Tim Coan, ALN’s CEO, writes an insightful and witty blog once a week about a variety of topics relevant to independent physician practices.

What Do You Put in that Cell?

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.

The Forced Discipline of Excel

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!

Muffled Signals

I was a psychology major with no interest in being a shrink.  I liked business, but hated accounting.  I was either open-minded or confused.

One place that my conflicted interests have always come together is around pricing.  That pricing decisions – for any product or service – contain a mix of economics, psychology, marketing and raw chutzpah has always intrigued me.

I am drawn to, and collect, pricing stories.  One of my favorites involves the owner of a small boutique getting ready to go on vacation.  Fall inventory arrived and she needed to clear out some stuff to make room.  A shelf of knick-knacks had not been selling, so she left a note for the assistant to cut the price in half and put them on sale.  The note got misinterpreted and the price was instead doubled.  When the owner returned, she was delighted to see that her 50% off sale worked as every one of the items had sold.  She was more delighted, though curiously puzzled, when she found out what actually happened.

That kind of stuff is fascinating.

Pricing plays a lot of roles, but one of its most important is as the signaling device between producers and consumers.  How does our complex market economy work without gnomes in the back room orchestrating everything?  Pricing signals.

Pricing helps everyone know how to behave.  If there is a shortage, prices go up.  Consumers get the message to think about curtailing consumption; producers get the signal to make more.  It is a beautifully elegant mechanism that makes this big old machine work.  Sure, we lurch here and there, making or buying too much, not making or buying enough.  But amazingly, it all seems to find its way back toward the steady middle without anyone having to call a meeting.

I am thinking about pricing signals as we watch the legislative processes around surprise medical bills and prescription drug prices.  I am thinking about the value of price signals as we listen to presidential candidates pitch various versions of universal healthcare.  But what I am really thinking about is mufflers.

That is because all these ideas, in the name of wanting to eliminate some real pain for some real people, are mufflers on the signals sent to the market through the price.  And when muffled, the signals don’t do their job.

Put an externally imposed ceiling on the price of anything – rent, concert tickets, meds, physician services – and you blunt the signal to producers to make more of it.  So, they don’t.  And the very thing we needed to help bring the price down – more supply – doesn’t happen because the signal never got through.

Deep thoughts for a summer Friday, I know.  But as we collectively consider options to address some of these issues, just be aware that price controls by any other name are still mufflers and suppressors of the critical signals that make a market work.

Shoppable Services

The US Constitution has only 4,534 words.  The instructions on how to light my gas grill had more.

So maybe it is not a surprise that Article II of the Constitution, the part that establishes the presidency and the executive branch, hinges on this rather pithy little sentence.

‘The executive Power shall be vested in a President of the United States of America.’

There is a lot in those 15 words, nine of which have only one syllable.  We notice these things.

There are far more words in Article II talking about what makes up a quorum and how to determine who actually got the majority of the electors (uh, my number is bigger than your number…I win) than that single sentence that gives the President a LOT of power.

One of the ways the executive branch executes is through the Executive Order. FDR was the king of Executive Orders, ringing in with 3,728 of these.

In these, the boss writes instructions telling people on his team what they need to do.  They are a bit more formal than firing a tweet at a cabinet secretary as they get posted on the White House website and in published in the Federal Register and printed up on fancy letterhead and things like that.

President Trump just issued one and Alex Azar, Secretary of the Department of Health and Human Services, the guy who got most of the TO DO assignments out of this one, called it ‘one of the most significant steps in the long history of American health care reform.’  All expected hyperbole from the home team aside, he is right – this is a big deal.

Trump’s order directs his team to develop regulations, generally over the next six months, to change the game in five basic ways:

  • Require hospitals to disclose negotiated commercial rates (huge transparency move).
  • Require insurance companies to provide information to patients about costs before they receive care (everyone taking a swing a surprise billing).
  • Require agencies to coordinate on quality metrics (because I guess we should keep saying this until they actually do it).
  • Require agencies to make more de-identified data available to outsiders to use in building tools to help patients (this means apps for price comparison; it is handing the market a jackhammer to break through on transparency).
  • Expand what you can do with a Health Savings Account (sounds like no big deal, but another nudge toward empowering the consumer, another market tool).

Regular readers know our bias here as we’ve not been trying to hide it – when asked to choose, we generally prefer ideas that trust the market (consumers and competition) more than bureaucrats.  We’ll see how things play out, how the regulatory rubber hits the road, but this is the administration giving healthcare policy a giant push in that direction.

