Moving Your Practice From "Viable" To "Profitable"

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Recently one of our therapist clients made the statement that 90% of all therapy practices are viable but that a much smaller percentage are profitable.  That conversation stimulated a discussion in our office about the importance of profitability and how technology might be used to help therapists to improve their bottom lines.

All too often a therapist, when asked about their revenue stream, will present a number - the amount that they "billed" in the last month, or quarter or year.  Since most small business owners understand that profit is generally defined as income less expenses, they will also include their total expenses in the disclosure.  Simple - amount billed less expenses equals profit.  But there is a huge hole in that formula.  And that is because amount billed is really a meaningless number in the health care business.  It is amount collected less expenses that equals profit.  Understanding the gap between billing and collection is the key to understanding why profit is often unattained.  Reducing that gap is the key to making that profit appear on the financial statements for the practice.

In an entirely "self pay" pay practice, bills or statements are presented to responsible parties and hopefully they remit their payments of the amount billed in full on a timely basis.  When that happens the profit begins to show on the financial statement.  There are many therapy practices that treat all patients on a "self pay" basis, and their profit is more or less easy to predict and to measure as long as their collections are steady, timely and successful.

But in our current economic climate it is far more common for the majority of therapy practices to accept health care insurance in partial or full payment of a patient's financial obligation to the therapist.  And that is where the billing and collections gap begins.  Some insurance policies, particularly those that are usually referred to as "executive benefit plans" issued to high-income corporate executives might pay amounts close to the amount billed by the therapist, and might pay them promptly, but those plans are rare and are quickly disappearing as the premiums for those plans keep increasing.  More commonly insurance companies will pay less than one half of the amount billed by the therapist, and that amount will be paid by the insurance carrier only after the policy holder's annual health insurance outlay has reached the annual deductible amount.  Herein lies the real reason why the amount billed less expenses equals profit calculation fails the reality test.  The amount collected less expenses that equals profit yields the real profit amount, and that is almost always a much smaller and often negative result.

There is possibly very little that a therapist can do to overcome the collections gap.  But the profit calculation still includes the expenses amount and the therapist has a reasonable amount of control over that number.  You make your practice profitable by keeping your expenses at a level that can be supported by your collections, not the reverse (as too many small business owners try to do).

Also, when dealing with insurance companies you also find that certain procedures are accepted for payment only when the presented diagnosis matches the insurance carrier's list of approved diagnoses for the reported procedure.  Diagnosis X might be rejected by the insurance carrier but Diagnosis Y might be accepted.  When both are legitimate diagnoses for your patient you improve your collections by using the right diagnosis (as defined by the insurance carrier's past claims approvals/denials).  You "play the game" using the insurance carrier's rules since they are the players who control the outcome (unless you believe that you can manage to operate a practice that does not include acceptance of insurance).

And this is where technology becomes one of your best allies in managing your financial success.  A good practice management system will help you to analyze your billing, your collections, your procedure and diagnosis coding, your payment turnaround time, the profitability of different procedures and diagnoses based upon your actual historical data, and will help you to steer your practice in the direction that will help you to maximize your profits.  A good practice management system will help you to identify which patients are profitable and which are not, which therapists generate profit and which do not, which procedures are profitable and which are not, which diagnoses are accepted by insurance carriers (and you collect the fees billed) and which are not.  In the end you might find that having two more therapists will dilute your profits, not increase them.  Or you might find that one of your multiple disciplines generates significantly more profit than another and that you should realign your expansion plans.

A simple report, generated by your practice management system, containing a few simple columns could help you to move your practice from viability to profitability:

• Patient
• Therapist
• Procedure
• Diagnosis
• Duration of Therapy Sessions (Time Spent)
• Amount Billed
• Amount Collected
• Writeoff Amount
• Form of Payment
• Insurance Carrier
• Days Between Billing and Collection

And, if you do not have a practice management system, then you should seriously consider purchasing and installing one.  Technology can easily become one of the most valued members of your management team - freeing you up to do what you do best.