This is the second part in a series on the long-term math of overhead expenses.  Click here for part one.

Back to our imaginary financial model…why did I think it was a good idea to try to describe a spreadsheet in a blog post?

To review, we’re going to assume that what you get paid for a unit of service – a visit, a claim, a CPT, an RVU – is flat going forward.  Now flip to the expense side of the equation.

Yesterday I rudely pointed out that Medicare’s reimbursement rate in 2019 is actually, in real terms, lower than what they paid you in 1998.  During that same period, general inflation averaged 2.1% a year.  That is not a Venezuelan or Jimmy Carter kind of inflation, but compounded over two decades, it adds up.  Something that cost $100 in 1998 would now carry a price tag of over $158.

You know where this is going, don’t you?

Put a big fat zero in the cell for your future rate of reimbursement increase (and that is probably too optimistic) and put anything bigger than zero as the assumption for your rate of expense increase and it won’t be long before the divergence of those two lines starts to cause some real pain.  And many of you are in markets where a 2.1% salary increase for your staff ain’t nowhere close to what you have to provide.  Should I mention the annual increase in your health insurance premiums?  No?  Yeah, probably not.

Please forgive me for using what may sound like a self-serving example, but it is the world I know and the conversation I have with practices a lot.  Assume the all-in costs for your revenue cycle process are currently 5.1% of revenue.  You have a lot of people costs in there, so your assumption on annual increases is something bigger than zero.  Unless something else changes, it won’t stay at 5.1% for long.

Which gets to the final part of the exercise: What else would you have to believe to keep your rev cycle costs from really eating into physician income?  Here is the list:

• You could beat the big revenue trend (zero increase in rates) and get better contracts. Some do.
• You could turn on new revenue streams whose rev cycle costs are near zero. Nah, that is a delusion.
• You could beat the big expense trend (costs go up every year). An even bigger delusion.
• Your physicians and providers could crank more volume. That could happen.  You have a plan for that, or is it just a hope?
• Your RCM team could get more productive, processing more claims per person. Speaking of having a plan, that one better come with a lot of technology investments.  You know that, right?

By the way, we could have done the same exercise for your clinical operations or general administrative staff or most any other bucket of expenses.  The math is the same.

Erosion is slow for a long time, then suddenly devasting.

I am not sure how I ended up here, but I really like working in spreadsheets.  I tend to think in spreadsheets.  For a guy who talks a lot, you’d think my go-to application would be the word processor, but most often I default to a spreadsheet.

If I am at my laptop, odds are high there is an open spreadsheet lurking somewhere on my desktop.  Generally, I am graphing a set of data – yes, I use Excel more to make pictures than to stare at numbers.  But one of the things I most like about Excel is model building. A model is simply a numeric representation of some particular idea about the future – a set of inputs, a set of assumptions, some formulas that define how the inputs and assumptions interact with one another, then some outputs that show how the world would work out if all the math in the model somehow proved to be right.

The great thing about a model is that it forces you to take a stand on the assumptions.  When asking, ‘how much will this cost?’ or ‘how fast with that grow?’ Excel tolerates no wishy-washy answers like, ‘A lot’ or ‘I don’t know.’  Be right or be wrong, but you must be specific.  It is really good exercise for clarifying your strategic thinking.

So, I have a little modeling question for you about the financial future of your practice and the income of your partners.

The big question, the one we want our imaginary model to answer, is, ‘What is our overhead rate going to look like in five years?’  And the more important corollary, ‘What will that mean to physician income?’

As administrators can attest, physicians focus on the overhead question – a lot.  So, consider this a public service whether you are on the asking or receiving end of the question.

When we think of overhead expenses, it is right and best to think of them in terms of a percentage of revenue.   How much of our revenue do we spend on staff?  Rent? Billing? IT? Donuts?

So, let’s start with the revenue assumptions that go into our little model.

Odds are your reimbursement rates have been flat, at best, over the past several years.  We know the Medicare numbers.  In 1998, the Medicare conversion factor used to determine physician reimbursement was $36.69 per RVU.  This year, it is $36.04.  No typo there…two decades and the most important number in your Medicare reimbursement is technically, absolutely down a smidge.  Commercial rates are all over the place, but it is probably a safe assumption that your commercial rates, as a multiple of Medicare, were higher in 1998 than they are now, right?

Let’s set the assumption on future reimbursement rate increases to 0.

Dang, this will take more time than I thought, so we’ll continue with a surprise bonus post tomorrow. Two in one week!  Christmas in July!