Losing proposition: When doctors take in less than what goes out

Physicians are struggling to cope with outlays that are rising faster than their reimbursements. Is there a way to tame growing cost?

By Julie A. Jacob, amednews staff. Jan. 7, 2002.

When your costs are rising and your reimbursement is declining, how do you make ends meet? That's the dilemma facing many doctors today who have overhead costs that are going up faster than their revenue.

Physicians around the country say it's not easy to figure out ways to trim costs without affecting patient care. They said they are coping by eliminating staff positions, dropping health insurance benefits for employees or switching to higher-deductible plans, working longer hours, buying supplies through purchasing alliances, moving to electronic medical records or even cutting their own salaries.

Up and up

His malpractice insurance premiums jumped 59% last year, he said, and health insurance premiums for himself and his five employees increased 20% -- and that was after he dropped family coverage for his employees because it was simply too expensive.

At the same time, one of the managed care companies that he has a contract with cut reimbursement by 42%.

He's coping by taking home less money for himself. "If I was a younger physician I don't know what I'd do ... but I'm 63 years old and I don't need that much money. The kids are educated, we can live on less, and we will," Dr. Jakubec said.

Medical practice cost hikes have outstripped revenue increases over the past 10 years.

Edward Reichelt, MD, a family physician in Arlington, Texas, said his practice costs had gone up about 15% last year while his revenue went down, he said.

"Medicine, supplies -- we're paying more for everything," he said.

He's simply trying to work harder to make up for it, he said.

Costs outpacing revenue

Increases in medical practice costs have outstripped revenue increases over the past 10 years, according to the Medical Group Management Assn.'s 2000 Cost Survey. Operating costs for multispecialty groups went up an average of 35% over the past 10 years, but revenue increased only 21% over that same period, said Dave Gans, MGMA director of medical practice resources.

Since 1986, total operating costs per full-time physician in a multispecialty group have risen 82%, but total medical revenue per full-time physician has increased only 63%, the MGMA said.

There are several reasons why operating costs are outpacing revenue, Gans said. The cost of running a practice has gone up due to steep hikes in health and malpractice insurance premiums, the pressure to offer competitive staff salaries during a decade-long economic boom, the need to hire additional employees to take care of ever-expanding managed care paperwork, the cost of expensive new medical equipment and drugs, and yearly increases in office rent.

Multispecialty group operating costs rose 35% on average in the past 10 years, revenues only 21%.

At the same time that costs have been going up, managed care plans have been cutting physician fees. According to the MGMA survey, the average percentage of gross charges that physicians collect on their services dropped from 89% in 1980 to 68% in 1999, due mostly to managed care companies discounting physician fees. Since gross charges per full-time physicians in a multispecialty group increased 122% during that same period, revenue increases have occurred mostly due to increases in physician productivity, not fee increases.

What all those numbers mean is that doctors have to make their money stretch further to cover their overhead costs.

For example, Vijay N. Koli, MD, a family physician in solo practice in San Antonio, recently dropped health insurance coverage for his three employees because he no longer could afford it. If an insurer does not have a toll-free number, he faxes information to the company to save on long-distance telephone costs.

He said these cost-cutting measures were necessary because his income had dropped about 5% a year for the past five years, a situation he blames on shrinking reimbursement from managed care companies combined with the extra expenses associated with managed care. He had to hire an extra employee just to deal with the paperwork.

"It's a domino effect. One cost leads to another," he said.

Jack Swanson, MD, a pediatrician with the 200-doctor multispecialty McFarland Clinic in Ames, Iowa, said his group also had been hit by rising medical costs.

Doctors collected an average of 68% of gross charges in 1999, down from 89% in 1980.

For example, safety sharps are about five times more expensive than the old sharps, he said, and new vaccination drugs are costly. Complying with the new medical records regulations of the Health Insurance Portability and Accountability Act also will add to the group's overhead, he said. The group buys its supplies through a purchasing alliance, he said, but the physicians are still looking for more ways to cut costs.

