Mastering Financial Management for Private Medical Practices

Running a small medical practice is far more than providing excellent patient care. It also requires a robust understanding of business finances. This blog post will explore strategies for making a medical practice profitable and optimising operations.

Financial health can be gauged through an analysis of its revenue, expenses, profitability, and cash flow. This analysis offers insights into the practice's financial performance so that practice owners can streamline business operations, optimise revenue generation, control expenses, and increase overall profitability.

"Understanding financial health through comprehensive analysis of revenue, expenses, profitability, and cash flow is crucial for private medical practices." - DoctorsManagement.com

Establishing Clear Financial Policies

Practices should ensure that a patient's insurance eligibility is verified before every appointment and remind patients to bring a form of payment with them. All financial policies should be communicated clearly and well in advance to avoid confusion. It is wise to have the following financial policies in place:

[ ] Patient Financial Responsibility: This policy should clearly outline the patient's responsibility for payment of services, including the process for self-pay patients, those with private medical insurance, and any potential penalties for late payment or non-payment.
[ ] Fee Setting: The practice should have a policy for setting and reviewing service fees. This policy should consider factors such as the cost of providing the service, and market rates.
[ ] Billing: This policy should detail the process for billing patients and collecting payments, including handling overdue accounts.
[ ] Cash Flow Management: Outline strategies for maintaining positive cash flow, such as regular financial forecasting and budgeting, to ensure the practice can cover its running costs.
[ ] Conflict of Interest: The practice should have a policy to manage potential conflicts of interest, particularly about financial and commercial dealings. Doctors must be honest with patients about any financial or commercial interests that could affect how they prescribe, treat, refer or commission services.
[ ] Investment and Reinvestment: It is advisable for the practice to set out how it allocates profits among partners and for reinvesting into the practice. This policy should consider factors such as the need for equipment upgrades, facility improvements, and staff training.
[ ] Compliance with Regulations: The practice should have a policy to ensure compliance with all relevant financial regulations, including tax, pensions, indemnity, and other financial obligations.

These policies should be regularly reviewed and updated to ensure they continue to meet the needs of the practice and its patients. There are of course other policies relating to the running of the business that are required by CQC, i.e. Business Continuity Plans.

Benchmarking Performance

Key performance indicators (KPIs) can help pinpoint areas that need improvement. These KPIs encompass a range of factors, including Doctor productivity, accounts receivable, insurance claims, reimbursement rates, denials, compensation to staffing ratios, expense management, performance compared to budget, and patient satisfaction. By tracking these KPIs, practices can assess their performance over time and benchmark it against comparable providers.

"Monitoring key performance indicators (KPIs) helps identify areas for improvement and benchmark performance against comparable providers."  - DoctorsManagement.com

KPIs can be divided into two categories: lagging and leading indicators. Lagging indicators measure past activities while leading indicators offer insights into potential future performance. Here are the definitions of the KPIs, categorised as lagging and leading indicators:

Lagging Indicators

• Operating Cash Flow refers to the net cash generated from a company’s regular business operations. Maintaining a positive cash flow is crucial to survival.
• Value of Debtors Greater Than 30 Days: This KPI tracks the total amount owed to the practice by patients or other parties who have not paid their bills within 30 days, indicating potential cash flow or collections issues.
• Value of Debtors Less Than 30 Days: This KPI measures the total amount owed to the practice by patients or other parties who have not yet reached the 30-day mark, providing an early warning of potential cash flow or collections issues.
• Net Promoter Score (NPS): This KPI gauges patient loyalty and satisfaction. It's calculated based on responses to the question: On a scale of 0-10, how likely are you to recommend our practice to a friend or colleague?
• Gross margin, a key financial metric, measures the practice’s financial health by showing the percentage of revenue that remains after covering the cost of goods sold (COGS).  A higher gross margin suggests that the practice is efficiently turning revenue into profit, which can be reinvested or shared among partners.