Family Psychology

I still remember the very first thing Dr. Powell said in my Family Psychology class.  ‘Two people don’t get married…two family histories do.’

Wow, there was so much more truth in that statement than my 20-year-old single self could begin to realize.  The rest of the semester was spent discussing the dynamics and dysfunctions that flow from that single reality. The past 32 years have been a practical homework assignment to help me really understand what that truth means.

This is worth remembering because as physician practices work to develop plans for remaining independent, many will contemplate various strategies that lead to combining with other practices through mergers, acquisitions, management agreements, joint ventures, independent physician organizations (IPAs, but not the beer), accountable care organizations (ACOs), or some other three-letter acronym that stands for getting married.

At least three of our current clients are actively pursing a strategy of ‘acquiring’ other practices in one form or another; other of our clients are being pursued.  So, this is a topic that comes up a lot in my world these days as we help them think thorough their options.

Invariably, the conversation gets around to the family psychology, the reality of trying to unite two different family histories.  These things generally end up looking just as messy, just as weird as real families.  One of our clients had a deal blow up at the last minute because the lead doc in the to-be-acquired practice went to jail.

Yep, humans are humans, both in families and physician practices. The Jerry Springer Show is not running out of potential guests.

It has long been a point that a lack of cultural and values alignment is often the most important reason that mergers and acquisitions fail.  Just because it is valid and has been made repeatedly does not mean many organizations still ignore it, as the high failure rate of all mergers proves.

The issue is even more true when combining physician practices than for most companies in general.  A physician practice, intentionally or not, was built in the image of the founding physicians.  They are not just the owners, but also the product…they are the source of the revenue for the business.  This combination of factors means that whatever the family history of this practice – its values, its operations, its approach to the patient experience, its way of making decisions, its lingo, its everything – it is hard-wired deep into the DNA.  Signing a transaction document and changing the logo on the door are not going to undo that history.

There is a high probability your practice is having, or will have, courtship discussions that have an eye toward either marriage or at least moving in together.  Your future independence likely means you need to entertain or pursue these discussions.  Just keep Dr. Powell’s truism at hand early and often.

Turtles and Tortoises

Turtle vs. tortoise.  Quick, what’s the difference?

Turtles spend most of their time in the water; tortoises on land.

There is a relatively long list of two things that seem the same, so much so that many of us use the words interchangeably, but have some meaningful differences.

Alligators and crocodiles

Cement and concrete

Champagne and sparkling wine

Ethnicity and nationality

Mugs and cups

It would make for a great casual dinner conversation.  Give a pair of words and note the thing that makes them different.  Or a drinking game if you live in a fraternity where everything is a drinking game.

My favorite couplet:  Great Britain vs the United Kingdom.  The latter contains Northern Ireland while the former does not.

Understanding the nuances between words that look like synonyms, but aren’t quite the same, will come in handy as the discussion around universal healthcare heats up with the coming political season.  It might not matter much if you know whether your road is solid (cement) or includes stone, rock and sand as well (concrete), but it may matter a lot what someone actually has in mind when they advocate for a ‘single payer system.’

The Medicare for All Act of 2019 (HR 1384) making its way through the House – not going anywhere in this Senate – is one such animal.  It is a single payer proposal, but a specific form of such.  And the details matter.  This proposal is radical, even by global standards, for a single payer model.

It is funded at a fixed amount allocated by Congress, has no role for private insurance nor any regional governance.  Further, it has no patient cost sharing – no participation in the premium, no co-pay, no deductible, no co-insurance.  It also has a very broad scope of coverage, including dental, vision and long-term care benefits.

It probably should be renamed ‘Medicaid for All’ because, but for everything being controlled at the federal level, it functions more like Medicaid than Medicare.  But that label doesn’t play as well in the marketing campaign, does it?

I’ll call my sparkling wine ‘champagne’ even if it was not made in that specific region of France because it just sounds better.

Canada, the idea that comes to mind for most people when you say, ‘single payer’ – maybe because it is the one other country most people can find on a map – does not have a single national insurance system.  Provincial governments receive per capita grants that they administer within the federal rules.

The Commonwealth Fund did an analysis of the ‘single payer system’ in 12 high-income countries.  There is variation across several dimensions – policy setting, administration, benefits coverage, and patient cost sharing.

Yes, they are all far more government driven than we are currently, but as with ‘ethnicity’ vs. ‘nationality,’ at times the subtle differences matter a lot.  Just a little tip in case you want to press in a little deeper in coming days as this idea gets tossed around.