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.