"It looks like we are going to have to decrease take-home pay for physicians. ... It's a real squeeze," Dr. Swanson said. "We've thought about cutting staff and increasing hours, but it's pretty hard to increase hours because we already work Saturdays."

James Hay, MD, a family physician in San Diego and president of the San Diego County Medical Society, said the five-doctor practice he belongs to eliminated three staff positions this year in an attempt to trim operating costs. Staff salaries and health insurance premiums take up the biggest cost chunk, but he said the group was reluctant to freeze wages or cut any more positions.

"We want to keep our senior staff. ... It's still a tight job market here," Dr. Hay said. But the group has asked the business manager to assess the office's expenses to see where further cost cuts can be made. The group also added telephone answering duties to the responsibilities of its medical assistants so the group could eliminate a receptionist's position.

Paul Handel, MD, a urologist in Houston, said his three-doctor group also had been trying to cope with costs that are outstripping revenue. His revenue decreased 13% last year due to a combination of declining reimbursement from managed care companies and the need to cut back on his schedule due to medical society activities.

At the same time, employee health insurance premiums jumped 35% last year, while staff salaries went up 7.3%. Like San Diego, Houston still has a tight labor market. "We cannot cut staff salaries or not give them cost-of-living and merit increase," he said.

His group switched to an employee health insurance plan with a higher deductible that will save the group about $5,000 a year in health insurance costs, he said. The group also signed a five-year office lease that will keep their rent stable for the next few years.

In an effort to generate more revenue, Dr. Handel said he recently started working two hours earlier each day. He and his colleagues also are giving patient education talks to civic and community groups in an effort to attract new patients.

Making your dollars go further

So what can physicians do to cover their overhead costs in a harsh practice climate in which revenue isn't keeping pace with practice costs?

Physicians can do what many of them are already doing -- find ways to trim expenses and increase productivity, said practice management experts.

The MGMA's Gans recommended that physicians carefully examine their staffing to make sure they aren't overstaffed and, in addition, that the staff is being used efficiently.

But it's important to look at the broad picture when it comes to staffing, said Sherry Migliore, director of consulting at PMSCO Healthcare Consulting, a subsidiary of the Pennsylvania Medical Society. Cutting staff to save costs in the short run won't help a physician in the long run if the staff that remains is overwhelmed with work or simply doesn't have the same level of training and experience as the employees who were let go.

"Practices that do best are not understaffed. ... Good employees are worth their weight in gold," Migliore said.

Doctors also can cut their overhead costs by buying supplies through purchasing alliances and shopping around carefully for insurance, accounting services, legal services and so on, Migliore said.

For example, Dr. Hay said his group buys office equipment and services through a subsidiary of the local medical society. They get discounts on computer software and billing services, he said.

Doctors who are looking for ways to cut overhead costs also should evaluate whether it's worth it to have multiple office sites, Migliore said. Physicians who are paying rent for an office that they use only a few days a week should consider sharing that office space with another doctor or simply closing that practice location.

Gans and Migliore also suggested that physicians and medical groups that haven't already switched to electronic medical records and electronic claims submission do so. Although a transition from a paper-based office to an electronic-based one requires an investment in equipment, software and training, it will pay off with lower costs and increased efficiency in the long run, they said.

They also noted that efficient patient scheduling can reduce overhead costs. They suggested that physicians look for days or times of day when they have a lot of no-show patients or vacant appointment slots. They recommended that physicians either figure out ways to increase the number of patients scheduled during those times or close the office during the slow periods.

ADDITIONAL INFORMATION:

Up and up

Operating cost as a percent of total revenue for multispecialty groups, 1989-1999

1989: 54.3%
1990: 54.4%
1991: 55.4%
1992: 54.4%
1993: 54.6%
1994: 54.9%
1995: 55.6%
1996: 56.0%
1997: 57.5%
1998: 58.9%
1999: 58.2%