Leading Indicators

• Utilisation %: Measures the percentage of available resources (such as staff time or equipment) that are being used, helping to identify inefficiencies and opportunities for cost savings.
• Website Sessions: The number of individual visits to your practice's website, providing insights into the effectiveness of your online presence and digital marketing efforts.
• Leads: Measures the number of potential new patients who have expressed interest in your practice by making an enquiry or signing up for a newsletter, indicating the success of your marketing and patient engagement strategies.
• Bookings: The number of appointments scheduled at your practice. Many bookings can suggest that patients are satisfied with your services.
• Marketing Spend - PPC: The amount of money spent on Pay-Per-Click (PPC) advertising, helping to assess the cost-effectiveness of your digital marketing efforts.
• Cost Per Lead: Calculates the average money spent to acquire each new lead. It's calculated by dividing the total marketing spend by the number of leads generated.

Key Financial Considerations

Having well-prepared financial statements is crucial as they provide a real-time snapshot of your practice's financial health. It's important to familiarise yourself with your income statement, paying particular attention to patient revenue and practice expenses. Additionally, your balance sheet should be reviewed monthly. Unlike your income statement, which shows performance over some time, the balance sheet provides a snapshot of your current cash position, owned fixed assets, current debt balances, and equity investment. Your accountant can give comparative statements to compare current performance with previous years and guide you on proper transaction recording.

Sources of Revenue

Identifying and understanding the primary sources of revenue for your practice is crucial. Revenue for private medical practices may come from various streams, such as routine patient visits, telehealth, procedures, consultations, diagnostic tests, and membership packages. Practices should consistently assess and adjust their pricing, cost management, and service offerings to maximise their gross margins. Annual health checks when priced appropriately offer a high gross margin, and are therefore very profitable.

Accounts receivable

Medical practices can often overlook their accounts receivable reports because those numbers often don't appear on the financial statements. Accounts receivable reports, which are available within Practice Management Software such as Semble, will tell you how much in services you billed and how much revenue you received in return.
If patients cannot pay for an appointment, it may be acceptable to turn them away and require them to reschedule at a time when they can pay. Certainly, if the are repeat offenders of not paying or have to be consistently chased it may not be appropriate to keep them, as customers. However, this policy needs to be documented, and staff must be well-trained so that it’s uniformly and properly applied.

Expense Management

Controlling expenses is crucial, just as vital as generating income. Consistently analysing expenses can reveal opportunities for cost reduction. This process should cover fixed expenses, such as rent and staff salaries, and variable expenses, like medical supplies.
Using the practice's funds for personal expenses can lead to conflicts in a medical practice operated by several partners. This approach risks breaching tax rules and jeopardizes the relationships among partners. It's advisable to treat personal expenses as partner bonuses or cease using practice funds for personal matters. Maintaining transparent records is key to building trust among partners and ensuring reliable financial reporting.
The compensation structure for you and your partners should mirror the revenue generation patterns of your practice. If you opt for an equal income split, it's wise to consider the typical revenue generated per Doctor in your speciality. An equal distribution might be suitable if the revenue per Doctor is relatively consistent. However, if there are notable differences in individual schedules, types of procedures, and their respective revenues, you should devise a remuneration method that reflects these variations.

"Effective expense management and a fair remuneration structure contribute to the financial health of the practice." - DoctorsManagement.com

It's equally important to be aware of the salaries for nurses, lab technicians, and receptionists, as well as the rising starting salaries for Doctors. Benchmarking these salaries can offer valuable insights into your practice's competitive position. Offering a compelling compensation package is essential not only for attracting skilled professionals but also for your practice's long-term success and sustainability.

Make it easy to pay

Practices should offer as many payment options as possible, including credit or debit cards, and online booking. Technological advances have made it easier for practices to accept credit cards, and some practices even offer discounts to patients who agree to pay their bills in full by a specific date. Taking cash payments is up for debate as as reconciliation can often be time consuming.

Profitability

Profitability stands as the definitive indicator of a medical practice's financial well-being. It is calculated by deducting total expenses from total revenue. Should there be a trend where costs are increasing quicker than revenues, it signifies a need to re-evaluate and possibly revise the financial strategies of the practice. This assessment ensures the long-term viability and financial stability of the practice.

"Profitability, the definitive indicator of financial well-being, is calculated by deducting total expenses from total revenue." -  - DoctorsManagement.com