that you're staying on top of your finances. Implement a system for following up on outstanding payments, and consider using a lockbox service to expedite payment processing. Consider hiring a staff member to follow up on the practice’s accounts receivable or offer a performance bonus to billing staff if they reach certain goals for bringing in payments. 

Unexpected expenses can arise at any time, which is why an emergency fund is essential. Aim to save 3 to 6 months' worth of operating expenses in a separate account. This fund will help you cover unexpected costs, such as equipment repairs or staffing shortages, without going into debt.

Investing in technology can help streamline your operations and increase efficiency. Consider implementing advanced EHRs, practice management software, or telemedicine solutions to reduce costs, open new revenue streams, and ultimately improve patient care. Or, purchasing advanced clinical equipment may increase the types of procedures you’re able to perform, thereby increasing billing and collections. 

A robust marketing strategy helps attract new patients and grow your practice. Identify your target audience and create a plan to reach them through various channels, such as social media, email marketing, or search engine optimization. Monitor your marketing efforts regularly to ensure they're effective and adjust your strategy accordingly.

As a medical practice owner, you may not have the expertise or time to manage all aspects of your finances alone. Consider working with an accountant,financial advisor, or practice management consultant to help you stay on top of your financials.

If you answered “no” to any of these questions, you’re missing a key opportunity to improve the operational and financial health of your practice. And remember, the financial health of your practice is intrinsically linked to the quality of care you provide. By maintaining a strong financial foundation, you're not just protecting your business; you're ensuring that you can continue to offer the best possible care to your patients.