The world of anesthesia is in a constant state of evolution because American healthcare is in such a constant state of flux. Practices come and go more rapidly than ever before. What used to be practices dedicated to providing anesthesia to surgical and obstetric patients at a given facility now find their scope expanding to a much wider variety of clinical services at a variety of venues. The key strategic question practices must address is whether they should maintain their independence and continue to anticipate changing market demands or sell out to the hospital or another anesthesia practice. Never has there been so much corporate activity merger and practice consolidation activity.
THE GROWTH OR SELL-OUT QUESTION
The first question every anesthesia practice should ask is how much control it has over the factors that determine providers’ income and lifestyle. Is the practice in control or at effect of payor mix, scope of service requirements, clinical volume, coverage and call requirements and administration expectations? If the practice is well managed, and if it enjoys a strong relationship with administration, it probably has a good opportunity to maintain its independence and explore market opportunities. If not, it would probably make sense to explore other alternatives. Practices that need excessive subsidies to remain viable may find hospital employment a viable option because it will shift the burden of financial viability to the hospital. Practices in very competitive markets may find a merger with a stronger practice the best strategy for ongoing success based on the assumption that bigger is better when it comes to maintaining a favorable market position. It should come as no surprise that many practices across the country have chosen this option. An ever-growing percentage of anesthesia providers are now employed by mega-groups of 100 or more providers.
How does an anesthesia practice know whether it is on a positive path to success or in denial about its imminent demise? Experienced practice management consultants like to perform a SWOT analysis with the management team. It is a particularly useful tool that every practice should use on a regular basis. An honest and careful examination of each of the four elements can shed light on areas requiring attention and significant refinement. The basic objective is to turn weaknesses to strengths and threats to opportunities.
Strengths are aspects of the practice that enhance its relationship with its customers. Many features of a practice may be its true strengths such as the quality and experience of its providers, the focus and diligence of its management team, the effectiveness of its billing solution and its overall relationship with administration.
Weaknesses can be subtle and deceiving. As service organizations, anesthesia practices are only as good as the quality of service they provide. In the current environment it is not enough to have consistent clinical outcomes. Anesthesia practices are expected to be corporate players who are always enhancing the reputation of the facility. The most important factor today is customer service. An increasing number of hospitals now use independent agencies to score anesthesia customer service.
Opportunities may be internal or external. Some practices are asked to expand their scope of services to include services such as stroke management, ICU or neonatology. Other opportunities such as surgery centers and endo centers may represent new challenges.
Threats are ever present but need to be clearly identified and assessed. The most common and annoying threat to an anesthesia practice is the RFP, the request for proposal, which is the administration’s way of assessing its options.
Anesthesia practice is a business and must be treated as such. Businesses need a clear plan and disciplined management to be successful. They must always be focused on maintaining the confidence of their employees and their customers. Three aspects are critical: accountability, collaboration and innovation. Whenever a practice is considering its options, it should always start with a careful review of its strengths, weaknesses, opportunities and market threats. A weak ship will never survive a big storm.
WHAT ARE THE BEST OPPORTUNITIES?
It is always useful to establish the objective of the practice's business. The biggest challenge facing most anesthesia practices today is generating enough revenue to cover the cost of providing the services it is contractually obligated to provide with its customers. Because of this it is best to pursue the most profitable opportunities.
The basic formula for determining profitability is to subtract the cost of a service from the revenue potential. The profitability of an anesthesia practice would be the total collections posted plus any stipend payments minus cost of provider payroll and business expenses. While such a calculation is relevant as an overall assessment of practice profitability it would not be particularly relevant for the evaluation of specific business situations such as profitability by lines of business. There are a variety of ways to further refine the profitability analysis such as per hour or per day. Most practices find analysis of profitability per clinical day most useful especially in the evaluation of opportunities for expansion.
COST PER LOCATION DAY
To determine the average cost per location day it is especially useful to coordinate with the practice accountant. There are two pieces of information necessary: the average total gross compensation for each class of provider, physician and CRNA and the number of days each provider works per year. This model is based on a standard day, typically 10 hours. The objective here is to determine the average cost of each clinical day's provider cost. Obviously, some days are much shorter while others are longer. The point is how much the practice must dedicate for each day staffed. This is a generic template. Each practice should adjust the variable factors based on specific practice experience.
REVENUE PER LOCATION DAY
The billing staff can provide the data elements necessary for this calculation. It is most useful if specific data is provided for each line of business or clinical location you wish to analyze. This combination of elements is selected so that the analysis will highlight what is unique about each line of business such as the average case time and the average acuity of care, as measured in base units per case. It is also to identify any revenue from flat fee services separately billed.
There are many ways to calculate the average yield per unit billed. We typically base this on historical data that is at least six months old, otherwise known as date of service data (DOS). Sometimes it might be necessary to base this calculation on expected data.
Successful practices perform this profitability assessment for each line of business and clinical venue. It is especially useful to perform this for each surgicenter.
WHAT ARE THE MOST SIGNIFICANT THREATS?
Market changes can threaten even the most serious anesthesia practice. Hospital mergers and consolidation can undermine even the most well-thought-out strategic plan. When a hospital closes its anesthesia practice loses a contract and must either shut down or find a new contract. Hospital mergers can have the same impact especially when the new hospital has its own preferred anesthesia solution. Anesthesia practices also find out occasionally that the administration they had been working with for years simply decided to find a new anesthesia solution. As a general rule, the higher the subsidy a facility must pay, the greater the risk for the anesthesia practice.
Changing administrators can also prove to be a serious threat. New administrators often have their own way of viewing and interpreting the relationship with the anesthesia practice. More often than not, such administrators chose to employ the anesthesia providers.
OPTIMIZING PRACTICE PROFITABILITY
The goal of every anesthesia practice must be optimum profitability. As we have discussed, there are five variables in the profitability calculation.
- Ensuring that the practice is collecting every dollar to which it is legally entitled, which requires a close working relationship with the billing staff and consistent monitoring of all appropriate management reports.
- Reasonable financial support from practice facilities that allows the practice to recruit and retail a qualified team of providers to meet the customers’ service requirements.
- Effective staffing with a staffing model that allows for adequate coverage and ideal customer service.
- Competitive provider compensation that enhances provider commitment to the mission and values of the practice.
- Rigorous expense management that enhances the revenue potential for provider compensation.
Given the dynamic nature of American medicine effective monitoring and management of each of the five variables listed above. This requires disciplined budgeting and the willingness to effect strategic changes when things change. To this end, it is especially important to monitor the profitability of each line of business and the willingness to cancel any unprofitable commitments.
Jody Locke, MA serves as vice president of anesthesia and pain management services for Coronis Health. Mr. Locke is responsible for the scope and focus of services provided to Coronis Health’s largest clients. He is also responsible for oversight and management of the company’s pain management billing team. He is a key executive contact for groups that enter into contracts with Coronis Health. Mr. Locke can be reached at jody.locke@coronishealth.com.